-----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, Cs/oJ9/vG1JJzZAUSY9M0jFPllEHTHZosOOnljRLCpn3tjdszoXRomNJu7js3jeW mT93+/O5Mej5z70nsyMXPQ== 0000950134-98-002766.txt : 19980401 0000950134-98-002766.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950134-98-002766 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE 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: 98581940 BUSINESS ADDRESS: STREET 1: 14160 DALLAS PKWY STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9727705600 MAIL ADDRESS: STREET 1: 14160 DALLAS PKWY STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75240 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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 10,333,950 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 26, 1998 was approximately $142,091,813. 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 26, 1998, 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 1998 Annual Meeting of Stockholders (the "Proxy Statement") and filed pursuant to Regulation 14A is incorporated herein by reference into Part III. =============================================================================== 2 CAPITAL SENIOR LIVING CORPORATION TABLE OF CONTENTS
PAGE NUMBER ------ PART I ITEM 1. BUSINESS ..................................................... 1 EXECUTIVE OFFICERS AND KEY EMPLOYEES ................................... 18 ITEM 2. PROPERTIES ................................................... 19 ITEM 3. LEGAL PROCEEDINGS ............................................ 20 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 .................................. 21 ITEM 6. SELECTED FINANCIAL DATA ...................................... 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......................... 25 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 ....................................... 33 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 33 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............... 33 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ....................................... 34 SIGNATURES ............................................................. 35 INDEX TO EXHIBITS ...................................................... E-1
3 PART I ITEM 1. BUSINESS GENERAL Capital Senior Living Corporation (together with its subsidiaries, the "Company") is one of the largest providers of senior living services in the United States in terms of resident capacity, according to the Assisted Living Federation of America's 1996 Annual Largest Provider Survey. As of December 31, 1997, the Company owned interests in and/or operated 33 communities in 17 states with a capacity of approximately 5,000 residents, including 17 communities in which it owned interests, 15 communities that it managed for third parties pursuant to multi-year management contracts and one community that it leased from a third party. As of December 31, 1997, the Company was developing 20 new communities which will have a capacity of approximately 3,500 residents and was expanding 11 existing communities to accommodate approximately 1,000 additional residents. As of December 31, 1997, the Company also operated one home health care agency. Approximately 92% of the total revenues and reimbursable expenses for the senior living communities managed by the Company as of December 31, 1997 are derived from private pay sources. At December 31, 1997, communities which the Company operated and in which it owned interests had an occupancy rate of approximately 96%, its managed communities had an occupancy rate of approximately 96%, and its leased community had an occupancy rate of approximately 96%. The Company and its predecessors have provided senior living services since 1990. FORMATION TRANSACTIONS The Company was incorporated in October 1996 in the state of Delaware. On November 5, 1997, the Company closed its initial public offering in which it sold 10,350,000 common shares pursuant to a final prospectus, under the Securities Act of 1933, as amended, at $13.50 per share (the "Offering"). Simultaneously with the consummation of the Offering, the Company, the Company's founders, Jeffrey L. Beck ("Beck"), James A. Stroud (and his affiliate) ("Stroud"), Lawrence A. Cohen, Vice Chairman and Chief Financial Officer of the Company ("Cohen"), and affiliates of Messrs. Beck and Stroud completed a series of transactions (collectively, the "Formation Transactions") that resulted in the reorganization of the Company (the "Formation"). In the Formation Transactions, 7,687,347 shares were issued to Beck, Stroud and Cohen in the transactions described below bringing the total issued and outstanding shares of the Company to 19,717,347 shares. Since the Offering, all of the Company's operations are being conducted by the Company or its wholly owned subsidiaries. As part of the Formation Transactions, Messrs. Beck and Stroud contributed all of the capital stock of Capital Senior Living, Inc., Capital Senior Management 1, Inc., Capital Senior Management 2, Inc., Capital Senior Development, Inc., and, with Mr. Cohen, of Quality Home Care, Inc. (the "Contributed Entities") to the Company in exchange for the issuance of 7,687,347 shares of common stock and the issuance of separate notes to Messrs. Beck, Stroud and Cohen in the aggregate principal amount of $18,076,380 (collectively, the "Formation Note"). The number of shares of common stock issued and the principal amount of the Formation Note were established by Messrs. Beck and Stroud and the Company in connection with the Formation based on an assessment of the value of the Contributed Entities and the value of the Acquired Assets (as defined below). The Formation Note was repaid from net proceeds of the Offering. Such repayment received by Messrs. Beck and Stroud will in turn be used by them to pay tax obligations which they incurred in connection with the Formation. The primary assets of the Contributed Entities consist of third-party management contracts, development contracts and a home health care agency. Also as part of the Formation Transactions, the Company purchased substantially all of the assets (the "Acquired Assets"), other than working capital items, of Capital Senior Living Communities, L.P., a Delaware limited partnership ("CSLC"), for the assumption of approximately of $70.8 million of debt plus cash equal to $5.8 million (the "Asset Acquisition"). The Acquired Assets of CSLC were: (i) four senior living communities located in Cottonwood, Arizona, Indianapolis, Indiana, Merrillville, Indiana and Canton, Ohio; (ii) approximately 56% of the limited partner interests in HealthCare Properties, L.P., a Delaware limited partnership ("HCP"); and (iii) approximately 31% of the aggregate principal amount of certain notes (the "NHP Notes") issued by NHP Retirement Housing Partners I Limited Partnership, a Delaware limited partnership ("NHP") and approximately 3% of the outstanding limited partnership interests of NHP. The primary assets of HCP consisted of: (i) approximately $9.9 million in cash and cash equivalents as of the Offering; (ii) four physical rehabilitation facilities located in Orlando, Florida, Nashville, Tennessee, Lancaster, South Carolina, and Martin, Tennessee; 1 4 and (iii) four skilled nursing facilities located in Evansville, Indiana, Cambridge, Massachusetts, Fort Worth, Texas, and Austin, Texas. The outstanding principal amount of all of the NHP Notes as of the Offering was $42.7 million. The NHP Notes accrue interest at a rate of 13% per annum, pay cash interest at a rate of 7% per annum, are secured by substantially all of the assets of NHP, and mature on December 31, 2001. The primary assets of NHP consist of five senior living communities located in Buffalo, New York, Sacramento, California (two communities), Detroit, Michigan, and Boca Raton, Florida. Messrs. Beck and Stroud control approximately 66% of the limited partnership interests in CSLC. The purchase price paid for the Acquired Assets was determined as follows: (i) CSLC's communities, other than construction in process, were valued based on the appraised value of the communities; (ii) CSLC's investment in HCP was valued based on the appraised value of HCP's communities, adjusted for working capital items and other assets and liabilities that would be settled in cash, multiplied by the percentage of HCP owned by CSLC; (iii) CSLC's investment in the NHP Notes was valued based on discounting the amount of principal and interest payments to be made following the maturity date (December 31, 2001) of the NHP Notes (assuming a six month lag between maturity and full repayment); and (iv) CSLC's investment in the NHP limited partnership interests was valued at its historical cost basis which approximates fair value. The appraised values for the communities were determined by third-party appraisals. CSLC, HCP and NHP are limited partnerships required to file periodic reports under the Securities Exchange Act of 1934, as amended. The general partner of CSLC is Retirement Living Communities, an Indiana limited partnership, which is beneficially owned by Messrs. Beck and Stroud. The general partner of HCP and NHP is Capital Realty Group Senior Housing, Inc. ("Senior Housing"), an entity beneficially owned by Messrs. Beck and Stroud. The general partners of CSLC, HCP and NHP remained beneficially owned by Messrs. Beck and Stroud after completion of the Formation Transactions. As part of the Formation Transactions, the Company received a ten-year option to purchase all of the capital stock of Senior Housing at fair market value (as determined by an independent appraisal). Pending such exercise, any fees received by Senior Housing from HCP or NHP will be assigned to the Company. The debt assumed by the Company in the Asset Acquisition consisted of an approximate $70.8 million mortgage loan pursuant to a $77.0 million commitment made on June 30, 1997 to CSLC by Lehman Brothers Holdings, Inc., an affiliate of Lehman Brothers (the "LBHI Loan"). Of the proceeds from the LBHI Loan, $5.5 million was used to repay outstanding amounts under the CSLC's prior credit facility, $0.8 million was used to fund construction in progress at CSLC's Cottonwood community, approximately $64.5 million was used by CSLC to purchase U.S. Treasury securities and the remaining $6.2 million was available to fund additional expenditures associated with the expansion of the Cottonwood community. The LBHI Loan was incurred by CSLC for the purpose of refinancing the outstanding debt due under CSLC's prior credit facility and to provide construction financing for the expansion of one of CSLC's communities. The U.S. Treasury securities were acquired with proceeds of the LBHI Loan to provide collateral for the borrowings thereunder. The U.S. Treasury securities were sold under a repurchase agreement with Lehman Brothers, with a term equal to their maturity. Upon consummation of the Offering and as a part of the Formation Transactions, the Acquired Assets were acquired by the Company through assumption of the LBHI Loan, the repurchase agreement was canceled and the LBHI Loan was reduced by the Company with net proceeds of the Offering. The U.S. Treasury securities reverted to CSLC for use or disposition as determined by CSLC, and the Company has no interest in such securities. INDUSTRY BACKGROUND The senior living services industry encompasses a broad and diverse range of living accommodations and health care services that are provided primarily to persons 65 years of age or older. For the elderly who require limited services, care in independent living residences supplemented at times by home health care, offers a viable option. Most independent living residences and retirement centers typically offer community living together with a basic services package consisting of meals, housekeeping, laundry, security, transportation, social and recreational activities and health care monitoring. As a senior's need for assistance increases, care in an assisted living residence is often preferable and more cost-effective than home-based care or nursing home care. Typically, assisted living represents a combination of housing and 24-hour a day personal support services designed to aid elderly residents with activities of daily living ("ADLs"), such as ambulation, bathing, dressing, eating, grooming, personal hygiene, and monitoring or assistance with medications. Certain assisted living residences may also provide assistance to residents with low acuity medical needs, or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other cognitive or physical frailties. Generally, assisted living residents require higher levels of care than residents of independent living residences and retirement 2 5 living centers, but require lower levels of care than patients in skilled nursing facilities. For seniors who need the constant attention of a skilled nurse or medical practitioner, a skilled nursing facility may be required. The senior living services industry is highly fragmented and characterized by numerous small operators. Moreover, the scope of senior living services varies substantially from one operator to another. Many smaller senior living providers do not operate purpose-built residences, do not have professional training for staff and provide only limited assistance with ADLs. The Company believes that few senior living operators provide the required comprehensive range of senior living services, such as dementia care and other services designed to permit residents to "age in place" within the community as they develop further physical or cognitive frailties. The Company believes that the senior living services industry will require large capital infusions over the next 30 years to meet the growing demand for senior living facilities. The National Investment Conference has estimated that gross capital expenditures for the senior living marketplace will grow from $86 billion in 1996 to $126 billion in 2005 and to $490 billion in 2030, in order to accommodate increasing demand. As a result, the Company believes there will continue to be significant growth opportunities in the senior living market for providing health care and other services to the elderly. The Company believes that a number of demographic, regulatory, and other trends will contribute to the continued growth in the senior living market, the Company's targeted market for future development and expansion, including the following: Consumer Preference The Company believes that senior living communities are increasingly becoming the setting preferred by prospective residents and their families for the care of the elderly. Senior living offers residents greater independence and allows them to "age in place" in a residential setting, which the Company believes results in a higher quality of life than that experienced in more institutional or clinical settings. The likelihood of living alone increases with age. Most of this increase is due to an aging population in which women outlive men. In 1993, eight out of ten noninstitutionalized elderly who lived alone were women. According to the United States Bureau of Census, based on 1993 data, for women the likelihood of living alone increases from 32% for 65- to 74-year-olds to 57% for those women aged 85 and older. Men show similar trends with 13% of the 65- to 74-year-olds living alone rising to 29% of the men aged 85 and older living alone. Societal changes, such as rising 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 65 and older. This age group is one of the fastest growing segments of the United States population and is expected to double by the year 2030. According to United States Census Bureau information, the segment of the population that is aged 75 and older is expected to increase from approximately 13.2 million in 1990 to over 16.6 million by 2000, an increase of 26%. The population of seniors aged 85 and over is expected to increase from approximately 3.1 million in 1990 to over 4.3 million by 2000, an increase of 39%. As the number of persons aged 65 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 the United States General Accounting Office, as of 1990 there are approximately 6.5 million people aged 65 and older in the United States who needed assistance with ADLs, and the number of people needing such assistance is expected to double by the year 2020. 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. 3 6 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 beds, the addition of new services, or the making of certain capital expenditures, a state agency must determine that a need exists for the new beds or the proposed activities. The Company believes that this Certificate of Need process tends to restrict the supply and availability of licensed nursing facility beds. High construction costs, limitations on government reimbursement for the full costs of construction, and start-up expenses also act to constrain growth in the supply of such facilities. At the same time, nursing facility operators are continuing to focus on improving occupancy and expanding services to subacute patients generally of a younger age and requiring significantly higher levels of nursing care. As a result, the Company believes that there has been a decrease in the number of skilled nursing beds available to patients with lower acuity levels and that this trend should increase the demand for the Company's senior living communities, including particularly the Company's assisted living communities and skilled nursing facilities. Cost-Containment Pressures In response to rapidly rising health care costs, governmental and private pay sources have adopted cost containment measures that have reduced admissions and encouraged reduced lengths of stays in hospitals and other acute care settings. The federal government had previously acted to curtail increases in health care costs under Medicare by limiting acute care hospital reimbursement for specific services to pre-established fixed amounts. Private insurers have begun to limit reimbursement for medical services in general to predetermined charges, and managed care organizations (such as health maintenance organizations) are attempting to limit hospitalization costs by negotiating for discounted rates for hospital and acute care services and by monitoring and reducing hospital use. In response, hospitals are discharging patients earlier and referring elderly patients, who may be too sick or frail to manage their lives without assistance, to nursing homes and assisted living residences where the cost of providing care is typically lower than hospital care. In addition, third-party payors are increasingly becoming involved in determining the appropriate health care settings for their insureds or clients, based primarily on cost and quality of care. Based on industry data, the typical day-rate in an assisted living facility is two thirds of the cost for comparable care in a nursing home. Senior Affluence The average net worth of senior citizens is higher than non-senior citizens, partially as a result of accumulated equity through home ownership. The Company believes that a substantial portion of the senior population thus has significant resources available for their retirement and long-term care needs. The Company's target population is comprised of moderate- to upper-income seniors who have, either directly or indirectly through familial support, the financial resources to pay for senior living communities, including an assisted living alternative to traditional long-term care. Reduced Reliance on Family Care Historically, the family has been the primary provider of care for seniors. The Company believes that the increase in the percentage of women in the work force, the reduction of average family size, and the increased mobility in society is reducing the role of the family as the traditional caregiver for aging parents. The Company believes that these factors will make it necessary for many seniors to look outside the family for assistance as they age. OPERATING STRATEGY The Company's operating strategy is to provide high quality senior living services at an affordable price to its residents, while achieving and sustaining a strong, competitive position within its chosen markets, as well as to continue to enhance the performance of its operations. The Company is implementing its operating strategy principally through the following methods: 4 7 Continue to Provide Broad Range of High-Quality Personalized Care Central to the Company's operating strategy is its focus on providing high-quality care and services that are personalized and tailored to meet the individual needs of each community resident. The Company's residences and services are designed to provide a broad range of care that permits residents to "age in place" as their needs change and as they develop further physical or cognitive frailties. By creating an environment that maximizes resident autonomy and provides individualized service programs, the Company seeks to attract seniors at an earlier stage, before they need the higher level of care provided in a skilled nursing facility. The Company also maintains a comprehensive quality assurance program designed to ensure the satisfaction of its residents and their family members. The Company conducts annual resident satisfaction surveys. In 1997, the Company achieved a 96% approval rating from its residents in a polling of its residents' satisfaction. Offer Services Across a Range of Pricing Options The Company's range of products and services is continually expanding to meet the evolving needs of its residents. The Company has developed a menu of products and service programs which may be further customized to serve both the moderate and upper income markets of a particular targeted geographic area. By offering a range of pricing options that are customized for each target market, the Company believes that it can develop synergies, economies of scale, and operating efficiencies in its efforts to serve a larger percentage of the elderly population within a particular geographic market. Maintain and Improve Occupancy Rates The Company continually seeks to maintain and improve occupancy rates by: (i) retaining residents as they "age in place" by extending optional care and service programs; (ii) attracting new residents through the on-site marketing program focus on residents and family members; and (iii) aggressively seeking referrals from professional community outreach sources, including area religious organizations, senior social service programs, civic and business networks, as well as the medical community. Improve Operating Efficiencies The Company will seek 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. Emphasize Employee Training and Retention The Company devotes special attention to the hiring, screening, training, supervising, and retention of its employees and caregivers to ensure that quality standards are achieved. In addition to the normal on-site training, the Company conducts annual national management meetings and encourages sharing of expertise among managers. The Company's commitment to the total quality management concept is emphasized throughout its training program. The Company believes its commitment to and emphasis on employee training and retention differentiates the Company from many of its competitors. Utilize Comprehensive Information Systems The Company employs comprehensive proprietary information systems to manage financial and operating data in connection with the management of its communities. Utilizing its computerized systems, the Company is able to collect and monitor on a regular basis key operating data for its communities. Reports are routinely prepared and distributed to on-site, district and regional managers for use in managing the profitability of the communities. The Company's management information systems provide senior management with the ability to identify emerging trends, monitor and control costs and develop current pricing strategies. The Company believes that its proprietary information systems are sufficient to support 5 8 future growth and that the Company will have adequate resources to expand these systems to support the growth envisioned by the Company's business plan. CARE AND SERVICES PROGRAMS The Company provides a wide array of senior living services to the elderly at its communities, including independent living, assisted living (with special programs and living units for residents with Alzheimer's and other forms of dementia), skilled nursing, and home health care services. By offering a variety of services and encouraging the active participation of the resident and the resident's family and medical consultants, the Company is able to customize its service plan to meet the specific needs and desires of each resident. As a result, the Company believes that it is able to maximize customer satisfaction and avoid the high cost of delivering unnecessary services to residents. Independent Living Services The Company provides independent living services to seniors who do not yet need assistance or support with ADLs, but who prefer the physical and psychological comfort of a residential community that offers health care and other services. As of December 31, 1997, the Company had ownership interests in nine communities and managed an additional 14 communities which provide independent living services, with an aggregate capacity for 1,607 and 1,913 residents, respectively. Independent living services provided by the Company include daily meals, transportation, social and recreational activities, laundry, housekeeping, security and health care monitoring. The Company also fosters the wellness of its residents by offering health screenings (such as blood pressure checks), periodic special services (such as influenza inoculations), chronic disease management (such as diabetes with its attendant blood glucose monitoring), dietary and similar programs, as well as ongoing exercise and fitness classes. Classes are given by health care professionals to keep residents informed about health and disease management. Subject to applicable government regulation, personal care and medical services are available to independent living residents through either the community staff or through the Company's or independent home health care agencies. The Company's independent living residents pay a fee ranging from $1,250 to $2,400 per month, in general, depending on the specific community, program of services, size of the units, and amenities offered. The Company's contracts with its independent living residents are generally for a term of one year and are typically terminable by the resident upon 30 days' notice. Assisted Living and Memory Impaired Services The Company offers a wide range of assisted living care and services 24 hours per day, including personal care services, support services, and supplemental services. As of December 31, 1997, the Company had ownership interests in seven communities, leased a community from a third party, and managed an additional 10 communities which provide assisted living services, with an aggregate capacity for 219, 38, and 399 residents, respectively. The residents of the Company's assisted living residences generally need help with some or all ADLs, but do not require the more acute medical care traditionally given in nursing homes. Upon admission to the Company's assisted living communities, and in consultation with the resident, the resident's family and medical consultants, each resident is assessed to determine his or her health status, including functional abilities, and need for personal care services, and completes a lifestyles assessment to determine the resident's preferences. From these assessments, a care plan is developed for each resident to ensure that all staff members who render care meet the specific needs and preferences of each resident where possible. Each resident's care plan is reviewed periodically to determine when a change in care is needed. The Company has adopted a philosophy of assisted living care that allows a resident to maintain a dignified independent lifestyle. Residents and their families are encouraged to be partners in their care and to take as much responsibility for their well being as possible. The basic types of assisted living services offered by the Company include the following: Personal Care Services. These services include assistance with ADLs such as ambulation, bathing, dressing, eating, grooming, personal hygiene, and monitoring or assistance with medications. 6 9 Support Services. These services include meals, assistance with social and recreational activities, laundry services, general housekeeping, maintenance services, and transportation services. Supplemental Services. These services include extra transportation services, personal maintenance, extra laundry services, non-routine care services, and special care services, such as services for residents with Alzheimer's and other forms of dementia. Certain of these services require an extra charge in addition to the pricing levels described below. In pricing its services, the Company has developed the following three levels or tiers of assisted living care: o Level I typically provides for minimum levels of care and service, for which the Company generally charges a monthly fee per resident ranging from $1,750 to $1,900, depending upon unit size and the project design type. Typically, Level I residents need minimal assistance with ADLs. o Level II provides for relatively higher levels and increased frequency of care, for which the Company generally charges a monthly fee per resident ranging from $1,900 to $2,250, depending upon the unit size and the project design type. Typically, Level II residents require moderate assistance with ADLs and may need additional personal care, support, and supplemental services. o Level III provides for the highest level of care and service, for which the Company generally charges a monthly fee per resident ranging from $2,250 to $2,400, depending upon the unit size and the project design type. Typically, Level III residents are either very frail or impaired and utilize many of the Company's services on a regular basis. The Company maintains programs and special units at 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, 1997, the Company had ownership interests in seven facilities, leased a facility, and managed an additional facility which provides nursing services, with an aggregate capacity for 746, 60, and 60 residents, respectively. Home Health Care As of December 31, 1997, the Company provided home health care services to clients at one of its senior living communities through an on-site home health care agency. The Company believes that the provision of home health care services is an attractive adjunct to its independent living services because it allows the Company to provide more services to its residents as they age in place and increase the length of stay in the Company's communities. The services and products that the Company provides through its home health care agency include: (i) general and specialty nursing services to clients with long-term chronic health conditions, permanent disabilities, terminal illnesses and post-procedural needs; (ii) rehabilitative therapy services including physical, occupational and speech therapy through outside contractors; (iii) personal care services and assistance with ADLs; (iv) enhanced hospice care for clients in the final phases of incurable disease; and (v) extensive 7 10 monitoring and educational services relative to respiratory care, medication administration, medical equipment, and medical supplies. The Company intends to expand its home health care service business to additional senior living communities and to develop, acquire, or manage home health care service businesses at other such communities. In addition, the Company will make available to residents certain customized physician, dentistry, podiatry, and other health-related services that may be offered by third-party providers. The Company may elect to provide these services directly or through participation in managed care networks. 8 11 OPERATING COMMUNITIES The table below sets forth certain information with respect to the independent, senior living, and continuum of care communities owned, leased, and managed by the Company as of December 31, 1997.
RESIDENT CAPACITY(1) --------------------------------- COMMENCEMENT OCCUPANCY OWNER- OF RATE AT COMMUNITY LOCATION IL AL SN TOTAL SHIP(2) OPERATIONS(3) 12-31-97 --------- -------- -- -- -- ----- ------------------------------ OWNED: Amberleigh ............. Buffalo, NY 365 29 -- 394 31% 1/92 97% Atrium of Carmichael ... Sacramento, CA 156 -- -- 156 31% 1/92 99% Cambridge Nursing Home ................. Cambridge, MA -- -- 120 120 56% 7/93 98% Canton Regency ......... Canton, OH 164 34 50 248 100% 3/91 96% Cottonwood Village ..... Cottonwood, AZ 69 -- -- 69 100% 3/91 100% Crosswood Oaks ......... Sacramento, CA 127 -- -- 127 31% 1/92 91% Harrison at Eagle Valley ................ Indianapolis, IN 138 -- -- 138 100% 3/91 97% Heatherwood ............ Detroit, MI 188 -- -- 188 31% 1/92 98% Towne Centre ........... Merrillville, IN 165 34 64 263 100% 3/91 92% Veranda Club ........... Boca Raton, FL 235 -- -- 235 31% 1/92 96% ----- --- --- ----- ---- Subtotal ............. 1,607 97 234 1,938 96% OWNED AND LEASED TO OTHERS: Cane Creek ............. Martin, TN -- 8 36 44 56% 7/93 100%(4) Cedarbrook ............. Nashville, TN -- 42 -- 42 56% 7/93 100%(4) Crenshaw Creek ......... Lancaster, SC -- 36 -- 36 56% 7/93 100%(4) Hearthstone ............ Austin, TX -- -- 120 120 56% 7/93 100%(4) McCurdy ................ Evansville, IN -- -- 236 236 56% 7/93 100%(4) Sandybrook ............. Orlando, FL -- 36 -- 36 56% 7/93 100%(4) Trinity Hills .......... Fort Worth, TX -- -- 120 120 56% 7/93 100%(4) ----- --- --- ----- ---- Subtotal ............. -- 122 512 634 LEASED FROM OTHERS: Maryland Gardens(5) .... Phoenix, AZ -- 38 60 98 6/97 96% ----- --- --- ----- ---- Subtotal ............. -- 38 60 98 MANAGED: Buckner Haven .......... Houston, TX 16 69 60 145 4/97 (6) Buckner Westminster Place ................ Longview, TX 117 -- -- 117 6/96 89%(7) Crown Pointe ........... Omaha, NE 163 -- -- 163 8/96 100% Crown Villa ............ Omaha, NE -- 73 -- 73 8/96 97% Independence Village ... East Lansing, MI 162 -- -- 162 8/96 93% Independence Village ... Peoria, IL 173 -- -- 173 8/96 100% Independence Village ... Raleigh, NC 155 22 -- 177 8/96 97% Independence Village ... Winston-Salem, NC 145 16 -- 161 8/96 96% Overland Park Place .... Kansas City, KS 126 25 -- 151 8/96 99% The Palms .............. Fort Myers, FL 235 20 -- 255 8/96 100% Rio Las Palmas ......... Stockton, CA 142 50 -- 192 8/96 93% Sedgwick Plaza ......... Wichita, KS 117 54 -- 171 8/96 93% Villa at Riverwood ..... St. Louis, MO 140 -- -- 140 8/96 94% Villa Santa Barbara .... Santa Barbara, CA 87 38 -- 125 8/96 99% West Shores ............ Hot Springs, AR 135 32 -- 167 8/96 93% ----- --- --- ----- ---- Subtotal/Average ..... 1,913 399 60 2,372 96% ----- --- --- ----- ---- Grand Total .......... 3,520 656 866 5,042 96%(8) ===== === === ===== ====
- ---------- (1) Independent living (IL) residences, assisted living (AL) residences (including areas dedicated to residents with Alzheimer's and other forms of dementia), and skilled nursing (SN) beds. (2) In the case of those communities shown as 31% owned by the Company, this represents ownership of approximately 31% of the outstanding NHP Notes which are secured by the properties. In the case of those communities shown as approximately 56% owned, this represents the Company's ownership of approximately 56% of the limited partner interests in HCP. (3) Indicates the date on which the Company acquired each of its owned and leased communities, or commenced operating its managed communities. The Company operated certain of its communities pursuant to management agreements prior to acquiring the communities. 9 12 (4) Represents communities owned by the Company and leased to third parties pursuant to master leases under which the Company receives rent regardless of whether the units are occupied. Does not represent occupancy rate, but rather percentage of property leased pursuant to the master lease. These leases were in place at the time the Company acquired its interest in these communities. (5) This community was leased pursuant to a 14-month operating lease entered into by the Company on June 1, 1997, under which the Company had an option to purchase the community. The Company terminated this lease effective January 31, 1998. (6) It is anticipated that this community will be closed in 1998 and the residents transferred to Buckner Parkway Place upon its completion in the first quarter of 1998. (7) The Buckner Westminister Place community was in its initial lease-up phase at December 31, 1997. (8) Excludes communities owned and leased to others. THIRD-PARTY MANAGEMENT CONTRACTS The Company is a party to two separate property management agreements (the "ILM Management Agreements") with ILM I Lease Corporation and ILM II Lease Corporation, corporations formed by ILM Senior Living, Inc. and ILM II Senior Living, Inc. (collectively, "ILM") that operate 13 senior living communities. The ILM Management Agreements commenced on July 29, 1996 and will expire on December 31, 1999 and December 31, 2000, respectively, subject to extension under certain circumstances, but not beyond July 29, 2001. Under the terms of the ILM Management Agreements, the Company earns a base management fee equal to 4% of the gross operating revenues of the facilities under management (as defined), and is also eligible to receive an incentive management fee equal to 25% of the amount by which the average monthly net cash flow of the facilities (as defined) for the 12-month period ending on the last day of each calendar month exceeds a specified base amount. The ILM Management Agreements are terminable upon the sale of the related facilities, subject to the Company's rights to offer to purchase the facilities. In the event of a sale, the Company has the right to make the first and last offer with respect to the purchase of the facilities subject to the ILM Management Agreements. The Company earned a total of $854,948 and $734,755 under the two ILM Management Agreements for the year ended December 31, 1997, which includes the incentive management fee, and $344,765 and $312,496 for the period July 29, 1996 through December 31, 1996. The Company believes there is a reasonable likelihood that it will earn such incentive fee in the future. The Company is also a party to two separate property management agreements (the "Buckner Agreements") with Buckner Retirement Services, Inc., a not-for-profit corporation that operates two senior living communities. The Buckner Agreements commenced on April 1, 1996 and 1997 and expire on March 31, 2001 and 2002, respectively, except that either party may terminate the agreements for cause under limited circumstances. Under the terms of the Buckner Agreement for Buckner Baptist Haven, the Company earns a base management fee equal to 5% of the gross revenues of the facility (as defined) or $5,000 per month, whichever is greater. Under the terms of the Buckner Westminster Place Agreement, the Company earns a base management fee of $6,050 per month. In the case of one of the two Buckner Agreements, the Company was also entitled, through August 31, 1997, to a marketing lease-up fee of $500 for each unit at the time it is initially occupied. Also in the case of one of the two Buckner Agreements, the Company is also eligible to receive a productivity reward (prior to the first tenant occupying a unit in the addition) equal to 5% of the Gross Revenues generated during the immediately preceding month that exceed $121,000. The productivity reward took the place of the incentive fee during 1997. Pursuant to the terms of the Buckner Agreements, the Company has a right of first refusal with respect to purchasing the communities subject to these agreements. GROWTH STRATEGIES The Company believes that the fragmented nature of the senior living services industry and the limited capital resources available to many small, private operators provide an attractive opportunity for the Company to expand its existing base of senior living operations. The Company believes that its current operations throughout the United States serve as the foundation on which the Company can build senior living networks in targeted geographic markets and thereby provide a broad range of high quality care in a cost-efficient manner. The following are the principal elements of the Company's growth strategy: 10 13 Expand Existing Communities The Company plans to expand certain of its existing communities to include additional independent living, assisted living residences (including special programs and living units for residents with Alzheimer's and other forms of dementia), and, possibly skilled nursing beds. As of December 31, 1997, the Company had one expansion project under construction and 10 expansion projects under development, representing an aggregate increase in capacity to accommodate an additional 944 residents. Of these 11 expansion projects, one is at a community which is owned by the Company, three are at communities in which the Company owns an interest and manages under multi-year agreements, and seven are at communities which the Company manages for third parties. The costs of the expansion of managed communities is borne by the community owner and not by the Company. However, with respect to the four expansion projects in which the Company has a partial 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 the Company's existing senior living communities as of December 31, 1997.
SCHEDULED COMMUNITY LOCATION COMPLETION IL AL TOTAL STATUS(1) --------- -------- ---------- -- -- ----- --------- Cottonwood Village ............ Cottonwood, AZ 2nd half 1998 66 47 113 Construction Buckner Westminster Village ... Longview, TX 1st half 1999 -- 60 60 Development Towne Centre .................. Merrillville, IN 1st half 1999 66 70 136 Development Canton Regency ................ Canton, OH 1st half 1999 100 30 130 Development Independence Village .......... Raleigh, NC 1st half 1999 -- 50 50 Development West Shores ................... Hot Springs, AR 2nd half 1998 -- 65 65 Development The Palms ..................... Ft. Myers, FL 1st half 1999 -- 48 48 Development Independence Village .......... Peoria, IL 1st half 1999 46 30 76 Development Crown Point/Crown Villa ....... Omaha, NE 1st half 1999 102 24 126 Development Amberleigh .................... Buffalo, NY 1st half 1999 -- 80 80 Development Independence Village .......... East Lansing, MI 2nd half 1999 -- 60 60 Development --- --- --- Total ..................... 380 564 944 === === ===
- ---------- (1) "Development" indicates that development activities, such as site surveys, preparation of architectural plans, or initiation of zoning processes, have commenced (but construction has not commenced). "Construction" indicates that construction activities, such as ground-breaking activities, exterior construction, or interior build-out have commenced. Develop New Senior Living Communities General. The Company intends to continue to expand its operations through the development, construction, marketing and management of new senior living communities in selected markets which provide a quality lifestyle that is affordable to a large segment of seniors. The Company's national presence provides it with extensive research and experience in various markets which serve as the basis for the formulation of its development strategy in the selection of new markets. The Company's development plan calls for the identification of multiple markets in which construction can occur within the Company's targeted time frame and budget. The Company has developed a list of target markets and submarkets based upon local market conditions, the availability of development sites and local construction capabilities, the existence of development barriers to entry, the overall health and growth trends of the local economies, and the presence of a significant elderly population. The Company's senior management has extensive experience in senior living development, having developed in excess of $350 million of senior living communities. The Company has an integrated internal development approach pursuant to which the Company's management and other personnel (including designers and architects, market analysts, and construction managers) locate sites for, develop, and open its communities. Personnel who are experienced in site selection conduct extensive market and site-specific feasibility studies prior to the Company's committing significant financial resources to new projects. The Company believes it can rapidly expand its operations into new markets and strengthen its presence within its existing markets utilizing its existing residence models, such as the Waterford model, discussed below. 11 14 Development with Triad. Eleven of the 21 senior living communities referred to in the table below will be Waterford communities, and will be developed pursuant to an arrangement with Triad Senior Living, L.P. ("Triad"), a limited partnership owned 19% by a wholly owned subsidiary of the Company and 81% by unaffiliated third parties, under which Triad will pay development and management fees to the Company for development and management services and the Company will have options to purchase the communities upon their completion during the term of the management contracts. Triad will be responsible for funding and obtaining financing for the construction and lease-up costs. The Company may make available to Triad an unsecured credit facility of up to $10 million. These communities will have an aggregate capacity for approximately 1,496 residents at an aggregate estimated cost of completion and lease-up of approximately $80.0 million to $100.0 million. 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 Company had previously entered into a development agreement to develop the Waterford communities with Tri Point Communities, L.P. ("Tri Point"), a limited partnership owned by the Company's founders (Messrs. Beck and Stroud) and their affiliates. Effective April 1, 1998, Tri Point will be reorganized and the interests of Messrs. Beck and Stroud will be sold at their cost to Triad Senior Living, Inc. and its affiliates, which are unrelated third-parties. Triad Senior Living, Inc. and its affiliates have previously owned, developed, operated and sold senior living communities for their own account. Tri Point will be renamed Triad Senior Living, L.P. ("Triad"). The new general partner of Triad, owning 1%, will be Triad Senior Living, Inc. The limited partners will be Blake N. Fail (principal owner of Triad Senior Living, Inc.), owning 80%, and a wholly owned subsidiary of the Company, owning 19%. Triad will continue to be bound by the existing Development and Turnkey Services Agreement and all existing development agreements previously entered into between the Company and Tri Point, except the development fee will be reduced from 7% to 4%, but will also include reimbursements for expenses and overhead. Triad will also continue to be bound by all existing property management agreements. The Company's subsidiary will have an option to purchase the partnership interests of Triad Senior Living, Inc. and Blake N. Fail for an amount equal to the amount such party paid for its interest, plus non-compounded interest of 12% per annum. The property management agreements also provide the Company with an option to purchase the communities developed by Triad upon their completion for an amount equal to the fair market value (based on a third-party appraisal but not less than hard and soft costs and lease-up costs). The Company has made no determination as to whether it will exercise its purchase options. The Company will evaluate the possible exercise of each purchase option based upon the business and financial factors which may exist at the time those options may be exercised. 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, or site. In addition, the Waterford design has been developed to facilitate the prompt, efficient, cost-effective delivery of health care and personal services. Site requirements for the various designs range from 4.5 to 6.0 acres. The Waterford design may also provide for specially designed residential units, common areas, and dining rooms for residents with Alzheimer's and other forms of dementia. The Company believes that its designs meet the desire of many of its residents to move into a new residence that approximates, as nearly as possible, the comfort of their prior home. The Company also believes that its designs achieve several other objectives, including: (i) lessening the trauma of change for residents and their families; (ii) facilitating resident mobility and caregiver access; (iii) enhancing operating efficiencies; (iv) enhancing the Company's ability to match its products to targeted markets; and (v) differentiating the Company from its competitors. Development through Other Strategic Alliances. The Company has also formed strategic alliances with for-profit (LCOR Incorporated) and not-for-profit organizations (Buckner Retirement Services, Inc.) to develop, market and manage additional communities while reducing the investment of, and associated risks to, the Company. The Company's alliances are with established development companies or not-for-profit owner/operators of senior living communities. Ten of the 21 senior living communities referred to in the table below will be developed through strategic alliances. The for-profit entities generally provide construction management experience, existing relationships with local contractors, suppliers, and municipal authorities, knowledge of local and state building codes and building laws, and assistance with site selection for new communities. The not-for-profit organizations generally provide existing relationships with religious organizations, a community reputation of caring for seniors, a tax-exempt status that permits tax-exempt bond financing, and in certain instances, home health care services. The Company contributes its operational and industry expertise, and has had, in most cases, leasing and management responsibilities for communities owned by these organizations, as well as has the right of first refusal to acquire the communities in most cases. The Company intends to continue to evaluate opportunities to form similar joint ventures and strategic alliances in the future. 12 15 The Company has entered into a strategic alliance with LCOR Incorporated ("LCOR") to develop, market and manage senior living communities developed by LCOR. As of February 28, 1998, six sites have been put under contract for the development and operation of independent and assisted living communities. The sites under contract are Trumbull, Connecticut; Dallas, Texas; Libertyville, Illinois; Summit, New Jersey; Montclair, 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 5 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 is currently evaluating a number of potential development projects. The table below summarizes information regarding those developments which the Company expects to be completed by 2000.
SCHEDULED LOCATION OF DEVELOPMENT PROJECTS: COMPLETION IL AL SN TOTAL STATUS(1) - --------------------------------- ---------- -- -- -- ----- --------- Houston, TX(2) ................. 1st half 1998 243 82 60 385 Completed San Antonio, TX ................ 2nd half 1998 136 -- -- 136 Construction Shreveport, LA ................. 2nd half 1998 136 -- -- 136 Construction Mesquite, TX ................... 2nd half 1998 136 -- -- 136 Development Jacksonville, FL ............... 1st half 1999 136 -- -- 136 Development N. Richland Hills, TX .......... 1st half 1999 136 -- -- 136 Development Mesa, AZ ....................... 1st half 1999 136 -- -- 136 Development Lawrenceville, GA .............. 1st half 1999 136 -- -- 136 Development Brownwood, TX(2) ............... 1st half 1999 125 30 -- 155 Development Oklahoma City, OK .............. 1st half 1999 136 -- -- 136 Development San Antonio, TX ................ 1st half 1999 136 -- -- 136 Development Las Vegas, NV .................. 1st half 1999 136 -- -- 136 Development Beaumont, TX(2) ................ 1st half 1999 156 54 30 240 Development Oklahoma City, OK .............. 1st half 1999 136 -- -- 136 Development Trumbull, CT(3) ................ 1st half 1999 120 30 -- 150 Development Dallas, TX(3) .................. 1st half 1999 270 40 -- 310 Development Georgetown, TX(2) .............. 2nd half 1999 270 84 40 394 Development Libertyville, IL(3) ............ 2nd half 1999 140 -- -- 140 Development Summit, NJ(3) .................. 1st half 2000 -- 90 -- 90 Development Montclair, NJ(3) ............... 1st half 2000 100 30 -- 130 Development Naperville, IL(3) .............. 1st half 2000 135 -- -- 135 Development ----- --- --- ----- Total ..................... 3,055 440 130 3,625 ===== === === =====
- ---------- (1) "Development" indicates that development activities, such as site surveys, preparation of architectural plans, or initiation of zoning processes, have commenced (but construction has not commenced). "Construction" indicates that construction activities, such as ground-breaking activities, exterior construction, or interior build-out have commenced. The Houston, Texas community was completed on January 15, 1998. (2) Represent communities being developed with Buckner Retirement Services, Inc. (3) Represent communities being developed with LCOR Incorporated. Development of Joint Venture Operations in China The Company has entered into a joint venture agreement with New World Development, Ltd. ("New World") for the purpose of investing, developing and managing senior living communities in several cities in mainland China. New World is a publicly traded property development company based in Hong Kong that currently develops condominium and office projects in China. New World has estimated that it has invested approximately $2.6 billion in real estate ventures in China. Pursuant to the agreement with New World, the Company and New World will form an entity which will develop and operate senior living communities in major cities in China. New World will contribute its expertise in constructing properties in China and will bear substantially of all of the construction costs. The Company will be responsible for development of senior living communities and for property management services. The Company currently expects that following its initial development of senior living communities in China, the joint venture will sell individual units in the communities to prospective residents, and the Company will retain the operating responsibilities in such communities. The Company's target cities currently include Shanghai, Guangzhou and Beijing. The Company's management is continually monitoring the various issues that are arising in Asia in order to evaluate the proper timing for any development to occur there. 13 16 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. Develop and Acquire Additional Home Health Care Agencies The Company intends to expand its home health care services by developing, acquiring, and managing new home health care agencies and expanding its range of existing home health care services. The Company currently anticipates that its home health care agencies will be based at the Company's communities, and will serve both the Company's communities and the surrounding area. The Company believes that the expansion of its home health care services will enhance its ability to provide a broad range of health care services, increase its market visibility, augment the creation of senior living networks in targeted areas, and further enhance efforts to coordinate with managed care networks, increase company profitability, as well as aid in the maintaining of current occupancy levels. As of December 31, 1997, the Company operated one home health care agency, and intends to establish approximately three new home health care agencies at its owned properties by the fourth quarter of 1998. Expand Referral Networks The Company intends to continue to develop relationships (which, in certain instances, may involve strategic alliances or joint ventures) with local and regional hospital systems, managed care organizations, and other referral sources to attract new residents to the Company's communities. The Company believes that such arrangements or alliances, which could range from joint marketing arrangements to priority transfer agreements, will enable it to be strategically positioned within the Company's markets if, as the Company believes, senior living programs become an integral part of the evolving health care delivery system. OPERATIONS Centralized Management The Company centralizes its corporate and other administrative functions so that the community-based management and staff can focus their efforts on resident care. The Company maintains centralized accounting, finance, human resources, training, and other operational functions at its national corporate office in Dallas, Texas. The Company's corporate office is generally responsible for: (i) establishing Company-wide policies and procedures relating to, among other things, resident care and operations; (ii) performing accounting functions; (iii) developing employee training programs and materials; (iv) coordinating human resources; (v) coordinating marketing functions; and (vi) providing strategic direction. In addition, financing, development, construction and acquisition activities, including feasibility and market studies, and community design, development, and construction management, are conducted by the Company's corporate offices. The Company seeks to control operational expenses for each of its communities through standardized management reporting and centralized controls of capital expenditures, asset replacement tracking, and purchasing for larger and more frequently used supplies. Community expenditures are monitored by regional and district managers who are accountable for the resident satisfaction and financial performance of the communities in their region. 14 17 Community-Based Management An executive director manages the day-to-day operations at each senior living community, including oversight of the quality of care, delivery of resident services, and monitoring of financial performance, and is responsible for all personnel, including food service, maintenance, activities, security, assisted living, housekeeping, and, where applicable, nursing. In most cases, each community also has department managers who direct the environmental services, nursing or care services, business management functions, dining services, activities, transportation, housekeeping, and marketing functions. The assisted living and skilled nursing components of the senior living communities are managed by licensed professionals, such as a nurse and/or a licensed administrator. These licensed professionals have many of the same operational responsibilities as the Company's executive directors, but their primary responsibility is to oversee resident care. Many of the Company's senior living communities and some of its skilled nursing facilities are part of a campus setting, which includes independent living. This campus arrangement allows for cross-utilization of certain support personnel and services, including administrative functions, which results in greater operational efficiencies and lower costs than free-standing facilities. The Company actively recruits personnel to maintain adequate staffing levels at its existing communities as well as new staff for new or acquired communities prior to opening. The Company has adopted comprehensive recruiting and screening programs for management positions that utilize corporate office team interviews and thorough background and reference checks. The Company offers system-wide training and orientation for all of its employees at the community level through a combination of Company-sponsored seminars and conferences. Home Health Management The Company collects all home health care financial data through the use of an electronic data system. This system gives senior management the ability to identify emerging trends, monitor cost controls and develop current pricing strategies. All accounting functions are performed at the corporate office. The Company's home health care agency is managed under the auspices of the executive director of the community where that agency is located and under the direct control of an agency director who is a registered nurse. This director and his or her team of registered nurses, licensed practical nurses, home health care aides and various allied medical professionals focus on assessing and subsequently managing the health care needs of residents in that senior living community. Quality Assurance Quality assurance programs are coordinated and implemented by the Company's corporate and regional staff. The Company's quality assurance is targeted to achieve maximum resident and resident family member satisfaction with the care and services delivered by the Company. The Company's primary focus in quality control monitoring includes routine in-service training and performance evaluations of care givers and other support employees. Additional quality assurance measures include: Resident and Resident Family Input. On a routine basis the Company provides residents and family members the opportunity to provide valuable input regarding the day-to-day delivery of services. On-site management at each community has 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 1997, the Company achieved a 96% approval rating 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 15 18 community interiors and grounds. The inspection also includes monitoring staff professionalism and departmental reviews of maintenance, housekeeping, activities, transportation, marketing, administration and food service as well as health care, if applicable. The monthly inspection also includes the observation of residents in their daily activities and community compliance with government regulations. Independent Service Evaluations. The Company engages the services of outside professional independent consulting firms to evaluate various components of the community operations. These services include "mystery shops," competing community analysis, pricing recommendations and product positioning. This provides management with valuable unbiased product and service information. A plan of action regarding any areas requiring improvement or change is implemented based on information received. At communities where health care is delivered, these consulting service reviews include the on-site handling of medications, record-keeping, and general compliance with all governmental regulations. Marketing Each community is staffed by on-site marketing directors and additional marketing staff depending on the community size. The primary focus of the on-site marketing staff is to create awareness of the Company and its services among prospective residents and family members, professional referral sources and other key decision makers. The marketing efforts incorporate an aggressive marketing plan to include monthly and annual goals for leasing, new lead generation, prospect follow up, community outreach, and resident and family referrals. Additionally, the marketing plan includes a calendar of promotional events and a comprehensive media program. On-site marketing departments perform a competing community assessment twice annually. Corporate and regional marketing directors monitor the on-site marketing departments' effectiveness and productivity on a monthly basis. Routine detailed marketing department audits are performed on an annual basis or more frequently if deemed necessary. Corporate and regional personnel assist in the development of marketing strategies for each community and produce creative media, assist in direct mail programs and necessary marketing collateral materials. Ongoing sales training of on-site marketing staff is implemented by corporate and regional marketing directors. In the case of new development, the corporate and regional staff develop a comprehensive community outreach program that is implemented at the start of construction. A marketing pre-lease program is developed and on-site marketing staff are hired and trained to begin the program implementation six to nine months prior to the community opening. Extensive use of media to include radio, television, print, direct mail and telemarketing is implemented during this pre-lease phase. After the community is opened and sustaining occupancy levels are attained, the on-site marketing staff is more heavily focused on resident and resident family referrals, as well as professional referrals. A maintenance program of print media and direct mail is then implemented. GOVERNMENT REGULATION Changes in existing laws and regulations, adoption of new laws and regulations and new interpretations of existing laws and regulations could have a material effect on the Company's operations. Failure by the Company to comply with applicable regulatory requirements could have a material adverse effect on the Company's business, financial condition, and results of operations. Accordingly, the Company monitors legal and regulatory developments on local and national levels. 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, the Company's communities are subject to regulation, licensing, Certificate of Need and permitting by state and local health and social service agencies and other regulatory authorities. While such requirements vary from state to state, they typically relate to staffing, physical design, required services, and resident characteristics. The Company believes that such regulation will increase in the future. In addition, health care providers are receiving increased scrutiny under anti-trust laws as integration and consolidation of health care delivery increases and affects competition. The Company's communities are also subject to various zoning restrictions, local building codes, and other ordinances, such as fire safety codes. Failure by the Company to comply with applicable regulatory requirements could have a material adverse effect on the Company's business, financial condition, and results of operations. Regulation of the assisted living industry is evolving. 16 19 The Company is unable to predict the content of new regulations and their effect on its business. There can be no assurance that the Company's operations will not be adversely affected by regulatory developments. The Company believes that its communities are in substantial compliance with applicable regulatory requirements. However, in the ordinary course of business, one or more of the Company's communities could be cited for deficiencies. In such cases, the appropriate corrective action would be taken. To the Company's knowledge, no material regulatory actions are currently pending with respect to any of the Company's communities. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state, and local laws exist that also may require modifications to existing and planned properties to permit access to the properties by disabled persons. While the Company believes that its communities are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by the Company. Further legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial. In addition, the Company is subject to various federal, state and local environmental laws and regulations. Such laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial and the liability of an owner or operator as to any property is generally not limited under such laws and regulations and could exceed the property's value and the aggregate assets of the owner or operator. The presence of these substances or failure to remediate such contamination properly may also adversely affect the owner's ability to sell or rent the property, or to borrow using the property as collateral. Under these laws and regulations, an owner, operator or an entity that arranges for the disposal of hazardous or toxic substances, such as asbestos-containing materials, at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of its properties, the Company could be liable for these costs, as well as certain other costs, including governmental fines and injuries to persons or properties. The Company has completed Phase I environmental audits of the communities in which the Company owns interests, and such surveys have not revealed any material environmental liabilities that exist with respect to these communities. The Company believes that the structure and composition of government, and specifically health care, regulations will continue to change and, as a result, regularly monitors developments in the law. The Company expects to modify its agreements and operations from time to time as the business and regulatory environments change. While the Company believes it will be able to structure all its agreements and operations in accordance with applicable law, there can be no assurance that its arrangements will not be successfully challenged. COMPETITION The senior living services industry is highly competitive, and the Company expects that all segments of the industry will become increasingly competitive in the future. Although there are a number of substantial companies active in the senior living services industry and in the markets in which the Company operates, the industry continues to be very fragmented and characterized by numerous small operators. For example, the Company competes with American Retirement Corporation in Texas, Sunrise Assisted Living, Inc. in North Carolina and New York, Atria Communities in New York, and Marriott Senior Living Services in Florida. The Company believes that the primary competitive factors in the senior living services industry are: (i) reputation for and commitment to a high quality of service; (ii) quality of support services offered (such as home health care and 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. 17 20 EMPLOYEES As of December 31, 1997, the Company employed approximately 1,600 persons, of which approximately 900 were full-time employees (approximately 39 of whom are located at the Company's corporate offices) and 700 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, directors and key employees as of December 31, 1997:
NAME AGE POSITION(S) WITH THE COMPANY - ---- --- ---------------------------- Jeffrey L. Beck 52 Co-Chairman and Chief Executive Officer James A. Stroud 47 Co-Chairman, Chief Operating Officer, and Secretary Lawrence A. Cohen 44 Vice Chairman and Chief Financial Officer Keith N. Johannessen 41 President Rob L. Goodpaster 44 Vice President -- National Marketing David W. Beathard, Sr. 50 Vice President -- Operations Charles W. Allison 49 Vice President -- Development David R. Brickman 39 Vice President and General Counsel Kathleen L. Granzberg 36 Controller -- Corporate Robert F. Hollister 42 Controller -- Property
JEFFREY L. BECK has served as a director and Chief Executive Officer of the Company and its predecessors since January 1986. He currently serves as Co-Chairman and Chief Executive Officer of the Company. Mr. Beck also serves on the boards of various educational, religious and charitable organizations and in varying capacities with several trade associations. Mr. Beck served as Vice Chairman of the American Seniors Housing Association from 1992 to 1994, and as Chairman from 1994 to 1996, and remains a member of its Executive Board, and is a council member of the Urban Land Institute. Mr. Beck is Chairman of the Board of Directors of United Texas Bank of Dallas and is Chairman and President of Beck Properties Trophy Club. JAMES A. STROUD has served as a director and Chief Operating Officer of the Company and its predecessors since January 1986. He currently serves as Co-Chairman and Chief Operating Officer of the Company. Mr. Stroud also serves on the boards of various educational and charitable organizations, and in varying capacities with several trade organizations, including as a member of the Founder's Council and Board of Directors of the Assisted Living Federation of America, and as Housing Commissioner, President-Elect, and as a member of the Board of Directors of the National Association For Senior Living Industries. Mr. Stroud also serves as an Advisory Group member to the National Investment Conference. Mr. Stroud was a Founder of the Texas Assisted Living Association and serves as a member of its Board of Directors. Mr. Stroud has earned a Masters in Law, is a licensed attorney and is also a Certified Public Accountant. LAWRENCE A. COHEN has served as a director and Vice Chairman and Chief Financial Officer of the Company since November 1996. From 1991 to 1996, Mr. Cohen served as President, and Chief Executive Officer of Paine Webber Properties Incorporated, which controlled a real estate portfolio having a cost basis of approximately $3.0 billion, including senior living facilities of approximately $110.0 million. Mr. Cohen is also president and a member of the boards of directors of ILM Senior Living, Inc. and ILM II Senior Living, Inc., and is a member of the boards of directors of ILM I Lease Corporation and ILM II Lease Corporation. In addition, he serves as a member of the Corporate Finance Committee and chairman of the Direct Participation Programs Subcommittee 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, 18 21 is a licensed attorney and is also a Certified Public Accountant. Mr. Cohen has had positions with businesses involved in senior living for 13 years. KEITH N. JOHANNESSEN has served as President of the Company and its predecessors since March 1994, and previously served as Executive Vice-President since May 1993. From 1992 to 1993, Mr. Johannessen served as Senior Manager in the health care practice of Ernst & Young. From 1987 to 1992, Mr. Johannessen was Executive Vice President of Oxford Retirement Services, Inc. Mr. Johannessen has served on the State of the Industry and Model Assisted Living Regulations Committees of the American Seniors Housing Association. Mr. Johannessen has been active in operational aspects of senior housing for 19 years. ROB L. GOODPASTER has served as Vice President - National Marketing of the Company and its predecessors since December 1992. From 1990 to 1992, Mr. Goodpaster was National Director for Marketing for Autumn America, an owner and operator of senior housing facilities. Mr. Goodpaster is a member of the Board of Directors of the National Association For Senior Living Industries. Mr. Goodpaster has been active in the operational, development and marketing aspects of senior housing for 21 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 serves as a Designated Alternate member of the Board of Directors of the Texas Assisted Living Association. Mr. Beathard has been active in the operational, sales and marketing, and construction oversight aspects of senior housing for 23 years. CHARLES W. ALLISON has served as Vice President - Development of the Company and its predecessors since February 1997. From 1996 to 1997, Mr. Allison served as Vice President of Development with Greenbriar Corporation, and from 1993 to 1996 as Regional Director of Development for Sterling House Corporation, both of which are in the senior housing and health care development and operational business. Mr. Allison has been active in site selection, feasibility phase, design phase, and construction of senior housing properties and multi-family commercial real estate for 29 years. Mr. Allison has earned a Masters Degree in Business Administration. 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 which provided travel services to U.S. corporations. Mr. Brickman has earned a Masters of Business Administration and a Masters in Health Administration. Mr. Brickman has either practiced law or performed in-house counsel functions for 11 years. KATHLEEN L. GRANZBERG, a Certified Public Accountant, has served as the Corporate Controller for the Company and its predecessors since December 1991, and as Property Controller since 1987. Ms. Granzberg is a member of the American Institute of Certified Public Accountants and is also a member of the Texas Society of Certified Public Accountants. ROBERT F. HOLLISTER, a Certified Public Accountant, has served as Property Controller for the Company and its predecessors since April 1992. From 1985 to 1992, Mr. Hollister was Chief Financial Officer and Controller of Kavanaugh Securities, Inc., a NASD broker dealer. Mr. Hollister is a Certified Financial Planner. Mr. Hollister is a member of the American Institute of Certified Public Accountants and is also a member of the Texas Society of Certified Public Accountants. ITEM 2. PROPERTIES The executive and administrative offices of the Company are located at 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, and consist of approximately 14,000 square feet. The lease on the premises extends through August 31, 2002. The Company also leases an executive office space in New York, New York pursuant to a monthly lease agreement. The Company believes that its corporate office facilities are adequate to meet its requirements through at least fiscal 1998 and that suitable additional space will be available, as needed, to accommodate further physical expansion of corporate operations. As of December 31, 1997, the Company owned, leased and/or managed the senior living communities referred to in Item 1 above. Occupancy rate information as of December 31, 1997, is also presented for each community in Item 1 above. 19 22 ITEM 3. LEGAL PROCEEDINGS On July 29, 1996, ILM terminated management agreements with Angeles Housing Concepts, Inc. ("AHC") covering the management of its senior living communities and entered into the ILM Management Agreements described herein under "Business--Third-Party Management Contracts." AHC filed a lawsuit currently pending in the U.S. District Court of California against the Company and certain of its subsidiaries and officers alleging that the defendants intentionally interfered with AHC's property management agreements with ILM by inducing ILM to terminate the Agreements. The complaint seeks damages of at least $2 million. Trial in the action is currently expected to occur in June 1998 and discovery in the action is ongoing. The Company is vigorously defending these claims. The Company believes that it has meritorious defenses to AHC's claims and is evaluating with counsel the various legal options it has against AHC and others. While the Company believes that ultimately its insurance will cover this claim if determined adversely to the Company, the Company's insurance carrier formally denied coverage. The Company has filed suit against the carrier for coverage and the insurance carrier has indicated it will reconsider its original decision. No assurance can be made that the Company will have adequate insurance coverage for any damage award against the Company in the AHC lawsuit. In an action pending in the U.S. District Court for the Eastern District of Virginia in which the Company is not a party, ILM initiated a lawsuit against AHC for breach of contact and other claims and AHC filed a counterclaim against ILM. AHC has obtained a judgment against ILM in this action in the amount of $1 million, which judgment ILM has appealed. The provision of personal and health care services entails an inherent risk of liability. In recent years, participants in the senior living and health care services industry have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which involve large claims and result in the incurrence of significant defense costs. The Company currently maintains property, liability, and professional medical malpractice insurance policies for the Company's owned and managed communities under a master insurance program in amounts and with such coverages and deductibles that the Company believes are within normal industry standards based upon the nature and risks of the Company's business, and the Company believes that such insurance coverage is adequate. The Company also has an umbrella excess liability protection policy in the amount of $10.0 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, 1997. 20 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) On October 31, 1997, the Company listed its shares of common stock on the New York Stock Exchange ("NYSE") under the symbol "CSU." During the period of October 31, 1997 through December 31, 1997, the high and low sales prices were $17 1/2 and $9 13/16, respectively. There was no trading in the Company's common stock prior to October 31, 1997. At December 31, 1997, there were approximately 3,200 shareholders of record of the Company's common stock. It is the policy of the Company's Board of Directors to retain all future earnings to finance the operation and expansion of the Company's business. Accordingly, the Company has not and does not anticipate declaring or paying cash dividends on the common stock in the foreseeable future. The payment of cash dividends in the future will be at the sole discretion of the Company's Board of Directors and will depend on, among other things, the Company's earnings, operations, capital requirements, financial condition, restrictions in then existing financing agreements, and other factors deemed relevant by the Board of Directors. Since the respective dates of their incorporation, the Contributed Entities had elected to operate as S corporations under Subchapter S of the Internal Revenue Code. As a result, the Contributed Entities' earnings for the period commencing on the dates of their incorporation and ending on the day preceding the date of termination of their S corporation status have been or will be, as the case may be, taxed for Federal income tax purposes, with certain exceptions, directly to the stockholders of the Contributed Entities. The termination of the Contributed Entities' S corporation status occurred on the date of the completion of the Offering. Subsequent to completion of the Offering, the Contributed Entities are no longer treated as S corporations and, accordingly, are fully subject to federal income taxes. (b) Recent Sales of Unregistered Securities. Information with respect to this Item is set forth above under the caption "Item 1. Business--Formation Transactions." The issuance therein described of the Company's Common Stock to Messrs. Jeffrey L. Beck, James A. Stroud (through a trust) and Lawrence A. Cohen in the Formation Transactions in exchange for the Contributed Entities was carried out in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended, pursuant to a binding written agreement entered into prior to the filing of the Registration Statement filed in connection with the Offering. In connection with the organization of the Company, during 1996, the Company issued 1,680,000 shares of its Common Stock to Messrs. Beck, Stroud (through a trust) and Cohen for $16,800. The shares were issued in equal amounts of 560,000 shares to each in consideration for a cash payment by each of $5,600. Such issuances were made in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. (c) Use of Proceeds. As described above in "Business," the Company has completed the Offering. The following information relates to the use of proceeds of the Offering: (1) Effective Date of Registration Statement and Commission File Number: The Company's Registration Statement on Form S-1, File No. 333-33379 (the "Registration Statement"), relating to the Offering, became effective on October 30, 1997. (2) Offering Date: The closing date of the Offering was November 5, 1997. (3) Managing Underwriters: Lehman Brothers Inc.; J.C. Bradford & Co.; Donaldson, Lufkin & Jenrette Securities Corporation; and Smith Barney Inc. (4) Securities Registered and Proposed Aggregate Offering Price: The Company registered a total 10,350,000 shares of Common Stock. The proposed maximum aggregate offering price was $134,550,000. 21 24 (5) Securities Sold: A total of 10,350,000 shares of Common Stock were sold pursuant to the Offering. The aggregate gross proceeds from the Offering were $139,725,000. (6) Aggregate Gross Proceeds, Expenses and Aggregate Net Proceeds: The sale of the 10,350,000 shares of Common Stock generated aggregate gross proceeds of $139,725,000. The aggregate net proceeds to the Company from the sale of the 10,350,000 shares of Common Stock were approximately $128,407,000, after deducting underwriting discounts and commissions of approximately $9,742,000 and expenses of the Offering of approximately $1,576,000 paid by the Company. (7) Use of Proceeds: Through December 31, 1997, the Company had used approximately $1.6 million of the net proceeds of the Offering for expenses associated with the Offering. In addition, the Company used a portion of such net proceeds as follows: (i) approximately $70.8 million of such net proceeds to repay the indebtedness incurred by the Company to acquire assets (including construction in progress) in the Formation Transactions; (ii) approximately $18.1 million to repay the Formation Note; (iii) approximately $5.8 million to pay the balance of the purchase price to an affiliate related to the purchase of assets on the Formation Transactions; and (iv) approximately $1.2 million of such net proceeds to repay indebtedness to affiliates. The Company anticipates using the balance of such net proceeds primarily to purchase additional interests in the Company's existing senior living communities and for working capital and other general corporate purposes. The amounts actually expended for such purposes will depend on numerous factors, including the cost of purchasing such additional interests and the cost and availability of other projects that fit within the Company's growth strategy and other factors. 22 25 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, 1997, 1996, 1995 and 1994 are derived from the audited consolidated financial statements of the Company. The selected financial data for the year ended December 31, 1993 is derived from the unaudited consolidated financial statements of the Company.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Statements of Income Data: Revenues: Resident and health care revenue .... $ 21,207 $ 13,692 $ 13,238 $ 12,761 $ 12,140 Rental and lease income ............. 4,276 1,101 1,231 1,235 1,175 Unaffiliated management services revenue ................... 1,920 801 -- -- -- Affiliated management services revenue ................... 1,378 2,708 2,778 3,113 3,458 Development fees .................... 977 673 -- -- -- Other ............................... 952 924 871 800 1,022 -------- -------- -------- -------- -------- Total revenues .................... 30,710 19,899 18,118 17,909 17,795 -------- -------- -------- -------- -------- Expenses: Operating expenses .................. 17,474 10,798 10,287 10,142 9,653 General and administrative expenses(1) ........................ 6,312 5,493 4,364 4,595 5,406 Depreciation and amortization ....................... 2,118 1,481 1,776 1,707 1,609 -------- -------- -------- -------- -------- Total expenses .................... 25,904 17,772 16,427 16,444 16,668 -------- -------- -------- -------- -------- Income from operations ............... 4,806 2,127 1,691 1,465 1,127 Other income (expense): Interest income ..................... 3,186 432 368 122 89 Interest expense .................... (2,022) (221) (278) (261) (307) Gain on sale of properties(2) ...................... -- 438 -- -- -- Equity in earnings on investments ......................... -- 459 -- -- -- Other ............................... 440 42 -- (16) (20) -------- -------- -------- -------- -------- Income before income taxes and minority interest in consolidated partnerships............ 6,410 3,277 1,781 1,310 889 (Provision) benefit for income taxes(3) ..................... (793) -- (18) (130) 62 -------- -------- -------- -------- -------- Income before minority interest in consolidated partnerships ........................ 5,617 3,277 1,763 1,180 951 Minority interest in consolidated partnerships ........... (1,936) (1,224) (760) (634) (572) -------- -------- -------- -------- -------- Net income .......................... $ 3,681 $ 2,053 $ 1,003 $ 546 $ 379 ======== ======== ======== ======== ======== Net income per share: Basic and Diluted ................... $ 0.33 ======== Weighted average shares outstanding ....................... 11,150 ======== Pro Forma Net Income Data (unaudited)(4): Net income .......................... $ 3,681 $ 2,053 Pro forma income taxes .............. (965) (811) -------- -------- Pro forma net income ................ $ 2,716 $ 1,242 ======== ========
23 26
AT DECEMBER 31, -------------------------------------------------------- ($ IN THOUSANDS) 1997 1996 1995 1994 1993 -------- ------- ------- ------- ------- Balance Sheet Data: Cash and cash equivalents ............ $ 48,125 $10,819 $10,017 $ 8,799 $ 2,065 Working capital ...................... 42,860 9,567 6,784 5,938 48 Total assets ......................... 117,371 33,203 29,747 29,913 27,861 Long-term debt, including current portion .............................. 6,677 666 2,687 2,192 2,556 Equity ............................... 92,560 17,201 14,447 12,495 10,631
- ---------- (1) General and administrative expenses include officers' salaries of $3,342,000, $3,372,000, $2,976,000, $3,443,000 and $4,009,000 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. These amounts are primarily comprised of salaries and bonuses paid to the founders and were based in part on federal income tax regulations regarding distributions of closely held corporations and S corporations. Effective with the Offering, these federal income tax regulations no longer applied to the Company. Compensation of the founders since October 1, 1997 have been based on the founders' employment agreements. (2) The statement of income for the year ended December 31, 1996 includes a gain of $438,000 on the sale of two multi-family rental properties on November 1, 1996. (3) Aprovision for income taxes was recorded by the Company from inception through February 1, 1995. No provision for income taxes has been recorded from February 1, 1995 through completion of the Formation Transactions as the operating companies included in the historical financial statements, prior to the Offering, were S corporations or partnerships and accordingly were not subject to income taxes during the period. (4) 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%. 24 27 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 an historical consolidated basis for the years ended December 31, 1997, 1996 and 1995. The following should be read in conjunction with the Company's historical consolidated financial statements and the selected financial data contained elsewhere in this report. On September 15, 1997, the Company increased its authorized common shares from 40,000,000 to 65,000,000 shares and authorized 15,000,000 shares of preferred stock. On November 5, 1997, the Company issued 18,037,347 additional shares of common stock (including 1,350,000 shares issued upon exercise of an option granted underwriters to purchase additional common shares in conjunction with the Offering) bringing its total issued and outstanding shares of common stock to 19,717,347 shares. Of the 18,037,347 shares issued, 7,687,347 shares were issued to Messrs. Beck, Stroud and Cohen in the Formation Transactions described below and 10,350,000 shares were registered with the Securities and Exchange Commission for trading in public markets. On November 5, 1997, the Company also entered into Formation Transactions with Messrs. Beck and Stroud whereby they contributed all of their owned capital stock of Capital Senior Living, Inc., Capital Senior Management 1, Inc., Capital Senior Management 2, Inc., Capital Senior Development, Inc., and with Mr. Cohen, of Quality Home Care, Inc. (the "Contributed Entities") to the Company in exchange for the issuance of 7,687,347 shares of common stock of the Company and the issuance of separate notes in the aggregate amount of $18,076,380 to Messrs. Beck, Stroud and Cohen, which were subsequently repaid by the Company from the net proceeds received from the sale of the Company's common stock in the Offering. As part of the Formation Transactions, the Company simultaneously purchased substantially all of the operating assets of CSLC (including CSLC's investment in HCP and NHP and excluding CSLC's cash, U.S. Treasury securities purchased under the LBHI Loan agreement and working capital items) for an aggregate purchase price of approximately $76.6 million, comprised of the assumption by the Company of CSLC's outstanding LBHI Loan of approximately $70.8 million and payment of cash of approximately $5.8 million to CSLC. On November 7, 1997, the Company repaid the LBHI Loan from the proceeds received from the Offering. In October 1997, the combined Companies declared and paid dividends of $457,647 to Messrs. Beck, Stroud and Cohen in preparation for the Formation Transactions that transformed the combined companies from closely held corporations and S corporations to non-closely held C corporations for federal income tax purposes. The Formation Transactions transferred ownership of the various entities previously under common control to the Company whereby all of the Company's operations are now conducted by the Company or its wholly owned subsidiaries. The Formation has been accounted for at historical cost in a manner similar to a pooling of interests to the extent of the percentage ownership by the Stockholders prior to the Formation. Due to all of these entities being under the common control of Messrs. Beck and Stroud, the Company's consolidated financial statements reflect the assets and liabilities at their historical values and the accompanying consolidated statements of income, equity, and cash flows reflect the combined results for the periods indicated through the date of the Offering even though they have historically operated as separate entities. The Formation Transactions have been accounted for at historical cost in a manner similar to a pooling of interests to the extent of the percentage ownership by Messrs. Beck and Stroud of the Company. Acquired assets and liabilities of CSLC have been recorded at fair value to the extent of minority interest. CSLC's assets include investments in HCP and NHP. From 1990 through December 31, 1997, the Company acquired interests in 17 communities and entered into an operating lease with respect to one community. In 1996, the Company expanded its senior living management services by taking over the management service contracts on 15 communities for four independent third-party owners and commenced 25 28 providing development and construction management services for new residence properties in addition to adding a home health care service agency. The Company generates revenue from a variety of sources. For the year ended December 31, 1997, the Company's revenue was derived as follows: 69.1% from the operation of five owned and one leased senior living communities that were operated by the Company; 13.9% from lease rentals from triple net leases of three skilled nursing facilities and four physical rehabilitation centers; 10.7% from management fees arising from management services provided for five affiliate owned senior living communities and fifteen third-party owned senior living communities; and 3.2% derived from development fees earned for managing the development and construction of new senior living communities for third parties. As the Company continues to implement its business plan, management believes that the mix of the Company's revenues may change and that development activities will take on an increased importance to the Company. 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 three of its owned communities and through the year 2001 for four of its owned communities. The payments under these leases are fixed and are not subject to change based upon the operating performance of these communities. Following termination of the lease agreements, the Company intends to convert and operate the communities as assisted living and Alzheimer's care facilities. The Company's current management contracts expire on various dates between July 1998 and February 2004 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, 1997, development fees have been earned for services performed for seven communities under development for third parties. During 1997, 1996 and 1995, the Company made various purchases of limited partnership interests in HCP, an affiliated partnership whose properties are managed by the Company under management contracts. HCP owns and operates a skilled nursing facility and owns and leases to third-party operators (under triple net leases) three skilled nursing facilities and four physical rehabilitation centers. During 1997, 1996 and 1995, the Company paid approximately $5,605,000, $3,201,000 and $309,000, respectively, for partnership interests in HCP. The Company changed its method of accounting for its investment in HCP from the cost method in 1995 to the equity method in 1996. As a result of additional purchases, the Company's ownership interest in HCP exceeded 50% on June 26, 1997. Accordingly, this partial acquisition has been accounted for by the purchase method of accounting and the assets, liabilities, minority interest, and the results of operations of HCP have been consolidated in the Company's financial statements since January 1, 1997. During 1997, 1996 and 1995, the Company made various purchases of outstanding notes of NHP, an affiliated partnership whose properties are managed by the Company under management contracts. NHP owns and operates five senior living communities. Prior to the Offering, the Company had cumulatively paid $10,790,828 for ownership of 30.8% of the outstanding NHP Notes, which represents $13,142,976 of the outstanding balance of these notes and $7,308,965 of the accrued interest. The NHP Notes bear simple interest at 13% per annum and mature on December 31, 2001. Interest is paid quarterly at a rate of 7%, with the remaining 6% interest deferred. Prior to April 1997, the Company did not accrue the deferred interest on the NHP Notes due to uncertainties regarding its ultimate realization; rather, the Company based its interest accrual on the interest received on its investment. Beginning April 1, 1997, the Company began accruing a portion of the deferred interest 26 29 income due to improved NHP cash flows and the results of an independent valuation of NHP's properties, which supported management's analysis that the investment in the NHP Notes and the deferred interest are recoverable. The operations of NHP have demonstrated continuing improvement since 1992, and, although there can be no assurance, management believes that the performance of NHP will be sustained through the time the NHP Notes mature. The Company acquired the NHP Notes at discounts to the outstanding principal balance of those Notes based on the prevailing secondary market prices for the NHP Notes at the dates of acquisition. The Company believes that the NHP Notes have traded at a significant discount due primarily to the lack of an organized secondary market for such Notes, and believes that such discount is not a function of the credit risks associated with such Notes. The Company acquired the NHP Notes owned by CSLC in the Formation Transactions for $18,664,128. Subsequent to the acquisition, the Company has been recording interest income at 10.5% of the purchase price paid which was determined based on the discounted amount of principal and interest payments to be made following the maturity date (December 31, 2001) of the NHP Notes (using a six-month lag between maturity and full repayment). Also, during 1996, the Company paid $1,364 for a 3% ownership of limited partnership interests in NHP. The Company accounts for its investment in NHP on the cost method with respect to the NHP limited partnership interests and as held-to-maturity securities and reported at amortized cost with respect to the NHP Notes. The Company will continue to develop senior living communities. The development of senior living communities typically involves a substantial commitment of capital over a 12-month construction period during which time no revenues are generated, followed by a 12-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 health care agencies, and other properties or businesses that are complementary to the Company's operations and growth strategy. 27 30 RESULTS OF OPERATIONS The following tables set forth for the periods indicated, selected historical consolidated statements of income data in thousands of dollars and expressed as a percentage of total revenues.
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ---------------------- --------------------- ---------------------- $ % $ % $ % -------- ------- -------- ------- -------- -------- Revenues: Resident and health care revenue ........................ $ 21,207 69.1% $ 13,692 68.8% $ 13,238 73.1% Rental and lease income .......... 4,276 13.9 1,101 5.5 1,231 6.8 Unaffiliated management services revenue ............... 1,920 6.2 801 4.0 -- -- Affiliated management services revenue ........................ 1,378 4.5 2,708 13.6 2,778 15.3 Development fees ................. 977 3.2 673 3.4 -- -- Other ............................ 952 3.1 924 4.7 871 4.8 -------- ------- -------- ------- -------- ------- Total revenues ................. 30,710 100.0 19,899 100.0 18,118 100.0 -------- ------- -------- ------- -------- ------- Expenses: Operating expenses ............... 17,474 56.9 10,798 54.3 10,287 56.8 General and administrative expenses ....................... 6,312 20.6 5,493 27.6 4,364 24.1 Depreciation and amortization .... 2,118 6.9 1,481 7.4 1,776 9.8 -------- ------- -------- ------- -------- ------- Total expenses ................. 25,904 84.4 17,772 89.3 16,427 90.7 -------- ------- -------- ------- -------- ------- Income from operations ............. 4,806 15.6 2,127 10.7 1,691 9.3 Other income (expense): Interest income .................. 3,186 10.4 432 2.2 368 2.0 Interest expense ................. (2,022) (6.5) (221) (1.1) (278) (1.5) Gain on sale of properties ....... -- -- 438 2.2 -- -- Equity in earnings on investments .................... -- -- 459 2.3 -- -- Other ............................ 440 1.4 42 0.2 -- -- -------- ------- -------- ------- -------- ------- Income before income taxes and minority interest in consolidated partnerships .......... 6,410 20.9 3,277 16.5 1,781 9.8 Provision for income taxes ......... (793) (2.6) -- -- (18) (0.1) -------- ------- -------- ------- -------- ------- Income before minority interest in consolidated partnerships ..... 5,617 18.3 3,277 16.5 1,763 9.7 Minority interest in consolidated partnerships .......... (1,936) (6.3) (1,224) (6.2) (760) (4.2) -------- ------- -------- ------- -------- ------- Net income ......................... $ 3,681 12.0% $ 2,053 10.3% $ 1,003 5.5% ======== ======= ======== ======= ======== =======
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Revenues. Total revenues were $30,710,000 in 1997 compared to $19,899,000 in 1996, representing an increase of $10,811,000, or 54.3%. The inclusion of HCP revenues in 1997 from January 1, 1997 contributed $8,978,000 of the increase, as HCP was not consolidated in 1996. Resident and health care revenue increased $7,515,000, of which $4,702,000 is a result of the HCP consolidation, $1,157,000 is improvement in CSLC's revenues due to realization of additional reimbursements previously limited under the Medicare program for 1994 and 1992 combined with improved CSLC rental rates and occupancies and $1,543,000 related to the Maryland Gardens facility leased on June 1, 1997. Rental and lease income increased $3,175,000, of which $4,276,000 was due to the HCP consolidation, offset by $1,101,000 due to the sale of CSLC's multi-family properties on November 1, 1996. Unaffiliated management services revenue increased $1,119,000 due to 15 third-party management contracts added in the third and fourth quarter of 1996 and one additional third-party management 28 31 contract added in the second quarter of 1997. Affiliated management services revenue decreased by $1,330,000, of which $1,177,000 was due to the HCP consolidation. Development fees increased $304,000 and is due to new development contract management revenue for managing the development and construction of new third-party owned senior living communities. Expenses. Total expenses were $25,904,000 in 1997 compared to $17,772,000 in 1996, representing an increase of $8,132,000, or 45.8%. The inclusion of HCP expenses from January 1, 1997 contributed $6,538,000 of the increase. Operating expenses increased $6,676,000 of which $4,251,000 is a result of the HCP consolidation, $1,561,000 due to Maryland Gardens operating expenses, and an increase in development operating expenses of $631,000 owing to increased development operations. General and administrative expenses increased $819,000, which was due to the HCP consolidation of $1,078,000 offset by an overall decrease in general and administrative expenses. Depreciation and amortization increased $637,000, of which $1,209,000 is related to the HCP consolidation, offset by a $572,000 decrease in CSLC's depreciation which is primarily due to the sale of CSLC's multi-family rental properties in November 1996. Other income and expenses. Interest income increased $2,754,000, primarily as a result of CSLC's increase in interest income of $1,116,754 associated with its investment in U.S. Treasury Bills, $1,230,000 as a result of the Company's increase in interest income associated with its increased investment in NHP Notes combined with the commencement of accruing a portion of the deferred income on the these notes beginning in April 1997, as a result of NHP's improved financial position and performance and increased valuation of the underlying properties, $288,361 associated with income from temporary investment of net proceeds from the Offering for November and December 1997, and the consolidation of HCP of $359,000. Interest expense increased $1,801,000 as a result of higher debt balances including the LBHI Loan borrowings on July 1, 1997 and $679,000 as a result of the HCP consolidation. Income from equity in earnings on investments decreased $459,000 as a result of the HCP consolidation on January 1, 1997. In connection with the sale of its investment in HCP to the Company immediately following completion of the Offering, CSLC incurred short swing profits, as defined by the Securities and Exchange Commission, and was, accordingly, required to remit such profits to HCP which recorded the remittance as other income. A gain of $438,000 was recorded on November 1, 1996, as a result of the sale of multi-family properties with no corresponding gain being realized in 1997. Minority interest. Minority interest in limited partnerships increased $712,000 primarily as a result of the HCP consolidation. Provision for income taxes. Provision for income taxes was approximately $793,000 in 1997 compared to no provision in 1996. As a result of the Formation Transactions, the Company and its consolidated subsidiaries were converted from S corporations that are taxed at the shareholder level to C corporations that are subject to corporate income taxes. Accordingly, a provision for federal and state income taxes is provided on earnings after the Formation Transactions. Net income. As a result of the foregoing factors, net income increased $1,628,000 to $3,681,000 for 1997 from $2,053,000 for 1996. YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995 Revenues. Total revenues were $19,899,000 in 1996 compared to $18,118,000 in 1995, representing an increase of $1,781,000, or 9.8%. Resident and health care revenue increased $454,000 as a result of $241,000 of 1996 revenues associated with the home health care business established in 1996 and a $213,000 increase in CSLC's senior living and health care revenues caused primarily by increased rates. Rental and lease income decreased $130,000 as a result of the sale of CSLC's multi-family properties on November 1, 1996. Unaffiliated management services revenue increased $801,000 due to the 15 third-party management contracts added in 1996. Affiliated management services revenue decreased by $70,000, with $181,000 of the decrease a result of the sale of two HCP managed properties in 1995 and 1996, offset by improved occupancies in managed properties and an overall increase in management fees to unconsolidated affiliates of $110,000. Development fees of $673,000 in 1996 were due to new development contract management revenue for managing the development and construction of new third-party owned senior living communities. Expenses. Total expenses were $17,772,000 in 1996 compared to $16,427,000 in 1995, representing an increase of $1,345,000, or 8.2%. Operating expenses increased $511,000 as a result of $142,000 of expenses associated with property development and $218,000 of expenses due to the home health care businesses established in 1996, and a $150,000 increase 29 32 in expenses related to increased resident and health care revenues. General and administrative expenses increased $1,129,000. This increase was due to an increase in officers' salaries and bonuses and an increase in other general and administrative expenses of $733,000, which was primarily the result of expanded business operations. Depreciation and amortization decreased $295,000 and was primarily related to decreases in depreciation of $245,000 associated with multi-family rental properties sold on November 1, 1996, and amortization of deferred income associated with the equity method of accounting of acquired interests in HCP in 1996 of $119,000, offset by a $69,000 increase in amortization expense. Other income and expenses. Interest and other income increased $106,000 primarily as a result of increased income associated with investment of cash reserves and interest received on CSLC's investment in the NHP Notes. Interest expense decreased $57,000 primarily as a result of the retirement of the mortgage loans associated with the properties sold on November 1, 1996. Equity in earnings on investments was $459,000 in 1996 as a result of the application of the equity method of accounting for CSLC's investment in HCP in the first quarter of 1996. A gain of $438,000 was recorded on November 1, 1996 as a result of the sale of properties with no corresponding gains being realized in 1995. Provision for income taxes. Prior to February 1, 1995, one of the Company's predecessor entities (Capital Senior Living, Inc.) incurred federal and state income taxes. Effective February 1, 1995, Capital Senior Living, Inc. became an S corporation and consequently was not subject to income taxes after February 1, 1995. CSLC and HCP are not subject to Federal income taxes as the partners are responsible for their respective shares of partnership net income or loss for income tax purposes and the companies owned by HCP did not generate taxable income for Federal income tax purposes. As a result, the provision for income taxes decreased from $18,000 in 1995 to no tax provision in 1996. Minority interest. Minority interest in combined partnerships increased $464,000 in 1996 primarily as a result of increased earnings of CSLC offset by a decrease in minority interest from 42.6% in 1995 to 37.2% in 1996. Net income. As a result of the foregoing factors, net income increased $1,050,000 or 104.7% to $2,053,000 for 1996 from $1,003,000 for 1995. QUARTERLY RESULTS The following table presents certain quarterly financial information for the four quarters ended December 31, 1997 and 1996. 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.
1997 Calendar Quarters ---------------------------------------- First Second Third Fourth ------ ------ ------ ------- (in thousands, except per share amounts) Total revenues ......................... $7,091 $7,977 $7,652 $ 7,990 Income from operations ................. 1,124 980 959 1,743 Net income ............................. 583 630 797 1,671 Net income per share ................... $ 0.06 $ 0.07 $ 0.09 $ 0.10 Weighted average shares outstanding .... 9,367 9,367 9,367 16,440
1996 Calendar Quarters ---------------------------------------- First Second Third Fourth ------ ------ ------ ------- (in thousands) Total revenues ......................... $4,754 $4,758 $4,855 $ 5,532 Income from operations ................. 481 393 157 1,096 Net income ............................. $ 313 $ 467 $ 24 $ 1,249
30 33 LIQUIDITY AND CAPITAL RESOURCES As described in the notes to the accompanying consolidated financial statements, the Company repaid all of its notes payable to affiliates and the mortgage loan payable to Lehman Brothers Holdings, Inc. with proceeds from the Offering in November 1997 leaving only the mortgage property loans of HCP outstanding thereafter. The Company also secured a three year revolving line of credit of $20 million which may be used for acquisition of additional interest in HCP and NHP, expansion of owned communities, acquisition of additional properties and general working capital purposes. In addition to approximately $48 million of cash balances on hand as of December 31, 1997, after payment of all Formation Transactions and expenses associated with the Offering, the Company's principal sources of liquidity are expected to be cash flows from operations and amounts available for borrowing under its $20 million revolving line of credit. There can be no assurance, however, that the Company will continue to generate cash flows at or above current levels or that the Company will be able to meet its anticipated need for working capital. The Company derives the benefits and bears the risk attendant to the communities it owns. The cash flows and profitability of owned communities depends on the operating results of such communities and are subject to certain risks of ownership, including the need for capital expenditures, financing and other risks such as those relating to environmental matters. The cash flows and profitability of the Company's owned communities that are leased to third parties depend on the ability of the lessee to make timely lease payments. At December 31, 1997, HCP was operating one of its properties and had leased seven of its owned properties under triple net leases to third parties until year 2000 or 2001. Four of these properties are leased until year 2001 to HealthSouth Rehabilitation Corp. ("HealthSouth"), which provides acute spinal injury intermediate care at these properties. HealthSouth closed one of these facilities in 1994 and closed another facility in February of 1997 due to low occupancy. HealthSouth has continued to make lease payments on a timely basis for all four properties. Should the operators of the leased properties default on payment of their lease obligations prior to termination of the lease agreements, six of the seven lease contracts contain a continuing guarantee of payment and performance by the parent company of the operators, which the Company intends to pursue in the event of default. Following termination of these leases, the Company intends to convert and operate the facilities as assisted living and Alzheimer's care facilities. HCP's facility leases are all current in their lease obligations to HCP. The lessee for one property continues to fund a deficit between the required lease payment and operators' cash flow. The cash flows and profitability of the Company's third-party management fees are dependent upon the revenues and profitability of the communities managed. While the management contracts are generally terminable only for cause, in certain cases the contracts can be terminated upon the sale of a community, subject to the Company's rights to offer to purchase such community. The Company plans to continue to develop senior living communities. The development of senior living communities typically involves a substantial commitment of capital over a 12-month construction period during which time no revenues are generated, followed by a 12-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. On September 16, 1997, the Company and Tri Point Communities, L.P. ("Tri Point"), a limited partnership owned by the Company's founders (Messrs. Beck and Stroud) and their affiliates, entered into a Development and Turnkey Services Agreement in connection with the development and management of the Company's planned new communities (Waterford Communities) where Tri Point will own and finance the construction of planned new Waterford Communities. In connection with these communities the Company will have an option to purchase the communities developed by Tri Point upon their completion at a price equal to fair market value (based upon a third-party appraisal). The Company has made no determination as to whether it will exercise its purchase options. The Company believes that the arrangement with Tri Point provides it with an attractive mechanism to develop new communities without employing its own capital and which will not be dilutive to earnings during the development and lease-up phases. Further, the Company will receive development fees of between 4% and 7% of total project costs. Tri Point has received and accepted commitments for loan facilities aggregating up to $100 million to fund its development activities. Effective April 1, 1998, Tri Point will be reorganized and the interests of Messrs. Beck and Stroud will be sold at their cost to Triad Senior Living, Inc. and its affiliates, which are unrelated third-parties. Triad Senior Living, Inc. and its affiliates have previously owned, developed, operated and sold senior living communities for their own account. Tri Point will be renamed Triad 31 34 Senior Living, L.P. ("Triad"). The new general partner of Triad, owning 1%, will be Triad Senior Living, Inc. The limited partners will be Blake N. Fail (principal owner of Triad Senior Living, Inc.), owning 80%, and a wholly owned subsidiary of the Company, owning 19%. Triad will continue to be bound by the existing Development and Turnkey Services Agreement and all existing development agreements, except the development fee will be reduced from 7% to 4%, but will include reimbursements for expenses and overhead. Triad will also continue to be bound by all existing property management agreements. The Company's subsidiary will have an option to purchase the partnership interests of Triad Senior Living, Inc. and Blake N. Fail for an amount equal to the amount such party paid for its interest, plus non-compounded interest of 12% per annum. The property management agreements also provide the Company with an option to purchase the communities developed by Triad upon their completion for an amount equal to the fair market value (based on a third-party appraisal but not less than hard and soft costs and lease-up costs). The Company has made no determination as to whether it will exercise its purchase options. The Company will evaluate the possible exercise of each purchase option based upon the business and financial factors which may exist at the time those options may be exercised. Net cash provided by operating activities of $9,684,000 for the year ended December 31, 1997 increased $5,782,000, or 148%, over that of the comparable year ended December 31, 1996, which was primarily comprised of increased cash flow created by improved earnings of $3,855,000 (after non-cash adjustments) combined with $1,927,000 of cash provided by a comparative decrease in working capital. Net cash used in investing activities of $81,502,000 for the year ended December 31, 1997 increased $79,799,000 over that of the comparable year ended December 31, 1996. This increase was comprised of increased capital expenditures of $1,589,000 primarily related to the Cottonwood expansion, the lack of comparable proceeds from sale of properties in 1997 compared to 1996's proceeds of $2,549,000 (1996 sale of multi-family properties), an increase in investments in 1997 in limited partnerships (CSLC, HCP and NHP pension notes) of $12,208,000, the $64,203,000 investment by the Company in restricted cash securities from the proceeds obtained from the LBHI Loan and cash paid for the November 1997 purchase of assets acquired from CSLC and cash not retained offset by HCP's beginning cash balance of $8,995,000 as a result of the consolidation of HCP at January 1, 1997. Net cash provided by financing activities of $109,125,000 for the year ended December 31, 1997 increased $110,521,000 over that of the comparable year ended December 31, 1996. This increase was due to $110,331,000 of net proceeds received by the Company in November 1997 from the Offering. YEAR 2000 ISSUE The Company has developed a plan to modify its information technology to be ready for the year 2000. The Company relies upon PC-based systems and does not expect to incur material costs to transition to Year 2000 compliant systems in its internal operations. The Company does not expect this project to have a significant effect on operations. The Company will continue to implement systems and all new investments are expected to be with Year 2000 compliant software. IMPACT OF INFLATION To date, inflation has not had a significant impact on the Company. Inflation could, however, affect the Company's future revenues and results of operations because of, among other things, the Company's dependence on senior residents, many of whom rely primarily on fixed incomes to pay for the Company's services. As a result, during inflationary periods, the Company may not be able to increase resident service fees to account fully for increased operating expenses. In structuring its fees, the Company attempts to anticipate inflation levels, but there can be no assurance that the Company will be able to anticipate fully or otherwise respond to any future inflationary pressures. FORWARD LOOKING STATEMENTS Certain information contained in this report constitutes "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The Company cautions readers that forward looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, 32 35 working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements, due to several important factors herein identified, among others, and other risks and factors identified from time to time in the Company's reports filed with the Securities and Exchange Commission. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are included under Item 14 of this Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company had no disagreements on accounting or financial disclosure matters with its independent accountants to report under this Item 9. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information contained under the caption "Election of Directors" in the Proxy Statement is incorporated herein by reference in response to this Item 10. See also Item 1. ITEM 11. EXECUTIVE COMPENSATION Information contained under the captions "Executive Compensation" and "Election of Directors" in the Proxy Statement is incorporated herein by reference in response to this Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information contained under the caption "Principal Stockholders" in the Proxy Statement is incorporated herein by reference in response to this Item 12. 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. 33 36 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 did not file any reports on Form 8-K during the quarterly period ended December 31, 1997. 34 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 27, 1998. CAPITAL SENIOR LIVING CORPORATION By: /s/ Jeffrey L. Beck --------------------------------- Jeffrey L. Beck Co-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 Jeffrey L. Beck and James A. Stroud and each of the, any one of whom may act without the joinder of the other, as his or her attorney-in-fact to sign on his behalf, individually and in each capacity stated below, and to file all amendments to this report, which amendment or amendments may make such changes in and additions to the report as any such attorney-in-fact may deem necessary or appropriate.
Signature Title Date --------- ----- ---- /s/ Jeffrey L. Beck Co-Chairman of the Board, Chief March 27, 1998 - --------------------------------- Executive Officer (Principal Jeffrey L. Beck Executive Officer) /s/ James A. Stroud Co-Chairman of the Board, Chief March 27, 1998 - --------------------------------- Operating Officer James A. Stroud /s/ Lawrence A. Cohen Vice Chairman, Chief Financial March 27, 1998 - --------------------------------- Officer (Principal Financial and Lawrence A. Cohen Accounting Officer) /s/ Dr. Gordon I. Goldstein Director March 27, 1998 - --------------------------------- Dr. Gordon I. Goldstein /s/ J. Frank Miller, III Director March 27, 1998 - --------------------------------- J. Frank Miller, III /s/ James A. Moore Director March 27, 1998 - --------------------------------- James A. Moore /s/ Dr. Victor W. Nee Director March 27, 1998 - --------------------------------- Dr. Victor W. Nee
35 38 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 Peat Marwick LLP, Independent Auditors.................................. F-3 Consolidated Balance Sheets - December 31, 1997 and 1996............................... F-4 Consolidated Statements of Income - December 31, 1997, 1996 and 1995................... F-5 Consolidated Statements of Equity - December 31, 1997, 1996 and 1995................... F-6 Consolidated Statements of Cash Flows - December 31, 1997, 1996 and 1995............... F-7 Notes to Consolidated Financial Statements............................................. F-8
F-1 39 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, 1997 and 1996, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 56% owned subsidiary, which statements reflect total assets of $32,801,853 as of December 31, 1997, and total revenues of $8,977,628 for the year ended December 31, 1997. 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 other auditors. 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 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, 1997 and 1996, and the results of their consolidated operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Dallas, Texas February 6, 1998 F-2 40 INDEPENDENT AUDITORS' REPORT The Partners HealthCare Properties, L.P. We have audited the accompanying consolidated balance sheet of HealthCare Properties, L.P. and subsidiaries (a Delaware limited partnership) as of December 31, 1997, and the related consolidated statements of income, partnership equity, and cash flows for the year ended December 31, 1997. 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 audit. We conducted our audit 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 audit provides 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, 1997, and the results of their operations and their cash flows for the year ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Dallas, Texas February 4, 1998 F-3 41 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31, ----------------------- 1997 1996 ---- ---- Current assets: Cash and cash equivalents................................................. $ 48,125,225 $ 10,818,512 Cash, restricted.......................................................... - 206,376 Accounts receivable, net.................................................. 1,966,357 607,028 Accounts receivable from affiliates....................................... 26,696 90,075 Deferred taxes............................................................ 8,280 - Prepaid expenses and other................................................ 481,149 121,993 ------------ ----------- Total current assets.................................................... 50,607,707 11,843,984 Deferred taxes............................................................... 10,090,997 - Property and equipment, net.................................................. 41,120,448 12,668,539 Investments in limited partnerships ......................................... 13,741,940 8,275,920 Management contract rights, net.............................................. 243,559 291,487 Goodwill, net................................................................ 1,257,595 - Deferred financing charges, net.............................................. 108,435 106,440 Other assets................................................................. 200,229 16,644 ------------ ----------- Total assets.......................................................... $117,370,910 $33,203,014 ============ =========== LIABILITIES AND EQUITY Current liabilities: Accounts payable.......................................................... $ 2,566,392 $ 396,867 Accrued expenses.......................................................... 1,259,410 1,084,686 Line of credit............................................................ 1,830,130 - Current portion of notes payable to affiliates............................ - 465,091 Current portion of notes payable.......................................... 932,664 - Customer deposits......................................................... 277,413 248,458 Federal and state income taxes payable.................................... 831,682 - Due to affiliates......................................................... 50,064 81,456 ------------ ----------- Total current liabilities............................................. 7,747,755 2,276,558 Deferred income ............................................................. 231,256 3,400,684 Notes payable to affiliates, net of current portion.......................... - 201,390 Notes payable, net of current portion ....................................... 5,744,767 - Minority interest in consolidated partnerships .............................. 11,087,512 10,123,858 Commitments and contingencies Equity: Partners' capital......................................................... - 17,257,778 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 1997 and 1,680,000 in 1996............................................... 197,173 16,800 Additional paid-in capital................................................ 91,740,251 26,558 Retained earnings (deficit)............................................... 622,196 (100,612) ------------ ----------- Total equity.......................................................... 92,559,620 17,200,524 ------------ ----------- Total liabilities and equity.......................................... $117,370,910 $33,203,014 ============ ===========
See accompanying notes. F-4 42 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ---- ---- ---- Revenues: Resident and health care revenue............................... $ 21,206,865 $ 13,691,984 13,237,891 Rental and lease income........................................ 4,275,611 1,101,317 1,230,859 Unaffiliated management services revenue....................... 1,919,618 800,961 - Affiliated management services revenue......................... 1,378,444 2,708,077 2,778,644 Development fees............................................... 976,694 673,587 - Other.......................................................... 952,650 923,700 870,717 ------------ ------------ ----------- Total revenues............................................ 30,709,882 19,899,626 18,118,111 Expenses: Operating expenses............................................. 17,474,127 10,798,431 10,286,743 General and administrative expenses............................ 6,311,986 5,492,873 4,363,707 Depreciation and amortization.................................. 2,117,288 1,481,056 1,776,268 ------------ ------------ ----------- Total expenses............................................ 25,903,401 17,772,360 16,426,718 ------------ ------------ ----------- Income from operations........................................... 4,806,481 2,127,266 1,691,393 Other income (expense): Interest income................................................ 3,185,815 432,342 367,715 Interest expense............................................... (2,022,494) (221,521) (278,065) Gain on sale of properties..................................... - 437,819 - Equity in earnings on investments.............................. - 458,992 - Other.......................................................... 440,007 42,042 - ------------ ------------ ----------- Income before income taxes and minority interest in consolidated partnerships...................................... 6,409,809 3,276,940 1,781,043 Provision for income taxes....................................... (792,524) - (18,242) ------------ ------------ ----------- Income before minority interest in consolidated partnerships..... 5,617,285 3,276,940 1,762,801 Minority interest in consolidated partnerships................... (1,936,122) (1,223,997) (759,407) ------------ ------------ ----------- Net income....................................................... $ 3,681,163 $ 2,052,943 $ 1,003,394 ============ ============ =========== Net income per share: Basic and diluted.............................................. $ 0.33 ============ Weighted average shares outstanding........................... 11,150,087 ============ Pro forma net income (unaudited): Net income..................................................... $ 3,681,163 $ 2,052,943 Pro forma income taxes......................................... (964,776) (810,912) ------------ ============ Pro forma net income............................................. $ 2,716,387 $ 1,242,031 ============ ============ See accompanying notes. F-5
43 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF EQUITY
COMMON STOCK ADDITIONAL RETAINED PARTNERS' -------------------- PAID-IN EARNINGS CAPITAL SHARES AMOUNT CAPITAL (DEFICIT) TOTAL ------- ------ ------ ------- --------- ----- Balance at January 1, 1995............. $12,257,996 1,680,000 $ 16,800 $ (13,242) $ 233,738 $12,495,292 Dividend upon acquisition of management contract rights........ - - - - (517,719) (517,719) Purchase of BUCs.................... 1,466,411 - - - - 1,466,411 Net income.......................... 931,262 - - - 72,132 1,003,394 ----------- ---------- ---------- ----------- ---------- ----------- Balance at December 31, 1995........... 14,655,669 1,680,000 16,800 (13,242) (211,849) 14,447,378 Issuance of common stock ........... - - - 16,800 - 16,800 Capital contributions............... - - - 23,000 - 23,000 Purchase of BUCs ................... 660,403 - - - - 660,403 Net income.......................... 1,941,706 - - - 111,237 2,052,943 ----------- ---------- ---------- ----------- ---------- ----------- Balance at December 31, 1996........... 17,257,778 1,680,000 16,800 26,558 (100,612) 17,200,524 Purchase of BUCs ................... 374,867 - - - - 374,867 Distributions prior to Offering .... - - - (457,647) (457,647) Issuance of stock resulting from 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 =========== =========== ========== =========== ========== ===========
See accompanying notes. F-6 44 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ---- ---- ---- OPERATING ACTIVITIES Net income....................................... $ 3,681,163 $ 2,052,943 $ 1,003,394 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................... 1,894,665 1,397,258 1,632,371 Amortization................................... 222,623 83,798 143,897 Deferred income tax benefit.................... (39,158) - - Non cash interest expense...................... - - 1,616 Minority interest in consolidated partnerships................................. 1,936,122 1,223,997 759,407 Equity in earnings on investments.............. - (458,992) - Gain on sale of properties..................... - (437,819) - Provision for bad debts........................ 43,254 22,312 71,098 Changes in operating assets and liabilities: Cash, restricted............................ 186,416 (2,588) (152,803) Accounts receivable......................... (1,556,965) (219,854) (215,233) Accounts receivable from affiliates......... 90,955 58,811 (294,237) Federal and state income taxes payable...... 831,682 - - Prepaid expenses and other.................. (373,006) 23,359 (36,141) Other assets................................ (184,910) (14,940) 6,766 Accounts payable............................ 2,698,550 85,328 256,183 Accrued expenses............................ 23,529 (5,402) (1,136,510) Customer deposits........................... 28,955 32,295 26,204 Deferred income............................. 231,256 - - Due to affiliates........................... (31,392) 61,310 655,936 ----------- ----------- ----------- Net cash provided by operating activities........ 9,683,739 3,901,816 2,721,948 INVESTING ACTIVITIES Capital expenditures............................. (2,441,106) (851,732) (400,701) Proceeds from sale of properties................. - 2,549,352 - Cash acquired upon acquisition of HCP............ 8,995,455 - - Investment in restricted cash equivalents........ (64,202,763) - - Cash paid for Asset Purchase and cash not retained (8,244,077) - - Investments in limited partnerships.............. (15,609,034) (3,401,207) (896,405) ----------- ----------- ----------- Net cash used in investing activities..................................... (81,501,525) (1,703,587) (1,297,106) FINANCING ACTIVITIES Proceeds from notes payable and line of credit... 78,663,883 $ - $ - Repayments of notes payable and line of credit... (77,363,736) (145,319) (58,565) Repayments of notes payable to affiliates........ (1,166,481) (455,592) (65,091) Proceeds from notes payable to affiliates........ 500,000 470,000 250,000 Distributions to minority partners............... (224,795) - - Distributions prior to Offering.................. (457,647) - - Issuance of common stock, net.................... 110,330,915 16,800 - Capital contribution............................. - 23,000 - Repurchase of BUCs............................... (960,752) (1,262,355) - Deferred loan charges paid....................... (196,888) (42,953) (130,829) Cash portion of dividend ........................ - - (202,698) ----------- ----------- ----------- Net cash provided by (used in) financing activities..................................... 109,124,499 (1,396,419) (207,183) ----------- ----------- ----------- Increase in cash and cash equivalents.................................... 37,306,713 801,810 1,217,659 Cash and cash equivalents at beginning of year........................................... 10,818,512 10,016,702 8,799,043 ----------- ----------- ----------- Cash and cash equivalents at end of year........................................... $48,125,225 $10,818,512 $10,016,702 =========== =========== =========== SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest....................................... $ 2,041,366 $ 188,510 $ 276,062 =========== =========== =========== Income taxes................................... $ - $ - $ 21,633 =========== =========== ===========
See accompanying notes F-7 45 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION, FORMATION AND INITIAL PUBLIC OFFERING Capital Senior Living Corporation, a Delaware corporation, was incorporated on October 25, 1996. The accompanying financial statements include the consolidated financial statements of Capital Senior Living Corporation (Corporation); Capital Senior Living Properties including HealthCare Properties, L.P. (HCP) (as of January 1, 1997).; Capital Senior Living, Inc. (Living); Quality Home Care, Inc. (Quality); Capital Senior Development, Inc. (Development); Capital Senior Management 1, Inc. (Management 1); and Capital Senior Management 2, Inc. (Management 2) (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 intercompany balances and transactions have been eliminated in consolidation. The Company is a provider of senior living services. The Company owns, operates and manages senior living communities throughout the United States. The Company has completed the registration of its common stock in an initial public offering (Offering) on November 5, 1997. Simultaneously with the closing of the Offering, Corporation acquired Living, Quality, Development, Management 1, and Management 2 (Formation) in exchange for 7,687,347 shares of common stock and a note payable for $18,076,380 (Formation Note) to Jeffrey L. Beck and James A. Stroud or a related trust (collectively, the Stockholders) and Lawrence A. Cohen, all officers of the Company. Additionally, Corporation purchased substantially all of the assets, other than working capital items, of CSLC (the Asset Purchase) for the assumption of a $70,833,752 note payable and a cash payment of $5,782,927. The Stockholders owned 46% of the common stock of the Company after the Offering. Due to all of these entities being under the common control of the Stockholders for all periods presented prior to the offering, these consolidated financial statements reflect the assets and liabilities at their historical values and the accompanying consolidated statements of income, equity, and cash flows reflect the consolidated results for the periods indicated even though they have historically operated as separate entities prior to the Formation. The Formation was accounted for at historical cost in a manner similar to a pooling of interests to the extent of the percentage ownership by the Stockholders. The Asset Purchase was recorded at fair value to the extent of the minority interest. A step-up in basis of $9,282,202 was recorded for property and equipment and $2,692,669 for the investment in NHP Notes. Additionally, a deferred tax asset of $10,060,119 and goodwill of $1,264,881 was recorded. Assets that were not acquired from CSLC in the Asset Purchase that were combined in the financial statements until such date were charged to paid-in capital. CSLC's assets included investments in HCP and NHP Retirement Housing Partners I, L.P. (NHP) which were acquired in the Asset Purchase. NHP owns a portfolio of five independent senior living communities. As of December 31, 1997, the Company had increased its ownership in HCP to 56% of the limited partner units. In the accompanying consolidated financial statements, HCP is consolidated as though a controlling financial interest in HCP had been acquired by the Company at January 1, 1997. At December 31, 1996 and 1995, the Company owned approximately 31% and 6% 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 seven properties are leased to qualified operators who provide specialized health care services. Capital Realty Group Senior Housing, Inc. (Housing), an entity controlled by the Stockholders, is the general partner. F-8 46 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The general partner of CSLC is Retirement Living Communities, L.P., an Indiana limited partnership (RLC). RLC is owned by the Stockholders. Additionally, CSLC has issued 1,264,000 Beneficial Unit Certificates (BUCs). At December 31, 1996 and 1995, BUCs outstanding were 1,172,146 and 1,264,000, respectively. At December 31, 1996 and 1995, James A. Stroud, Jeffrey L. Beck, and RLC collectively owned 63.4% and 57.4% of the outstanding BUCs, respectively. Prior to February 1, 1995, Living's operations were limited to payroll services provided to affiliated entities. On February 1, 1995, Living acquired 14 management contracts from Housing in exchange for a note payable to Housing of $467,164. The acquisition was accounted for in a manner similar to a pooling of interests as it was under the common control of the Stockholders. Accordingly, the management contracts were recorded at Housing's historical basis and the financial statements were restated to include the operations stemming from the management contracts for all periods prior to the February 1, 1995 acquisition date. Effective February 1, 1995, a dividend of $517,719 (including cash of $202,698) was recorded to eliminate the carrying value of the net assets of the business stemming from the property management contracts which were not acquired. 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 which exceed Federal Deposit Insurance Corporation insurance limits. Management believes that credit risk related to these deposits is minimal. Property and Equipment Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which range from three to 31 years. Management Contract Rights and Goodwill Management contract rights are stated at cost and amortized on a straight-line basis over their respective contract lives. Accumulated amortization for management contract rights at December 31, 1997 and 1996, was $272,604 and $224,676, respectively. Goodwill is the excess purchase price over the fair value of the assets acquired in the Asset Purchase to the extent of the minority interest and is amortized over 30 years on a straight-line basis. Accumulated amortization for goodwill at December 31, 1997, was $7,286. 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 intangible asset, including contract changes, local market developments, and other publicly available information. If these external factors indicate the intangible assets and property and equipment will not be recoverable, the carrying value of the intangible assets and property and equipment will be analyzed and adjusted accordingly. During 1996 and 1995, management contract rights of $44,755 and $52,771, respectively, were written off due to the termination of certain contracts which has been reflected as additional amortization expense. The Company does not believe there are any indicators that would require an adjustment to the carrying value of the management contract rights, goodwill or property and equipment or their remaining useful lives as of December 31, 1997 or 1996. F-9 47 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income Taxes The Company accounts for income taxes under the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. CSLC and HCP are partnerships and, consequently, are not subject to income taxes. Taxable income or loss is directly allocated to the individual partners. Prior to the Formation, Living, Quality, Development, Management 1, and Management 2 were S corporations and consequently, were not subject to income taxes. Thus, taxable income or loss is directly allocated to the individual stockholders. Upon Formation, these corporations converted from S corporations to C corporations. A deferred tax benefit of $41,085 was recorded in the consolidated statements of income upon conversion. Prior to February 1, 1995, Living was subject to federal and state income taxes. Revenue Recognition Resident and healthcare revenue is recognized at estimated net realizable amounts due from residents in the period to which the rental and other services are provided. Revenues from the Medicare and Medicaid programs accounted for 22% in 1997 (that also related to exceptions granted for 1992 and 1994, as discussed below,) and less than 10% in 1996 and 1995 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 which are lower than private pay rates. Patient service revenue for Medicaid patients is recorded at the reimbursement rates as the rates are set prospectively by the state upon the filing of an annual cost report. Two communities are providers of services under the Medicare program and are entitled to reimbursement under the foregoing programs in amounts determined based on the filing of an annual cost report prepared in accordance with Federal regulations, which reports are subject to audit and retroactive adjustments in future periods. Revenue from the Medicare program is recorded at established rates and adjusted for differences between such rates and estimated amounts reimbursable from the program. Any differences between estimated and actual reimbursements are included in operations in the year of settlement, which have not been material. Under Federal regulations, Medicare reimbursements to these facilities are limited to routine cost limits determined on a geographical region. The Company has filed exception reports to request reimbursement in excess of its routine cost limits for the years 1992 through 1996, as of December 31, 1997, and recorded $345,831 in 1997, as a result of being granted exception requests for 1992 and 1994. There can be no assurance that an exception to a facility's routine cost limits will be granted. CSLC retained cost report exposure for cost years prior to the Offering. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Management services revenue, resident and healthcare revenue, and development fees are recognized when earned. Management services revenue relates to providing certain management and administrative support services under management contracts, which have terms expiring through 2002 and provide for termination fees upon early cancellation. Management services revenue are shown net of reimbursed expenses. The reimbursed expenses to affiliates were $3,892,526, $6,477,199 and $7,015,250, for the years ended December 31, 1997, 1996 and 1995, respectively. Reimbursed expenses to unaffiliated parties were $8,941,343, $2,600,529 and $-0-, for the years ended December 31, 1997, 1996 and 1995, respectively. F-10 48 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Credit Risk The Company's receivables are generally due within 30 days. The Company does not require collateral. Credit losses have been within management's expectations, and management believes that the allowance for doubtful accounts adequately provides for any expected losses. Advertising Advertising expenses are expensed as incurred. Advertising expenses for the years ended December 31, 1997, 1996 and 1995 were $336,738, $210,028 and $223,862, 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. Net income per share for periods prior to 1997 are not comparable to subsequent period amounts due to the Company's Formation and Offering in October 1997 and, consequently, are not included. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. In accordance with APB 25, since the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FASB 123"). 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. New Accounting Pronouncements The Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income and Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, both effective for fiscal 1998. Statement No. 130 requires reporting and display of comprehensive income and its components in the financial statements. Statement No. 131 requires reporting about operating segments and other disclosures about the business in its annual and interim financial statements. These new Statements will only expand the Company's disclosures with respect to these items. F-11 49 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, -------------------------- 1997 1996 ------------ ----------- Land................................................................................ $ 2,777,087 $ 879,723 Land improvements................................................................... 3,906 127,481 Buildings and building improvements................................................. 47,562,214 13,562,383 Furniture and equipment............................................................. 2,387,485 4,606,048 Construction in process............................................................. 2,049,574 280,946 ------------ ----------- 54,780,266 19,456,581 Less accumulated depreciation....................................................... 13,659,818 6,788,042 ------------ ----------- Property and equipment, net......................................................... $ 41,120,448 $12,668,539 ============ ===========
On November 1, 1996, CSLC sold its two multi-family properties to a non-related third party for a combined sales price of $4,793,000. This sale resulted in the recognition of a $437,819 gain and net cash proceeds of $2,549,352 after repayment of the related mortgage payable of $1,889,829. 4. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, --------------------------- 1997 1996 ---------- ---------- Accrued salaries, bonuses and related expenses.................................. $ 432,249 $ 460,646 Accrued property taxes.......................................................... 493,796 506,418 Other........................................................................... 333,365 117,622 ---------- ---------- $1,259,410 $1,084,686 ========== ==========
5. NOTES PAYABLE TO AFFILIATES Notes payable to affiliates consist of the following:
DECEMBER 31, ------------------------------ 1997 1996 ------------- ------------- Demand notes payable to stockholders; interest at 10%........................... $ - $ 400,000 Note payable to Housing; interest at 10%........................................ - 266,481 ------------- ------------- - 666,481 Less current portion............................................................ - 465,091 ------------- ------------- $ - $ 201,390 ============= =============
F-12 50 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. NOTES PAYABLE AND LINE OF CREDIT Notes payable consists of the following:
DECEMBER 31, ------------------------------- 1997 1996 -------------- ------------- HCP mortgage loans, bearing interest ranging from 6.6% to 10.75%; payable in monthly installments of $100,812 including interest, maturing from 2001 to 2012 secured by certain properties of HCP.................................... $ 6,677,431 $ - -------------- ------------ Less current portion............................................................ 932,664 $ - -------------- ------------ $ 5,744,767 $ - ============== ============
The aggregate maturities of notes payable at December 31, 1997, are as follows: 1998 $ 932,664 1999 382,640 2000 417,147 2001 378,170 Thereafter 4,566,810 ----------- $ 6,677,431 ===========
On December 10, 1997, the Company entered into a $20 million revolving line of credit with a bank which expires December 10, 2001. Borrowings under the line of credit are secured by three senior living communities and bear interest at the prime rate or LIBOR plus 1.7% (7.42% at December 31, 1997). The line of credit may be used for acquisition of additional interests in HCP and NHP, acquisition of additional properties, development of expansions to existing properties and general working capital purposes. Amounts outstanding under the line of credit at December 31, 1997, were $1,830,130. In connection with obtaining the line of credit, the Company incurred $111,533 in deferred financing charges, which are amortized over the life of the line of credit using the straight line method. Accumulated amortization was $3,098 at December 31, 1997. Under the line of credit, the Company must maintain certain levels of tangible net worth and comply with other restrictive covenants. On June 30, 1997, CSLC entered into a $77,000,000 mortgage loan agreement with Lehman Brothers Holdings, Inc., and pledged four senior living communities and its investments in HCP and NHP as collateral. Subsequent to June 30, 1997, approximately $70,800,000 became outstanding under this loan agreement; $5,500,000 was used to repay an outstanding mortgage loan commitment (the prior credit facility) and approximately $64,500,000 was used to fund the liquidity requirement under the loan agreement through the purchase of three-month U.S. Treasury Securities. The U.S. Treasury Securities were sold under a repurchase agreement with a term equal to their maturity. The repurchase agreement was cancelled and the outstanding debt was assumed and repaid by the Corporation from the proceeds of the Offering. The U.S. Treasury Securities reverted to CSLC for use or disposition as determined by CSLC, and the Company has no interest in such securities. CSLC's prior credit facility from a non-affiliated mortgage company was for $17,500,000. This facility was canceled in connection with the Offering. F-13 51 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In connection with obtaining the prior credit facility, the Company incurred $273,070 in deferred financing charges, which were amortized over the life of the loan commitment using the straight-line method. In connection with obtaining the mortgage loan agreement, the Company incurred $85,355 in deferred financing charges. Accumulated amortization was $329,617 and $166,630 in 1997 and 1996, respectively. The unamortized balance at the Offering date of $28,808 was not retained in the Asset Purchase. HCP leases four of its properties under a master lease. The rentals under the master lease provide additional security for two notes payable used to finance two of the master lease properties. These notes are due December 1, 2001. 7. EQUITY In connection with the Offering, the Company is authorized to issue preferred stock in series and to fix and state the voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions, thereof. Such action may be taken by the Board without stockholder approval. On November 5, 1997, the Company issued 10,350,000 shares of $.01 par value common stock for cash of $110,330,915, net of issuance costs of $11,317,705 and payment of the Formation Note of $18,076,380, in connection with the Offering. Additionally, the Company issued 7,687,347 shares of $.01 par value common stock in connection with the Formation. For financial reporting purposes, the shares issued in connection with the Formation are presented as outstanding as of January 1, 1997. During 1996, the Company issued 1,680,000 shares of $.01 par value common stock for $16,800 in cash. For financial reporting purposes, as the combined entities were under common control, the Company's common stock is presented as outstanding as of January 1, 1995. During 1996, Development, Management 1, Management 2 and Quality each issued 1,000 shares of $.01 par value common stock for $1,000. All shares authorized are outstanding at December 31, 1996. At December 31, 1996 and 1995, Living has 1,000 shares of $.01 par value common stock authorized, issued and outstanding. The par value and associated paid-in capital are included in additional paid-in capital in the accompanying financial statements. Common stock reserved for future issuance is 1,565,000 for stock options. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of Preferred Stock. Purchases of BUCs during 1997, 1996 and 1995 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 as a reduction in minority interest. CSLC purchased 55,316 BUCs for $960,762 during 1997, at an average cost of $17.37 per unit. CSLC purchased 91,854 BUCs for $1,262,355 during 1996, at an average cost of $13.74 per unit. These repurchases of BUCs have been reflected as a reduction in minority interest at December 31, 1996. F-14 52 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net income (loss) of HCP is generally allocated 98% to the limited partners and 2% to the general partner. The net income of HCP from the disposition of a property is allocated: (i) to partners with deficit capital accounts on a pro rata basis; (ii) to limited partners until they have been paid an amount equal to the amount of their adjusted investment (as defined); (iii) to the limited partners until they have been allocated income equal to their 12% Liquidation Preference; and (iv) thereafter, 80% to the limited partners and 20% to the general partner. The net loss of HCP from the disposition of a property is allocated: (i) to partners with positive capital accounts on a pro rata basis and (ii) thereafter, 98% to the limited partners and 2% to the general partner. Distributions of available cash flow are generally distributed 98% to the limited partners and 2% to the general partner, until the limited partners have received an annual preferential distribution, as defined. Thereafter, available cash flow is distributed 90% to the limited partners and 10% to the general partner. HCP made a $224,795 distribution in 1997 to minority partners. 8. STOCK OPTIONS The company adopted a stock option plan during 1997, providing for the grant of incentive and nonqualified stock options to employees and directors. This plan provides for the grant of options to purchase up to 1,565,000 shares. The option exercise price and vesting provisions of such options are fixed when the option is granted. The options expire ten years from the date of grant and vest from zero to five years. The option exercise price is the fair market value of a share of common stock on the date the option is granted. A summary of the Company's stock option activity, and related information for the year ended December 31, 1997, is presented below:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------- ----------------- Outstanding at beginning of year - - Granted 776,250 $ 13.50 Exercised - - Forfeited - - Expired - - ----------- ----------------- Outstanding at end of year 776,250 $ 13.50 =========== ================= Exercisable at end of year 121,500 $ 13.50 =========== =================
The weighted average remaining contractual life of the options at December 31, 1997, is approximately 9.8 years. Unoptioned shares available for the granting of options at December 31, 1997 is 788,750. The average daily price of the stock during 1997 subsequent to the Offering was $13.04 per share, and therefore, the options are considered anti-dilutive for the calculation of diluted net income per share. Pro forma information regarding net income per share is required by Statement of Financial Accounting Standards No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 5.7 percent; dividend yield of zero percent; expected lives of seven years; and volatility of 70.1 percent. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which 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. F-15 53 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows for fiscal 1997: Net income As reported..................................................... $3,681,000 Pro forma....................................................... 2,787,000 Net income per share As reported..................................................... 0.33 Pro forma....................................................... 0.25
9. INCOME TAXES The provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1997 1996 1995 --------------- -------------- --------------- Current: Federal................................................ $ 730,184 $ - $ 15,903 State.................................................. 101,498 - 2,339 Deferred: Federal................................................ (39,404) - - State.................................................. 246 - - -------------- -------------- --------------- $ 792,524 $ - $ 18,242 ============== ============== ===============
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, ----------------------------------------------------- 1997 1996 1995 --------------- -------------- -------------- Tax expense at federal statutory rates.................... $ 1,521,053 $ - $ 15,903 Tax expense at federal statutory rates on income earned prior to Formation and Asset Purchase ................. (831,026) - - State income tax expense.................................. 101,744 - 2,339 Conversion of S corporations to C corporation status ..... (41,085) - - Other..................................................... 41,838 - - --------------- -------------- -------------- $ 792,524 $ - $ 18,242 =============== ============== ==============
A summary of the Company's deferred tax assets and liabilities at December 31, 1997, are as follows:
Deferred tax assets: Tax basis in excess of book basis arising from the Asset Purchase............................... $10,060,119 Other........................................................................................... 128,000 ----------- Total deferred tax assets....................................................................... 10,188,119 Deferred tax liabilities........................................................................... 88,842 ----------- $10,099,277 ===========
F-16 54 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. 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 $679,423, $552,586, and $351,387 for the years ended December 31, 1997, 1996 and 1995, 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 is also a director of the third-party companies. Management fees received for the years ended December 31, 1997 and 1996 were $1,589,703 and $657,260, respectively. In October 1997, HCP paid an affiliate a refinancing fee of $13,245. Upon sale of the multi-family properties in November 1996, an affiliate received a $79,883 brokerage fee. One of the Stockholders is chairman of the board of a bank where the Company holds the majority of its operating cash accounts. 11. CONTINGENCIES Angeles Housing Concepts, Inc. ("AHC") has filed a lawsuit currently pending in the U.S. District Court of California against the Company and certain of its subsidiaries and officers alleging that the defendants intentionally interfered with AHC's property management agreements with a third party by inducing such party to terminate the agreements. The complaint seeks damages of at least $2 million. Trial in the action is currently expected to occur in June 1998 and discovery in the action is ongoing. The Company is vigorously defending these claims. The Company believes the claims filed by AHC are spurious and is evaluating with counsel the various legal options it has against AHC and others. While the Company believes that ultimately its insurance will cover this claim if determined adversely to the Company, the Company's insurance carrier formally denied coverage. The Company has filed suit against the carrier for coverage and the insurance carrier has indicated it will reconsider its original decision. No assurance can be made that the Company will have adequate insurance coverage for any damage award against the Company in this lawsuit. 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. F-17 55 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of financial instruments at December 31, 1997 and 1996, are as follows:
1997 1996 ----------------------------------- ------------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE --------------- --------------- ------------ -------------- Cash and cash equivalents.................. $ 48,125,225 $ 48,125,225 $10,818,512 $ 10,818,512 Cash, restricted........................... - - 206,376 206,376 Investments in limited partnerships, net of related deferred income in 1996......... 13,741,940 18,665,492 4,875,236 6,348,776 Line of credit............................. 1,830,130 1,830,130 - - Notes payable.............................. 6,677,431 6,611,128 - - Notes payable to affiliates................ - - 666,481 666,481
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. Investment in limited partnerships: The fair values are based on discounted cash flow analysis in 1997 and the most recent purchase price in 1996. Line of credit, notes payable and notes payable to affiliates: 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. 13. INVESTMENTS IN LIMITED PARTNERSHIPS The investments in limited partnerships balance consists of the following:
DECEMBER 31, ------------------------------- 1997 1996 ------------ ---------- HCP limited partnership interests (including deferred income and equity in earnings).................................... $ - $7,487,818 NHP pension notes............................................................. 13,740,576 786,738 NHP limited partnership interests............................................. 1,364 1,364 ------------ ----------- $ 13,741,940 $ 8,275,920 ============ ===========
During 1997, 1996 and 1995, the Company paid $5,604,944, $3,200,686 and $308,825, respectively, for partnership interests in HCP and, as of December 31, 1997 and 1996, the Company owned a 56% and 31% ownership in HCP, respectively. F-18 56 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As a result, the Company changed its method of accounting for its investment in HCP from the equity method to the consolidation of HCP in its financial statements in 1997. Had HCP been consolidated in 1996, using its weighted average ownership interest of 23%, the results of operations on a pro forma basis for the year ended December 31, 1996 would have been: Revenue....................................................... $ 26,504,461 Income before extraordinary item and minority interest.................................................... 1,166,289 Net income.................................................... 2,118,981 Pro forma net income, assuming a tax rate of 39.5%, is $1,281,984.
In the second quarter of 1996, CSLC purchased a 9.36% in limited partnership interest in HCP from Housing. CSLC paid $1,269,077 to Housing, who recognized a gain of $878,592 on the transaction. As a result of this purchase, the Company exceeded a 20% ownership in HCP and changed its method of accounting from the cost method to the equity method. The change resulted in recognizing $3,519,315 of deferred income for the difference between cost and the underlying equity in HCP, which was being amortized over 20 years. At the Offering date, the unamortized deferred income was eliminated as a result of applying the purchase method of accounting for CSLC's acquisition of HCP limited partnership units. At the Offering date, the allocation of purchase price to the assets and liabilities of HCP was based on independent valuation information from third party valuation firms. Subsequent to year-end through February 6, 1998, the Company disbursed $101,072 for additional investments in HCP units. These purchases bring the Company's ownership in HCP limited partnership interests to 56.4%. Summary financial information regarding the financial position and results of operations of HCP for 1996 is as follows:
1996 ------------ Cash................................................................. $ 8,995,455 Property and equipment, net.......................................... 22,112,619 Other assets......................................................... 1,379,473 ----------- Total assets......................................................... $32,487,547 =========== Liabilities.......................................................... $ 1,215,508 Mortgage loans....................................................... 7,207,414 Partnership capital.................................................. 24,064,625 ----------- Total liabilities and partnership capital............................ $32,487,547 =========== Net revenue.......................................................... $7,560,104 Net income........................................................... 1,637,343
During 1997, 1996 and 1995, the Company made various purchases of outstanding pension notes of NHP (the NHP Notes). During 1997, 1996 and 1995, the Company paid $10,004,090, $199,158 and $587,580, respectively, for purchases of NHP Notes. As of December 31, 1997, the Company has cumulatively paid $10,790,828 for an ownership of 30.8% of the outstanding NHP Notes. Upon purchase of the NHP Notes by the Company from CSLC, the Company recorded a step-up in basis of $2,692,669 to fair market value over CSLC's historical basis of $11,047,907 (which included cost of $10,790,828 plus deferred interest of minority interest in the NHP Notes). The pension notes bear simple interest at 13% per annum. Interest of 7% is paid quarterly, with the remaining 6% interest deferred. Deferred interest and principal matures on December 31, 2001. The Company accrued the interest income on the pension notes at 7% through December 31, 1996, at 10.5% from April 1, 1997 through October 31, 1997, and at 10.5% of the fair value of the NHP Notes since the Asset Purchase, due to uncertainties F-19 57 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) regarding the ultimate realization of the accrued interest. The ultimate realization of the NHP Notes is expected to be based primarily upon the value of the underlying properties, which have an appraised value in excess of the NHP Notes as of December 31, 1997. During 1996, the Company paid $1,364 for a 3.1% ownership of limited partnership interests in NHP. Subsequent to year end and through February 6, 1998, the Company disbursed $173,900 for an additional investment in NHP Notes. These purchases bring the Company's ownership of NHP Notes to 31.1% at February 6, 1998. The Company classifies its investment in NHP as held to maturity in NHP. Summary financial information regarding financial position and results of operations of NHP as of December 31 and for the years then ended is as follows:
DECEMBER 31, -------------------------------- 1997 1996 ----------- ----------- Cash.................................................................. $ 4,495,733 $ 4,017,181 Property and equipment, net........................................... 49,490,473 50,171,241 Other assets.......................................................... 1,599,634 1,883,462 ----------- ----------- Total assets..................................................... $55,585,840 $56,071,884 =========== =========== Pension notes......................................................... $42,672,000 $42,672,000 Interest payable...................................................... 23,730,407 20,681,172 Other liabilities..................................................... 1,203,421 1,154,823 Partnership deficit................................................... (12,019,988) (8,436,111) ----------- ----------- Total liabilities and partnership deficit........................ $55,585,840 $56,071,884 =========== ===========
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Net revenue.......................................... $15,548,138 $14,488,099 $14,020,626 Net loss............................................. (3,522,917) (3,574,668) (3,690,549)
14. ALLOWANCE FOR DOUBTFUL ACCOUNTS The components of the allowance for doubtful accounts are as follows:
DECEMBER 31, ------------------------------------------------- 1997 1996 1995 -------- -------- --------- Balance at beginning of year......................... $164,822 $141,452 $ 86,049 Provision for bad debts........................... 43,254 22,312 71,098 Write-offs and other.............................. (17,474) 1,058 (15,695) Allowances not assumed in Asset Purchase.......... (145,602) - - Allowance arising from consolidation of HCP....... 256,042 - - -------- -------- -------- Balance at end of year............................... $301,042 $164,822 $141,452 ======== ======== ========
F-20 58 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. 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 a duration of 5 years or less and are on a fee basis as services are rendered. Rent expense under these leases was $188,986 during 1997. Future commitments are as follows: 1998 $ 266,590 1999 271,573 2000 277,753 2001 279,187 2002 182,472 ----------- $ 1,277,575 ===========
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 $271,340 in 1997. Minimum rentals for the next two years for the HCP leases are $3,971,328 per year, subject to change based on changes in interest rates. Minimum rentals are $3,761,262 and $2,858,619 for the years 2000 and 2001. There are no minimum rentals thereafter. Property and equipment less accumulated depreciation attributable to such rentals, amounted to $19,339,886 at December 31, 1997. Four of HCP's senior living communities are subject to a master lease with a single operator. 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, 1997, no contingent rentals have been accrued on the master lease. Prior to February 28, 1997, two of the four communities under the master lease were closed by the operator. Despite these closures, the operator has continued making its full lease payments under the terms of the master lease. 16. OFFICERS' SALARIES AND BONUS General and administrative expense includes officers' salaries and bonuses of $3,342,360, $3,371,887, and $2,976,302 for the years ended December 31, 1997, 1996 and 1995, respectively. Compensation of the Stockholders and Cohen, all officers of the Company, are based on their respective employment agreements since October 1, 1997. 17. PRO FORMA INCOME TAXES (UNAUDITED) The income taxes on earnings of the S corporations and partnerships for fiscal 1996 and 1995 and for the period from January 1, 1997 through October 31, 1997, are the responsibility of the Stockholders and partners. The pro forma adjustments reflected on the statements of income assume these S corporations and partnerships were subject to income taxes. Pro forma income tax expense has been calculated using statutory federal and state tax rates, estimated at 39.5%. F-21 59 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED) Shown below are unaudited pro forma consolidated amounts for the year ended December 31, 1997 and 1996, respectively, representing the results of operations of the Company for such periods after giving effect to the adjustments relating to the Offering and the Formation, as if the transactions had occurred as of January 1, 1996. The unaudited pro forma consolidated amounts are presented for informational purposes only and do not necessarily reflect the financial position or results of operations of the Company which would have actually resulted had the Offering and the Formation occurred as of January 1, 1996, or the future results of operations of the Company.
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 ----------- ----------- Total revenues........................................................ $30,709,882 $26,504,461 Net income............................................................ 4,991,288 3,396,742 Net income per share.................................................. $ 0.25 $ 0.17 Shares used in computing pro forma net income per share............... 19,717,347 19,717,347
F-22 60 INDEX TO EXHIBITS The following documents are filed as a part of this report. Those exhibits previously filed and incorporated herein by reference are identified below. Exhibits not required for this report have been omitted.
Exhibit Number Description ------- ----------- *3.1 -- Amended and Restated Certificate of Incorporation of the Registrant *3.2 -- Amended and Restated Bylaws of the Registrant *10.1 -- Asset Purchase Agreement, dated as of July 8, 1997, by and between Capital Senior Living Communities, L.P. and Capital Senior Living Corporation *10.2 -- Contribution Agreement, dated as of August 1, 1997, by and among Capital Senior Living Corporation, Jeffrey L. Beck, James A. Stroud, Senior Living Trust, and Lawrence A. Cohen *10.3 -- Stock Purchase and Stockholders' Agreement, dated as of November 1, 1996, by and among Capital Senior Living Corporation, Jeffrey L. Beck, Senior Living Trust, and Lawrence Cohen *10.4 -- Amended and Restated Exchange Agreement, dated as of June 30, 1997, by and between Lawrence A. Cohen and Jeffrey L. Beck *10.5 -- Amended and Restated Exchange Agreement, dated as of June 30, 1997, by and among Lawrence A. Cohen and James A. Stroud +*10.6 -- 1997 Omnibus Stock and Incentive Plan *10.7 -- Senior Living Agreement, by and between Capital Senior Living, Inc. and New World Development (China) Limited *10.8 -- Amended and Restated Loan Agreement, dated as of June 30, 1997, by and between Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, A Division of Lehman Brothers Holdings Inc., and Capital Senior Living Communities, L.P. +*10.9 -- Amended and Restated Employment Agreement, dated as of May 7, 1997, by and between Capital Senior Living, Inc. and Jeffrey L. Beck +*10.10 -- Amended and Restated Employment Agreement, dated as of May 7, 1997, by and between Capital Senior Living, Inc. and James A. Stroud +*10.11 -- Employment Agreement, dated as of November 1, 1996, by and between Capital Senior Living Corporation and Lawrence A. Cohen +*10.12 -- Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living, Inc. and David R. Brickman +*10.13 -- Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living, Inc. and Keith N. Johannessen
E-1 61 *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 62 *10.29 -- Option Agreement, by and between Capital Realty Group Corporation, as optionor, and Capital Senior Living Corporation, as optionee *10.30 -- Development Agreement, by and between Capital Senior Development, Inc., as developer, and Tri Point Communities, L.P., as owner *10.31 -- Development and Turnkey Services Agreement, dated as of September 1, 1997, by and between Capital Senior Development Corporation and Tri-Point Communities, L.P. *10.32 -- Management Agreement, by and between Tri Point Communities, L.P., as owner, and Capital Senior Living, Inc. **10.33 -- 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. **10.33 -- 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. **10.34 -- Alliance Agreement, dated as of December 10, 1997, by and between LCOR Incorporated and Capital Senior Living Corporation **10.35 -- 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 **10.36 -- 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 **10.37 -- 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
E-3 63 **10.38 -- 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 **21.1 -- Subsidiaries of the Company **27.1 -- Financial Data Schedule
- ----------------------------- * 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. ** Filed herewith. E-4 EX-10.33 2 AMENDED & RESTATED LOAN AGREEMENT - 12/10/97 1 EXHIBIT 10.33 AMENDED AND RESTATED LOAN AGREEMENT THIS AMENDED AND RESTATED LOAN AGREEMENT (the "Loan Agreement") dated as of December 10, 1997, is made by and between BANK ONE, TEXAS, N.A., a national banking association ("Lender"), whose address is 1717 Main Street, Dallas, Texas 75201, Attention: Craig F. Hartberg, Senior Vice President, and CAPITAL SENIOR LIVING PROPERTIES, INC., a Texas corporation ("Borrower"), whose address is 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, with respect to a loan in the principal sum of $20,000,000.00. RECITALS A. Reference is made to (i) that certain Loan Agreement dated as of July 29, 1994 (the "First Agreement"), between Lender and Capital Senior Living Communities, L.P. ("Original Borrower"), (ii) that certain Restatement of Loan Agreement dated as of June 30, 1995 (the "Second Agreement") between Lender and Original Borrower, (iii) that certain Amended and Restated Loan Agreement dated as of June 30, 1997 between Original Borrower and Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. ("Lehman") (the "Third Agreement"), and (iv) that certain Loan Assumption and Modification Agreement dated November 3, 1997 between Lehman, Original Borrower and Borrower (the "Assumption and Modification") . Lender and Borrower desire to amend the First Agreement, Second Agreement, Third Agreement and Assumption and Modification in accordance with the terms of this Loan Agreement and restate those agreements in their entirety. B. Lender and Borrower agree as follows: ARTICLE I DEFINITIONS For purposes of this Loan Agreement, the following terms shall have the respective meanings assigned to them. 1.1 Advances. The term "Advances" shall mean a disbursement by Lender of any of the proceeds of the Loan which shall be used solely for the purposes set forth in Section 1.28 herein. 1.2 Affidavit of Borrower. The term "Affidavit of Borrower" shall mean a sworn affidavit of Borrower (and such other parties as Lender may reasonably require) to be delivered to Lender no later than forty-five (45) days after the end of each calendar quarter in the form of Exhibit "D". AMENDED AND RESTATED LOAN AGREEMENT Page 1 2 1.3 Appraisals. The term "Appraisals" shall mean appraisals of the Property in form and containing substance (including all assumptions and methods of valuation) reasonably satisfactory to Lender and each prepared by an independent appraiser who is a member of the American Institute of Real Estate Appraisers and is satisfactory to Lender. 1.4 Assignment of Landlord's Interest in Leases. The term "Assignment of Landlord's Interest in Leases" shall mean an assignment by Borrower to Lender of Borrower's interest in all leases covering all or a part of the Property and all rights derived therefrom. 1.5 Borrower. The term "Borrower" shall mean all parties named Borrower in the first paragraph of this Loan Agreement and any and all subsequent record owners of the Property. 1.6 Borrowing Base. The term "Borrowing Base" shall mean sixty-two and one-half percent (62.5%) of the value of the Property (in the aggregate) as determined from the Appraisals. 1.7 Canton Regency. The term "Canton Regency" shall mean that certain congregate community owned by Borrower in Canton, Ohio commonly known as Canton Regency Retirement Community as further described in Exhibit "A". 1.8 Code. The term "Code"shall mean the Uniform Commercial Code as in force in the State of Texas. 1.9 Commitment. The term "Commitment" shall mean the Commitment issued by Lender with respect to the Loan dated December 1, 1997, and any subsequent amendment in writing by Lender and Borrower. 1.10 CSLC. The term "CSLC" shall mean Capital Senior Living Corporation, a Delaware corporation. 1.11 Current Assets. The term "Current Assets" shall mean all cash, cash equivalents, customers' accounts and other receivables due within one year from statement date, inventory, deposits, marketable securities, and prepaid expenses to be consumed within one year from statement date. 1.12 Current Liabilities. The term "Current Liabilities" shall mean all amounts due or to become due for payment within twelve (12) months of statement date. 1.13 Current Ratio. The term "Current Ratio" shall mean the ratio of Current Assets to Current Liabilities. AMENDED AND RESTATED LOAN AGREEMENT Page 2 3 1.14 Debtor Relief Laws. The term "Debtor Relief Laws" shall mean any applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization, or similar laws affecting the rights or remedies of creditors generally, as in effect from time to time. 1.15 Environmental Indemnity Agreements. The term "Environmental Indemnity Agreements" shall mean environmental indemnity agreements made by Borrower in favor of Lender with respect to the Property. 1.16 Event of Default. The term "Event of Default" shall mean the occurrence of any one or more of the following. (a) A failure by Borrower to make any payment of principal or interest on the Note within five (5) days of the due date. (b) Except as otherwise specifically addressed elsewhere in this Section 1.15, a failure by Borrower to materially comply with any of the other terms or conditions specified herein or in any other Loan Document or the occurrence of an event of default under any of such instruments and the continuation of such failure for a period of thirty (30) days following written notice to Borrower of such failure; provided, however, that in no event shall Lender be requested to give notice of any Event of Default more than two (2) times in any twelve (12) month period. (c) There shall be an event of default in connection with any other obligation of Borrower payable to Lender and the continuation of such failure for a period of thirty (30) days following written notice to Borrower of such failure; provided however, in no event shall Lender be requested to give notice of any Event of Default more than two (2) times in any twelve (12) month period. (d) The failure of Borrower to maintain the various financial ratio tests and financial status called for herein and the continuation of such failure for a period of thirty (30) days following written notice to Borrower of such failure; provided however, in no event shall Lender be requested to give notice of any Event of Default more than two (2) times in any twelve (12) month period. (e) The incorrectness of any material representation or warranty made by Borrower to Lender in any of the Loan Documents; (f) The failure by Borrower and/or the Property and Improvements materially to comply with any Governmental Requirements including, without limitation, environmental laws, The Americans With Disabilities Act of 1990, The Judicial Fair Housing Act, and any other law, rule or regulation mandating accessibility; and the continuation of such failure for a period of thirty (30) days AMENDED AND RESTATED LOAN AGREEMENT Page 3 4 following written notice to Borrower of such failure; provided, however, in no event shall Lender be obligated to give notice of an Event of Default more than two (2) times in any twelve (12) month period. (g) The appointment of a receiver, trustee, conservator, or liquidator of Borrower, any of the Property, or any other property of Borrower, and such appointment is not rescinded within ninety (90) days following the appointment; (h) The filing of any voluntary petition seeking an entry of an order for relief as a debtor in a proceeding under the United States Bankruptcy Code or seeking reorganization or rearrangement or taking advantage of any Debtor Relief Laws, concerning Borrower or CSLC or the admitting of material allegations of a petition filed against Borrower or any one or more of said parties, in any bankruptcy, reorganization, insolvency, conservatorship, or similar proceeding, or an admission in writing by Borrower, or any one or more of said parties of an inability to pay its, his or their debts as they become due; (i) The filing of any involuntary petition seeking an entry of an order for relief as a debtor in a proceeding under the United States Bankruptcy Code or seeking reorganization or rearrangement or taking advantage of any Debtor Relief Laws, concerning Borrower or CSLC and any such petition is not rescinded or dismissed within ninety (90) days following such filing; (j) The making of a general assignment for the benefit of creditors by Borrower; (k) There shall be a material adverse change in the financial circumstances of Borrower; (l) Any sale, exchange, assignment or other transfer or conveyance of the Property or any interest therein; (m) A replacement of the Manager without Lender's prior written approval; (n) Borrower is adjudged in a final administrative decision to have committed fraud or abuse against Medicare, Medicaid or any other governmental health care program; (o) The failure of Borrower to maintain any insurance coverage required by this Agreement or any of the Mortgages and such failure continues for five (5) business days after receipt by Borrower of written notice of such failure; AMENDED AND RESTATED LOAN AGREEMENT Page 4 5 (p) The failure of Borrower to correct, within the time deadlines set by any applicable Medicaid, Medicare or licensing agency, any deficiency related to the Property which would result in: 1. a termination of any Permit or Reimbursement Contract; or 2. a ban on new admissions with respect to the Property; or (q) The Borrower, Manager, or the Property shall be assessed fines or penalties by any state health or licensing agency having jurisdiction over such Persons or the Property in excess of $100,000, which fine or penalty may not be appealed; (r) The Property or any portion thereof is taken on execution or other process of law in any action against Borrower; (s) The holder of any lien or security interest on any of the Property (without implying the consent of Lender to the existence or creation of any such lien or security interest), declares a default thereunder or institutes foreclosure or other proceedings for enforcement of its remedies thereunder and such default is not cured within ninety (90) days; or (t) Borrower abandons all or any portion of the Property. 1.17 Existing Loan. The term "Existing Loan" shall mean the "Loan" as defined in the Third Agreement. 1.18 Existing Loan Documents. The term "Existing Loan Documents" shall mean the "Loan Documents" as defined in the Third Agreement. 1.19 Financial Statements. The term "Financial Statements" shall mean such balance sheets, profit and loss statements, schedules of sources and applications of funds, operating statements, with respect to Borrower, Capital Senior Living Corporation and the Property, and other financial information of Borrower, as shall be reasonably required by Lender, from time to time. All annual Financial Statements of CSLC shall be certified by a certified public accountant, acceptable to Lender. Ernst & Young, L.L.P. is acceptable to Lender. All other Financial Statements shall be certified by an officer of Borrower. All Financial Statements shall be in form reasonably satisfactory to Lender using generally accepted accounting principles, consistently applied. 1.20 Financing Statements. The term "Financing Statements" shall mean the Form UCC-1 or other financing statements, to be filed in the appropriate offices for the perfection of a security interest in any of the personal property securing the Loan. AMENDED AND RESTATED LOAN AGREEMENT Page 5 6 1.21 Governmental Authority. The term "Governmental Authority" shall mean the United States, the state, the county, the city, or any other political subdivision in which the Property is located, and any other political subdivision, agency, or instrumentality exercising jurisdiction over Borrower, with respect to the Property. 1.22 Governmental Requirements. The term "Governmental Requirements" shall mean all laws, ordinances, rules, and regulations of any Governmental Authority applicable to Borrower or the Property, including but not limited to those described above. 1.23 The Harrison. The term "The Harrison" or "Eagle Valley" shall mean that certain congregate care community owned by Borrower in Indianapolis, Indiana known as The Harrison or Eagle Valley Retirement Community and as further described on Exhibit "A". 1.24 Improvements. The term "Improvements" shall mean the buildings, structures and other improvements located on the real property constituting portions of the Property. 1.25 Insurance Policies. The term "Insurance Policies" shall mean the insurance policies required pursuant to the terms of the Mortgages. 1.26 Land. The term "Land" shall mean those certain parcels or tracts of the real property described on Exhibit "A" attached hereto and incorporated herein by reference. 1.27 Lender. The term "Lender" shall mean the Lender named in the first paragraph of this Loan Agreement and its successors and assigns. 1.28 Loan. The term "Loan" shall mean the Loan by Lender to Borrower, in an amount not to exceed $20,000,000, to (i) pay or otherwise take-out the Existing Loan and to take by assignment the Third Agreement and the Existing Loan Documents from Lehman, (ii) fund the tender and solicitation for purchase by Borrower of partnership interests in Healthcare Properties, L.P. ("HCP") and limited partnership interests and pension notes in NHP Retirement Housing Partners I Limited Partnership ("NHP"); (iii) fund the acquisition of other senior living communities; (iv) fund the construction of improvements to properties owned by Borrower, and (v) fund working capital of Borrower. 1.29 Loan Documents. The term "Loan Documents" shall mean this Loan Agreement, the Mortgages, the Note, the Assignments of Landlord's Interest in Leases, the Financing Statements, the Security Agreement, the Environmental Indemnity Agreements, the Notice of Final Agreement of even date herewith between Borrower and Lender, the Specific Assignment, Subordination and Attornment Agreement of even date herewith between Borrower, Lender and Manager, the Extension, Assumption and Modification Agreement (Marion County, Indiana) of even date herewith between Borrower and Lender, the Extension, Assumption and Modification Agreement (Lake County, Indiana) of even date herewith between Borrower and Lender, the Extension, Assumption and Modification Agreement (Ohio) AMENDED AND RESTATED LOAN AGREEMENT Page 6 7 of even date herewith between Borrower and Lender, the Modification and Assumption of Amended and Restated Security Agreement of even date herewith between Borrower and Lender, all other documents executed by Borrower in connection with this Agreement, and such other instruments securing the First Agreement, Second Agreement and Third Agreement (as amended and restated hereby) and the Loan as shall, from time to time, be executed and delivered by Borrower, or any other party to Lender pursuant to the First Agreement, Second Agreement or Third Agreement (as amended and restated hereby) and this Loan Agreement, including, without limitation, each Affidavit of Borrower. 1.30 Loan Fees. The term "Loan Fees" shall mean the fees described in Section 4.16. 1.31 Management Agreements. The term "Management Agreements" shall mean the three management agreements pertaining to the Property, each dated November 3, 1997, between Borrower and Manager. 1.32 Manager. The term "Manager" shall mean Capital Senior Living, Inc., a Texas corporation. 1.33 Medicaid. The term "Medicaid" shall mean that certain program of medical assistance, funded jointly by the federal government and the States, for impoverished individuals who are aged, blind and/or disabled, and for members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. ss.ss. 1396 et seq.) and the regulations promulgated thereunder. 1.34 Medicare. The term "Medicare" shall mean that certain federal program providing health insurance for eligible elderly and other individuals, under which physicians, hospitals, skilled nursing homes, home health care and other providers are reimbursed for certain covered services they provide to the beneficiaries of such program, which program is more fully described in Title XVIII of the Social Security Act (42 U.S.C. ss.ss. 1395 et seq.) and the regulations promulgated thereunder. 1.35 Mortgages. The term "Mortgages" shall mean the mortgages described in Exhibit "C" attached hereto and made a part hereof. Each of the foregoing documents secures payment of the Note and the payment and performance of all obligations specified in the Mortgages and this Loan Agreement, and evidences a valid and enforceable first lien on the Property subject only to the matters reflected in the Title Insurance. 1.36 Note. The term "Note" shall mean that certain Promissory Note dated of even date herewith, in the stated principal amount of $20,000,000.00, executed by Borrower and payable to the order of Lender. AMENDED AND RESTATED LOAN AGREEMENT Page 7 8 1.37 Permits. The term "Permits" shall mean all licenses, permits and certificates used or useful in connection with the ownership, operation, use or occupancy of the Property, including, without limitation, business licenses, state health department licenses, food service licenses, licenses to conduct business, certificates of need and all such other permits, licenses and rights, obtained from any governmental, quasi-governmental or private person or entity whatsoever. 1.38 Permitted Exceptions. The term "Permitted Exceptions" with respect to the Property shall mean (i) title exceptions set forth in the Title Insurance, (ii) liens for ad valorem real property taxes, ad valorem personal property taxes and general or special assessments against real property and other governmental charges not yet due or payable, (iii) liens created pursuant to the Loan Documents, (iv) unrecorded leases of residents or patients, (v) easements, rights of way, restrictions, reservations, conditions, minor defects or irregularities in title and other similar charges or encumbrances, none of which individually or in the aggregate have a material adverse affect upon the Property as security for the Loan or interfere with the ordinary conduct of business at the Property, and (vi) statutory liens of mechanics and materialmen and other similar liens, in respect of liabilities which are not yet due or which are being contested by Borrower in good faith. 1.39 Property. The term "Property" shall mean collectively: (a) Canton Regency, The Harrison and Towne Centre, as well as the Land and Improvements and all other property (real and personal, fixture or otherwise) related thereto which is subject to the Mortgages, and (b) the Collateral (as such term is defined in the Security Agreement). The term "any of the Properties" shall mean any one or more of Canton Regency, The Harrison and Towne Centre and the term "any of the Property" shall mean any of the Land, Improvements and Collateral. Further, in those instances where required by the context in which it is used, the term "Property" shall also mean "any of the Property" or "any of the Properties". 1.40 Reimbursement Contracts. The term "Reimbursement Contracts" shall mean all third party reimbursement contracts for the Property which are now or hereafter in effect with respect to residents qualifying for coverage under the same, including private insurance agreements. 1.41 Security Agreement. The term "Security Agreement" shall mean the Amended and Restated Security Agreement dated June 30, 1997 between Lehman and Original Borrower, as modified by Modification and Assumption of Amended and Restated Security Agreement dated of even date herewith between Borrower and Lender. 1.42 Subsidiary. The term "Subsidiary" means any corporation, limited liability company, association, partnership, joint venture or other business or corporate entity, enterprise or organization which is directly or indirectly (through one or more intermediaries) controlled by or owned fifty percent or more by CSLC. AMENDED AND RESTATED LOAN AGREEMENT Page 8 9 1.43 Survey. The term "Survey" shall mean a current certified as built ALTA survey of each of the senior living communities constituting the Property satisfactory to Lender. 1.44 Title Company. The term "Title Company" shall mean Lawyers Title Insurance Company. 1.45 Title Insurance. The term "Title Insurance" shall mean the policies of mortgage title insurance issued by Lawyers Title Insurance Corporation with respect to the Mortgages. 1.46 Towne Centre. The term "Towne Centre" shall mean that certain congregate care community owned by Borrower in Merrillville, Indiana commonly known as Towne Centre Retirement Community as further described in Exhibit "A". 1.47 Treasury Note Rate. The term "Treasury Note Rate" shall mean the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the applicable Business Day, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to ten years. Such implied yield shall be determined, if necessary, by (i) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (ii) interpolating linearly between reported yields. The term "Business Day" as used in this paragraph means a day on which banks are open for business in New York, New York. ARTICLE 2 AGREEMENTS OF LENDER 2.1 Commitment of Lender. Subject to the conditions hereof, and provided that an Event of Default has not occurred, Lender will make Advances to Borrower in accordance with this Loan Agreement and solely for the purposes set forth in Section 1.28. Notwithstanding anything to the contrary in this Loan Agreement or any other instrument executed hereunder or in connection herewith, Borrower shall not use any Advance to pay fees, commissions, salaries, or other compensation of any kind to Borrower or to any affiliates or any persons or entities deemed by Lender to be affiliates of Borrower, whether directly or indirectly under any agreement, including, without limitation, management agreements, unless such fees, commissions, salaries or other compensation are specifically approved in a separate written instrument signed by Lender; provided however, Lender hereby acknowledges its approval of Borrower's reimbursement of actual expenses incurred and the payment of fees payable under the Management Agreements and development agreements. 2.2 Interest on the Loan: Adjustment of Interest. Interest on the Loan, at the rate specified in the Note, shall be computed on the outstanding balance of Advances and shall be AMENDED AND RESTATED LOAN AGREEMENT Page 9 10 computed with respect to each Advance only from the date of such Advance. Since the term of the Loan may be reduced to less than the full stated term under various circumstances, it is not possible at the time of execution of this Agreement to determine whether interest charged under the Note together with other loan charges constituting interest (herein called "Loan Finance Charges") will exceed the maximum interest rate permitted by applicable law for the actual term of the Loan. Therefore, the parties agree that at the end of the actual term of the Loan (as it may be renewed or extended), the following calculations will be made: (i) first, the Loan Fees (to the extent that they constitute interest) shall be added to the interest charged, collected or received by Lender under the Note, such total being hereinafter called the "Stated Interest"; and (ii) second, the maximum amount of interest that may be charged under applicable law (including, without limitation, Section 501 of the Depository Institutions Deregulation and Monetary Control Act of 1980, Public Law No. 96-221 ) for the actual term of the Loan on the principal balance remaining unpaid from time to time shall be calculated. If the Stated Interest exceeds the Maximum Interest (as defined in the Note), the amount of such excess shall be credited to the principal amount of the Note or refunded immediately to Borrower if such principal amount has theretofore been entirely paid. In no event shall the amount of the Loan Fees together with the interest charged, collected or received by Lender under the Note exceed the highest interest rate permitted by applicable law for the actual term of the Loan. 2.3 Limitation on Aggregate Amount of Advances. In no event shall Lender be required to make any Advances in excess of the stated principal amount of the Loan or if the making of such Advance would cause Lender to violate any law, rule or regulation to which Lender is subject limiting the amount that may be advanced by Lender as contemplated in this Loan Agreement. 2.4 Conditions to Advances. As a condition precedent to each Advance hereunder, in addition to all other requirements herein, Borrower must satisfy the following requirements and, if required by Lender, deliver to Lender evidence of such satisfaction: (a) Borrower shall deliver to Lender a Request for Advance in the form attached hereto as Exhibit "B" at least two (2) business days prior to the date such advance is to be made. (b) There shall then exist no Event of Default; (c) The representations and warranties made in this Loan Agreement shall be true and correct on and as of the date of each Advance, with the same effect as if made on that date; (d) There shall be no material adverse change or modification in the financial condition of Borrower; and AMENDED AND RESTATED LOAN AGREEMENT Page 10 11 (e) The total of all outstanding Advances together with the requested Advance shall not exceed the Borrowing Base. No Advance will be made under the Loan after December 1, 2000. 2.5 Future Acquisitions. Furthermore, Borrower understands and agrees that so long as Borrower has outstanding obligations to Lender related to the Loan, Borrower shall not, without the prior written consent of Lender, which consent shall not be unreasonably withheld: incur any third party purchase money indebtedness related to any other retirement community, nursing home facility, or other real estate property without the Lender's prior written consent if such property, development or proposed investment is not generating positive cash flow from operations after payment of operating expenses, maintenance capital expenditures and debt service of third party financing. 2.6 No Waiver. No Advance shall constitute a waiver of any condition precedent to the obligation of Lender to make any further Advance or preclude Lender from thereafter declaring the failure of Borrower to satisfy such condition precedent to be an Event of Default. 2.7 Conditions Precedent for the Benefit of Lender. All conditions precedent to the obligation of Lender to make any Advance are imposed hereby solely for the benefit of Lender, and no other party may require satisfaction of any such condition precedent or be entitled to assume that Lender will refuse to make any Advance in the absence of strict compliance with such conditions precedent. All requirements of this Loan Agreement may be waived by Lender, in whole or in part, at any time, in a writing signed by Lender. 2.8 Payment Procedure. All payments and prepayments made by Borrower under the Note or this Loan Agreement shall be made to Lender at its offices specified herein in immediately available funds before 2:00 p.m. Dallas time, on the date that such payment is required to be made. Any payment received and accepted by Lender after such time shall be considered for all purposes (including the calculation of interest) to the extent permitted by law, as having been made to Lender on the next following business day. 2.9 Recourse. Borrower shall be liable for the indebtedness evidenced by the Note and for the performance of all agreements in the Mortgages and the other Loan Documents to the full extent of the Property and other assets owned by Borrower, whether pledged to Lender or subject to a separate lien or otherwise. If there is an Event of Default, any judicial proceedings brought by Lender against Borrower shall be limited initially to the protection of the Property and the enforcement and foreclosure of the liens and security interests created by the Loan Documents. The collection of any deficiency remaining after Lender has sought to satisfy the indebtedness and reasonable expenses incurred subsequent to foreclosure of the liens and security interests created by the Loan Documents shall be against the remaining assets of Borrower. Notwithstanding the foregoing, Lender shall not be required to exercise its rights and remedies with respect to a Property (including the Land, Improvements and AMENDED AND RESTATED LOAN AGREEMENT Page 11 12 Collateral related to such Property) (the "Affected Property") which is affected by any Hazardous Substance (as such term is defined in the Environmental Indemnity Agreements) if as a result thereof, the value of all of the Property after the exercise of such rights and remedies (taking into account the costs to be incurred to clean up, remove, resolve, or minimize the impact of, or otherwise deal with the Hazardous Substance) would be less than the outstanding principal balance of the Loan prior to the exercise of such rights and remedies. In the event of the circumstances described in the preceding sentence, Lender shall only be required to exercise its rights and remedies with respect to the Property other than the Affected Property before proceeding directly against Borrower for the indebtedness and the performance of its obligations under the Loan Documents. Nothing contained in this Section 2.9 shall alter, affect or impair or relieve Borrower from any of its obligations under the Environmental Indemnity Agreements. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF BORROWER Borrower hereby represents and warrants as follows: 3.1 Organization and Authority of Borrower. Borrower is a duly organized, validly existing Texas corporation and in good standing under the applicable laws of Texas, and is qualified to do business and is in good standing in each state where its business activities require such qualification, with full power, and authority to enter into this Agreement. If the issuance of any interest in Borrower, or in any constituent business entity of Borrower is subject to any state or federal securities laws and/or the rules and regulations of the Securities and Exchange Commission, each such issuance has been and will be in compliance with all said laws and regulations to which it is subject. 3.2 Execution and Delivery of Loan Documents. The execution and delivery of the Loan Documents executed or delivered by Borrower, and the consummation of the transactions contemplated thereby: (i) have been duly authorized by all actions required under the terms and provisions of their governing instruments, the laws of the State of Texas, and any applicable requirement of a Governmental Authority; (ii) create legal, valid and binding obligations on Borrower; (iii) do not require the approval or consent of any Governmental Authority having jurisdiction over Borrower, or the property of Borrower; and (iv) do not and will not constitute a violation of, or default under, the governing instruments of Borrower, any requirement of a Governmental Authority applicable to Borrower, or any mortgage, indenture, agreement, commitment, or instrument to which Borrower is a party or by which any of its assets are bound, nor create or cause to be created any mortgage, lien, encumbrance, or charge against the assets of Borrower other than those expressly permitted by the Loan Documents. 3.3 Information Supplied by Borrower. The Financial Statements of Borrower and CSLC heretofore delivered to Lender are true, complete and correct in all material respects, AMENDED AND RESTATED LOAN AGREEMENT Page 12 13 have been prepared on a consistent basis and fairly and accurately present the respective financial conditions of the subjects thereof as of the respective dates thereof. No material adverse change has occurred since the respective dates thereof. 3.4 Compliance With Laws. To Borrower's knowledge, the use of the Property and Improvements comply with all Governmental Requirements, applicable zoning ordinances, regulations and restrictive covenants affecting the Property and all other requirements of a Governmental Authority, and all requirements for such use have been satisfied. 3.5 Licenses; Permits. Borrower represents and warrants to Lender that, to Borrower's knowledge, all necessary licenses, Permits and other necessary certificates are in full force and effect and have been issued in Borrower's or Manager's name with respect to the Property and Borrower and Manager are in good standing with all Governmental Authorities in connection with all beds or units required to be licensed and other facilities constituting a portion of the Property. Borrower further represents and warrants that all necessary and applicable certificates of occupancy, permits and other appropriate authorization and approval matters from Governmental Authorities have been issued and are in existence with regard to the Property. No funds have been received by Borrower or any other person or entity with respect to the Property pursuant to Title VI of the Public Health Service Act, 42 U.S.C. ss. 291 et seq., as amended (the "Hill-Burton Act"), and the Property is not subject to any provision or requirements of the Hill-Burton Act. 3.6 No Defaults. Borrower is not in default under any of the Loan Documents, and no event has occurred which by notice, the passage of time or otherwise would constitute an event of default under any of the Loan Documents. Borrower is not in default in the payment of any indebtedness for borrowed money or under the terms and provisions of any agreement or instrument evidencing any such indebtedness, and, to Borrower's knowledge, it is not in default with respect to any order, writ, injunction, decree or demand of any court or of any other requirement of a Governmental Authority. 3.7 Access and Utilities. The Property has adequate rights of access to public ways and all water, sanitary sewer and storm drain facilities. All public utilities necessary or convenient to the full use and enjoyment of the Property are available at the boundaries of the Property and same are in service. All roads necessary for the full utilization of the Property for their intended purposes are present or the necessary rights of way therefor have been acquired. 3.8 Lien Potential. Borrower has not made any contract or arrangement of any kind which has given rise to (or the performance of which by the other party thereto would give rise to) a lien or claim of lien on the Property, or other collateral covered by the Loan Documents, except for the collateral documents executed in connection with the Loan. 3.9 Complete Information. No representation or warranty of Borrower contained in any of the Loan Documents, and no statement contained in any certificate, schedule, list, AMENDED AND RESTATED LOAN AGREEMENT Page 13 14 financial statement or other instrument furnished to Lender by or on behalf of Borrower contains, or will intentionally contain, any untrue statement of a material fact, or omits, or will intentionally omit, to state a material fact necessary to make the statements contained herein or therein not misleading. To Borrower's knowledge, all information material to the transactions contemplated herein has been expressly disclosed in writing by Borrower to Lender. 3.10 Investment Company Act. Borrower is not an investment company as defined in the Investment Company Act of 1940, as amended. 3.11 Payment of Taxes. Borrower has filed all federal, state and other tax returns and reports required to be filed, and has paid all taxes as shown on said returns and reports and all assessments received by it to the extent that such taxes and assessments have become due (except to the extent that the same are being contested in good faith by appropriate proceedings diligently prosecuted and as to which adequate reserves have been set aside in conformity with generally accepted accounting principles). 3.12 The Financial Statements. Except with respect to the initial Financial Statements of Borrower which were proformas only, the Financial Statements are true, correct, and complete as of the dates specified therein and fully and accurately present the financial condition of Borrower as of the dates specified. No material adverse change has occurred in the financial condition of Borrower since the date of the Financial Statements. 3.13 Suits, Actions. etc. There are no actions, suits, or proceedings pending or, to Borrower's knowledge, threatened in any court or before or by any individual, entity or Governmental Authority against or affecting Borrower which could have a material adverse effect on the ability of each of any such parties to perform their respective obligations under the Loan Documents or otherwise, or against or affecting the Property, or involving the validity, enforceability, or priority of any of the Loan Documents, at law or in equity. The consummation of the transactions contemplated hereby, and the performance of any of the terms and conditions hereof and of the other Loan Documents by Borrower, will not result in a breach of, or constitute a default in, any mortgage, deed of trust, lease, promissory note, loan agreement, credit agreement. partnership agreement, or other agreement to which Borrower or by which Borrower may be bound. 3.14 Title to the Property. Borrower holds full legal and equitable title to the Property subject only to the Permitted Exceptions. 3.15 ERISA Compliance. (a) As of the date hereof and throughout the term of the Loan, (i) Borrower is not and will not be an "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), which is AMENDED AND RESTATED LOAN AGREEMENT Page 14 15 subject to Title I of ERISA, and (ii) the assets of Borrower do not and will not constitute "plan assets" of one or more such plans for purposes of Title I of ERISA; and (b) As of the date hereof and throughout the term of the Loan (i) Borrower is not and will not be a "governmental plan" within the meaning of Section 3(3) of ERISA and (ii) transactions by or with Borrower are not and will not be subject to state statutes applicable to Borrower regulating investments of and fiduciary obligations with respect to governmental plans. 3.16 Management Agreements. The Management Agreements are in full force and effect and there are no defaults by the Manager or Borrower thereunder. 3.17 Reimbursement Contracts. There is no action pending or threatened to terminate (a) any Medicare or Medicaid Reimbursement Contract of any of the Properties or to fail to renew any Medicare or Medicaid Reimbursement Contract, or (b) any material Reimbursement Contract (other than Medicare and Medicaid) or to fail to renew any material Reimbursement Contract (other than Medicare and Medicaid). ARTICLE 4 COVENANTS AND AGREEMENTS OF BORROWER Borrower hereby covenants and agrees as follows: 4.1 Compliance with Governmental Requirements. Borrower shall timely comply in all material respects with all Governmental Requirements and, if requested by Lender, deliver to Lender evidence of such compliance. 4.2 Correction of Defects. Borrower shall correct or cause to be corrected (a) any material defect in the Improvements, or (b) any encroachment by any part of the Improvements or any other structure located on the Property on any building line, easement, property line, or restricted area. 4.3 Underground Storage Tanks. Borrower represents and warrants: (i) Borrower has formally registered underground storage tanks ("UST's") located at Towne Centre and Canton Regency with all Governmental Authorities; (ii) the UST's are in full compliance with all Governmental Requirements; (iii) to the best of Borrower's knowledge, the UST's do not leak and are in first class condition; (iv) Borrower has conducted tightness tests on the UST's and has provided or shall upon request provide Lender with copies of all such test results, and shall comply with all future requirements, requests and recommendations of Lender concerning the UST's; (v) Borrower will conduct additional tightness tests of the UST's on or before the expiration of twelve (12) months from the date hereof; and (vi) Borrower shall fully comply AMENDED AND RESTATED LOAN AGREEMENT Page 15 16 with all future obligations and otherwise maintain said UST's in a manner so as to comply with all future Governmental Requirements. 4.4 Inspection of the Property. Borrower shall permit Lender, any Governmental Authority, and their agents and representatives, to enter upon the Property and any location for the purpose of inspection of the Property at all reasonable times. 4.5 Notices by Governmental Authority, Fire and Casualty Losses, etc. Borrower shall timely comply with and promptly furnish to Lender true and complete copies of any official notice or claim by any Governmental Authority pertaining to the Property. Borrower shall promptly notify Lender of any fire or other casualty or any notice of taking or eminent domain action or proceeding affecting the Property. 4.6 Expenses. Whether or not the transactions contemplated under this Loan Agreement and the Loan Documents shall be consummated, Borrower shall pay all expenses in connection with such transactions, including, without limitation, the cost and expenses of preparation of this Loan Agreement and of any other document or instrument Lender considers necessary or appropriate with respect to the Loan, the cost and expenses of or incident to the enforcement or performance of and compliance with any of the provisions of this Loan Agreement or any agreement or condition contained in any other document or instrument required by Lender, and any other costs and expenses related to the transactions contemplated under this Loan Agreement. Furthermore, Borrower agrees to reimburse Lender for all other expenses incurred by Lender associated with the due diligence examination of the Property, review of all materials and records presented to Lender, travel expenses incurred for inspection of the Property, attorney's fees incurred and other costs and expenses related to the Loan. 4.7 Additional Acts. In addition to the acts recited herein and contemplated to be performed, executed and/or delivered by Borrower, Borrower hereby agrees, at any time, and from time to time, to perform, execute and/or deliver to Lender any and all such further acts, additional instruments, or further assurances as may be necessary or proper to (i) implement the intent of the parties under this Loan Agreement; (ii) correct any errors in this Loan Agreement or any other instrument relating thereto; (iii) assure Lender a valid and direct first lien and prior first perfected security interest under the Loan Documents or any of them on the Property; (iv) create, perfect, preserve, maintain and protect the liens and security interests created or intended to be created by the Loan Documents; and (v) provide the rights and remedies to Lender granted or provided for by the Loan Documents. 4.8 Inspection of Property. Books and Records. Borrower shall permit Lender, at all reasonable times: (i) to examine and inspect the Property; and (ii) examine, inspect and copy the books and records of Borrower pertaining to the Loan and the Property, and all contracts, statements, invoices, bills, and claims related thereto. All such books and records shall be maintained and kept in accordance with generally accepted accounting principles, consistently applied. AMENDED AND RESTATED LOAN AGREEMENT Page 16 17 4.9 Defense of Actions. Lender may (but shall not be obligated to) commence, appear in, or defend any action or proceeding purporting to affect the Loan, the Property, or the respective rights and obligations of Lender and Borrower pursuant to this Loan Agreement. Lender may (but shall not be obligated to) pay all necessary expenses, including attorneys' fees and expenses incurred in connection with such proceedings or actions, which Borrower agrees to repay to Lender upon demand. 4.10 Prohibition of Assignment or Debt. (a) Except as otherwise expressly permitted herein or in the Mortgage, Borrower shall not assign or encumber any interest in the Property without the prior written consent of Lender. Borrower shall not (i) pledge any part of the Property, or (ii) dispose of any asset (personal property or real property) related to the Property belonging to Borrower without the prior written consent of Lender; provided, however, that with respect to the purchase of inventory, supplies and equipment necessary for the day-to-day operation of any one or more of the facilities comprising the Property, and the purchase of any equipment necessary for the repair and/or replacement of any equipment or improvement used or operated in connection with any one or more of the facilities comprising the Property, nothing herein shall prohibit such purchases, replacements or dispositions or require Lender's approval; further provided however, nothing herein is intended to revise or diminish Borrower's rights stated in Section 2.5 above in connection with the acquisition of other properties which meet the financial criteria set forth therein. Borrower shall make no loans whatsoever to anyone other than CSLC and Subsidiaries of CSLC without the prior written consent of Lender. (b) Without the prior written consent of Lender, Borrower shall not enter into any merger or consolidation with, or sell, lease, transfer or dispose of all or substantially all of its assets to, any entity. (c) Borrower shall carry on and conduct its business in substantially the same manner and substantially the same field of enterprise as it is presently conducted. 4.11 Payment of Claims. Borrower shall promptly pay or cause to be paid when due all costs and expenses incurred in connection with the Property and the Improvements, and Borrower shall keep the Property free and clear of any liens, charges, or claims other than the lien of the Mortgages and other liens approved in writing by Lender. Notwithstanding anything to the contrary contained in this Loan Agreement, Borrower, provided it does so in good faith and in diligent and continuous manner, may (a) contest the validity or amount of any claim of any contractor, consultant, or other person providing labor, materials, or services with respect to the Property, and (b) contest any tax or special assessments levied by any Governmental Requirements, and such contest on the part of Borrower shall not be a default hereunder and shall not release Lender from its obligations to make Advances hereunder; provided, however, that during the pendency of any such contest, Borrower shall furnish to Lender and the Title AMENDED AND RESTATED LOAN AGREEMENT Page 17 18 Company an indemnity bond with a corporate surety satisfactory to Lender and the Title Company, a letter of credit issued by a financial institution approved by Lender and the Title Company, or other security acceptable to them, in an amount equal to twice the amount being contested plus a reasonable additional sum to cover possible costs, interest, and penalties, and provided further that Borrower shall pay any amount adjudged by a court of competent jurisdiction to be due, with all costs, interest, and penalties thereon, before such judgment becomes a lien on the Property. 4.12 Restrictions and Annexation. Borrower shall not impose any restrictive covenants or encumbrances upon the Property, execute or file any subdivision plat affecting the Property, take any action whatsoever to convert the Property or any part thereof to a condominium or cooperative, or consent to any action taken by any Governmental Authority without the prior written consent of Lender. 4.13 Current Financial Statements. (a) On or before the expiration of 45 days after each fiscal quarter during the term of the Loan, Borrower shall deliver to Lender Financial Statements of Borrower. On or before the expiration of 120 days after each fiscal year during the term of the Loan, Borrower shall deliver to Lender annual audited Financial Statements of Capital Senior Living Corporation (on a consolidated and consolidating basis). (b) With respect to the Property, Borrower shall deliver to Lender: (1) Within 45 days after each fiscal quarter, monthly and year-to-date Financial Statements of the operations of the Property, in the form of Exhibit "E", certified by an officer of Borrower to be true and correct to the best of the officer's knowledge and belief. (2) If and when applicable, within twenty (20) days of receipt, copies of all licensure and certification survey reports and statements of deficiencies, and, attached thereto, a copy of any plan of correction generated by the Borrower or Manager in connection with such survey or report; and to correct, in requisite time, any deficiency the curing of which is a condition to continued licensure or ability to operate. (3) If and when applicable, within three (3) days of receipt, any and all notices (regardless of form) from any and all licensing and/or certifying agencies that the Property is being downgraded to a substandard category, revoked, or suspended or that any such action is pending or being considered. (4) If requested by Lender, within fifteen (15) days of Lender's request, an aged accounts receivable report of the Property. AMENDED AND RESTATED LOAN AGREEMENT Page 18 19 (5) Within twenty (20) days of filing or receipt, all Medicaid cost reports and amendments thereto filed with respect to the Property, and all responses, audit reports or other inquiries with respect to such cost reports. (6) Within ten (10) days of receipt, a copy of the Medicaid rate calculation worksheet (or the equivalent thereof) issued by the appropriate Medicaid agency for the Property. (c) If Borrower routinely prepares more frequent Financial Statements (unaudited) for interim periods, Borrower shall furnish Lender copies of such interim statements (unaudited) when they are prepared. In addition Borrower will promptly prepare and deliver, or cause to be prepared and delivered, to Lender such other Financial Statements as Lender may from time to time reasonably request. All Financial Statements shall be prepared in accordance with generally accepted accounting principles, consistently applied. Furthermore, Borrower shall execute and deliver to Lender its Affidavit of Borrower in accordance with the terms set forth in paragraph 1.2. 4.14 Tax Receipts. Borrower shall furnish Lender with receipts, or tax statements marked "Paid" to evidence the payment of all taxes levied on the Property on or before thirty (30) days prior to the date such taxes become delinquent. 4.15 Financial Covenants. Borrower shall, at all times, comply with the following financial covenants, maintain such amounts and ratios as set forth herein, which shall in each instance be calculated on a basis of generally accepted accounting principles, consistently applied. Compliance with the financial covenant requirements shall be determined as of the dates of the financial statements to be provided to Lender, and Borrower shall deliver schedules reflecting the calculation of such amounts and the ratios concurrently with each set of financial statements. (a) Current Ratio. Borrower shall maintain a minimum Current Ratio of 1.0 to 1.0 at all times. The Current Ratio shall be calculated based upon Current Assets divided by Current Liabilities equals Current Ratio: As of the quarter ending : -------------------- $ /$ = --------------- ------------------ ------------- Current Assets / Current Liabilities Current Ratio For purposes of this calculation pre-paid expenses will be classified as non-current assets. AMENDED AND RESTATED LOAN AGREEMENT Page 19 20 (b) Tangible Net Worth. Borrower shall maintain a minimum of $45,000,000 as Tangible Net Worth (as defined below) through the end of each current fiscal year. As of the year ending : ------------------------ Total Assets $ ------------- Less: Total Liabilities $ ------------- Intangibles $ ------------- Goodwill $ ------------- Other $ ------------- Equals: Tangible Net Worth $ ------------- (c) Loan to Value Ratio. Throughout the term of the Loan, Borrower will maintain a Loan to Value Ratio not to exceed sixty-two and one-half percent (62.5%) as to the outstanding indebtedness payable to Lender under the Loan. (d) Leverage Ratio. Borrower shall maintain a Leverage Ratio less than 0.35 to 1.0 at all times. The Leverage Ratio will be calculated as Borrower's total liabilities divided by Market Capitalization of CSLC, where Market Capitalization of CSLC equals the total number of outstanding shares of stock of CSLC multiplied by the price of such shares. The Leverage Ratio shall be computed as of the first day of the applicable quarter. (e) Cash Flow Coverage. The Property (in the aggregate) shall maintain a minimum Cash Flow Coverage ratio of 1.3 to 1.0, calculated based on the prior three (3) months of operation. This ratio shall be calculated as (1) net income from the normal operations of the Property (without deduction for actual management fees paid or incurred), plus interest expense (to the extent deducted in calculating net income) and allowances for depreciation and amortization of the Property for said period, less (i) the greater of actual capital expenditures for that period or $150 per unit per year, and (ii) the greater of actual management fees during that period or a five percent (5%) management fee, divided by (2) an amount equivalent to the sum of (i) interest on the Loan during such period at a rate of interest equal to 2.50% per annum above the Treasury Note Rate and (ii) an amount equivalent to the monthly installment of principal payable under the Loan during such period assuming a 25-year amortization. 4.16 Loan Fees. On each anniversary date of the Loan, Borrower shall pay Lender a fee equal to one eighth of one percent (0.125%) of the then unused portion (i.e., not outstand ing) of the principal amount of the Loan commitment set forth in the first paragraph of this Loan Agreement if such unused portion is not more than $14,000,000, and one-quarter of one AMENDED AND RESTATED LOAN AGREEMENT Page 20 21 percent (0.250%) of the then unused portion of the principal amount of the Loan commitment if such unused portion is more than $14,000,000. 4.17 Affiliated Transactions. Borrower agrees that all transactions with third party entities will be fully negotiated and shall be on an "arms-length" bona fide type basis. Although Borrower is not prohibited from entering into service agreements or other contracts with affiliated entities, any such agreements shall be on competitive terms, and shall otherwise be fair and equitable. Any agreement with a third party affiliated entity shall be subject to review and approval by Lender and shall be subject to termination if same does not meet with Lender's reasonable approval; provided however, Lender acknowledges its consent and approval of the fees and reimbursements payable under the Management Agreements and development agreements. 4.18 Operation of Business. Borrower shall conduct, or cause the Manager to conduct, the operation of the Property at all times in a manner consistent with the following: (a) to maintain the standard of care for the residents of the Property at all times at a level necessary to ensure quality care for the residents of the Property in accordance with customary and prudent industry standards; (b) to operate the Property in a prudent manner and in compliance with applicable laws and regulations relating thereto and cause all Permits, Reimbursement Contracts, and any other agreements necessary for the use and operation of the Property or as may be necessary for applicable reimbursement programs to remain in effect without reduction in the number of licensed units or units authorized for use in applicable reimbursement programs; (c) to maintain sufficient inventory and equipment types and quantities at the Property to enable Borrower adequately to perform operations of the Property; (d) to keep all improvements and equipment located on or used or useful in connection with the Property in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needed and proper repairs, renewals, replacements, additions, and improvements thereto to keep the same in good operating condition; and (e) to maintain sufficient cash in the operating accounts of the Property in order to satisfy the working capital needs of the Property . 4.19 ERISA. Borrower has not in the past and does not presently maintain any "employee benefit plan" as defined in Section 3(3) of ERISA. AMENDED AND RESTATED LOAN AGREEMENT Page 21 22 4.20 Management Agreements. Maintain the Management Agreements in full force and effect and timely perform all of Borrower's obligations thereunder and enforce performance of all obligations of the Manager thereunder and not permit the termination, amendment or assignment of the Management Agreements unless the prior written consent of Lender is first obtained, which consent may be in the sole and absolute discretion of Lender. Borrower will not enter into any other management agreement regarding the Property without Lender's prior written consent, which may be in the sole and absolute discretion of Lender. 4.21 Notice of Fees or Penalties. Borrower shall immediately notify Lender, upon Borrower's knowledge thereof, of the assessment by any state or any Medicare, Medicaid, health or licensing agency of any fine or penalties against Borrower, Manager or the Property. 4.22 Assignment of Licenses and Permits. Borrower shall not assign or transfer any of its interest in any Permits or Reimbursement Contracts (including rights to payment thereunder) pertaining to the Property, or assign, transfer, or remove or permit any other person to assign, transfer, or remove any records pertaining to the Property including, without limitation, resident records, medical and clinical records (except for removal of such resident records as directed by the residents owning such records), without Lender's prior written consent, which consent may be granted or refused in Lender's sole discretion. 4.23 Periodic Surveys. Borrower shall furnish to Lender, or cause the Manager to furnish to Lender, within twenty (20) days of receipt, a copy of any Medicare, Medicaid, or other licensing agency survey or report and any statement of deficiencies and/or any other report required in Section 4.13 indicating that any action is pending or being considered to downgrade the Property (or any portion thereof) to a substandard category, and within the time period required by the particular agency for furnishing a plan of correction also furnish or cause to be furnished to Lender a copy of the plan of correction generated from such survey or report to the Property, and correct or cause to be corrected any deficiency, the curing of which is a condition of continued licensure or for full participation in Medicaid/Medicare or other reimbursement programs pursuant to any Reimbursement Contract for existing patients or for new patients to be admitted with Medicaid or Medicare coverage, by the date required for cure by such agency (plus extensions granted by such agency). 4.24 Further Assurances. Borrower will, on request of Lender, (i) promptly correct any defect or error which may be discovered in the contents of any Loan Document now or hereafter executed in connection herewith or in the execution or acknowledgment thereof; (ii) execute, acknowledge, deliver and record or file such further instruments (including without limitation further deeds of trust, security agreements, financing statements, continuation statements and assignments of rents or leases) and do such further acts as may be necessary, desirable or proper to carry out more effectively the purposes of the Loan Documents and to subject to the liens and security interests thereof any property intended by the terms hereof and thereof to be covered hereby and thereby including specifically, but without limitation, any renewals, additions, substitutions, replacements, or appurtenances to the Property; and (iii) AMENDED AND RESTATED LOAN AGREEMENT Page 22 23 execute, acknowledge, deliver, procure and record or file any document or instrument (including specifically any financing statement) deemed advisable by the Lender to protect the liens or the security interests under the Loan Documents against the rights or interests of third persons. 4.25 Ownership and Liens. Borrower will maintain good and marketable title to all of the Property free and clear of all liens, security interests, encumbrances or adverse claims, except for the liens and security interests created by the Loan Documents and the Permitted Encumbrances. Borrower will not permit any dispute, right of setoff, counterclaim or defense to exist with respect to all or any part of the Property. Borrower will cause any lien, financing statement or other security instrument with respect to the Property to be terminated, except as may exist or as may have been filed in favor of Lender. Borrower will defend at its expense Lender's right, title and security interest in and to the Property against the claims of any third party. 4.26 Transfer or Encumbrance. Borrower will not (i) sell, assign by operation of law or otherwise), transfer, exchange, lease or otherwise dispose of any of the Property, (ii) grant a lien or security interest in or execute, file or record any financing statement or other security instrument with respect to the Property to any party other than Lender, or (iii) deliver actual or constructive possession of any of the Property to any party other than Lender, except for (A) sales and leases of inventory in the ordinary course of business, and (B) the sale or the disposal of any item of equipment which is worn out or obsolete and which has been replaced by an item of equal suitability and value, owned by Borrower and made subject to the liens and security interests under the Loan Documents, but which is otherwise free and clear of any lien, security interest, encumbrance or adverse claim; provided, however, the exceptions permitted in clauses (A) and (B) above shall automatically terminate upon the occurrence of an Event of Default. ARTICLE 5 RIGHTS AND REMEDIES OF LENDER 5.1 Acceleration. Upon the occurrence of an Event of Default, subject to the terms and conditions of the Note, Lender may, at its option, declare the Loan immediately due and payable without notice of any kind. 5.2 Cessation of Advances. Upon the occurrence of an Event of Default, the obligation of Lender to disburse the Loan and all other obligations of Lender hereunder shall, at Lender's option, immediately terminate. 5.3 No Waiver or Exhaustion. No waiver by Lender of any of its rights or remedies hereunder, in the other Loan Documents, or otherwise, shall be considered a waiver of any other or subsequent right or remedy of Lender; no delay or omission in the exercise or enforcement by Lender of any rights or remedies shall ever be construed as a waiver of any AMENDED AND RESTATED LOAN AGREEMENT Page 23 24 right or remedy of Lender; and no exercise or enforcement of any such rights or remedies shall ever be held to exhaust any right or remedy of Lender. ARTICLE 6 INDEMNIFICATION Borrower agrees to and does hereby indemnify Lender (for purposes of this Article 6 the term "Lender" shall include the directors, officers, employees and agents of Lender and any persons or entities owned or controlled by, owning or controlling, or under common control or affiliated with Lender) and hold Lender harmless as follows: (a) against any and all claims, demands, causes of action, judgments, penalties, loss, damage, liabilities, costs and expenses (including, without limitation, attorneys' fees and court costs) asserted against or incurred by Lender by reason of, arising out of, or in connection with, any bodily injury or death or property damage occurring in or upon or in the vicinity of the Property through any cause whatsoever; (b) against any and all claims, demands, causes of action, judgments, penalties, loss, damage, liabilities, costs and expenses (including, without limitation, attorneys' fees and court costs) asserted against or incurred by Lender by reason of, arising out of, or in connection with, any violation or breach by Borrower of any of the terms and provisions of the Loan Documents or any of them; and (c) against any and all claims, demands, causes of action, judgments, penalties, loss, damage, liabilities, costs and expenses (including, without limitation, attorneys' fees and court costs) asserted against or incurred by Lender by reason of, arising out of, or in connection with, the Loan, any of the Loan Documents, or the Property. WITHOUT LIMITATION, IT IS THE INTENTION OF BORROWER AND BORROWER AGREES THAT THE FOREGOING INDEMNITIES SHALL APPLY TO EACH INDEMNIFIED PARTY WITH RESPECT TO CLAIMS, DEMANDS, LIABILITIES, LOSSES, DAMAGES, CAUSES OF ACTION, JUDGMENTS, PENALTIES, COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEY'S FEES) WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OF SUCH (AND/OR ANY OTHER) INDEMNIFIED PARTY OR ANY STRICT LIABILITY. HOWEVER, SUCH INDEMNITIES SHALL NOT APPLY TO ANY INDEMNIFIED PARTY TO THE EXTENT THE SUBJECT OF THE INDEMNIFICATION IS CAUSED BY OR ARISES OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY. AMENDED AND RESTATED LOAN AGREEMENT Page 24 25 ARTICLE 7 PARTIAL RELEASES Borrower may, at any time and from time to time, obtain a release from the lien and security interest created by a Mortgage and the Security Agreement of that portion of the Property related to such Mortgage (the "Related Property") as Borrower may designate, upon satisfaction of the following terms and conditions: (a) After giving effect to the release from the lien of a Mortgage of the Related Property, the remaining Property (in the aggregate) shall have (a) a Cash Flow Coverage of 1.3 to 1.0, and (b) a Loan to Value Ratio of 62.5% or less. If Lender, in its sole discretion, requires new Appraisals in order to make such calculation, Lender will order and Borrower will reimburse Lender the costs of such Appraisals, which Appraisals must be in form and substance reasonably satisfactory to Lender. (b) At least seven (7) days prior to the date of such release, Borrower shall deliver to the Lender at the Borrower's expense the form of the release to be executed by the Lender (which form of release must be satisfactory to the Lender in form and substance). (c) At the time of such release, there shall exist no Event of Default, and no event shall have occurred which with the passage of time or the giving of notice or both would constitute such an Event of Default. ARTICLE 8 GENERAL TERMS AND CONDITIONS 8.1 Notices. All notices, demands requests, and other communications required or permitted hereunder shall be in writing and shall be deemed to have been given and received when presented personally or three (3) days after being deposited in a regularly maintained receptacle for the United States Postal Service, postage prepaid, registered or certified, return receipt requested, addressed to Borrower or Lender, as the case may be, at the respective addresses set forth on the first page of this Loan Agreement, or such other address as Borrower or Lender may from time to time designate by written notice to the other as herein required. 8.2 Modifications. No provision of this Loan Agreement or the other Loan Documents may be modified, waived, or terminated except by instrument in writing executed by the party against whom a modification, waiver, or termination is sought to be enforced. AMENDED AND RESTATED LOAN AGREEMENT Page 25 26 8.3 Severability. In case any of the provisions of this Loan Agreement shall for any reason be held to be invalid, illegal, or unenforceable, such invalidity, illegality, or unenforce ability shall not affect any other provision hereof, and this Loan Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. 8.4 Election of Remedies. Lender shall have all of the rights and remedies granted in the Loan Documents and available at law or in equity, and these same rights and remedies shall be cumulative and may be pursued separately, successively, or concurrently against Borrower or any property covered under the Loan Documents at the sole discretion of Lender. The exercise of, or failure to exercise, any of the same shall not constitute a waiver or release thereof or of any other right or remedy, and the same shall be nonexclusive. 8.5 Form and Substance. All documents. certificates, insurance policies, and other items required under this Loan Agreement to be executed and/or delivered to Lender shall be in form and substance satisfactory to Lender. 8.6 Usury. It is the intent of Lender and Borrower in the execution of the Note, this Agreement and all other instruments now or hereafter securing the Note or executed in connection therewith or under any other written or oral agreement by Borrower in favor of Lender to contract in strict compliance with applicable usury law. In furtherance thereof, Lender and Borrower stipulate and agree that none of the terms and provisions contained in the Note, this Loan Agreement or any other instrument securing the Note or executed in connection herewith, or in any other written or oral agreement by Borrower in favor of Lender, shall ever be construed to create a contract to pay for the use, forbearance or detention of money, interest at a rate in excess of the maximum interest rate permitted to be charged by applicable law; that neither Borrower nor any guarantors, endorsers or other parties now or hereafter becoming liable for payment of the Note or the other indebtedness secured by the Loan Documents shall ever be obligated or required to pay interest on the Note or on indebtedness arising under any instrument securing the Note or executed in connection therewith, or in any other written or oral agreement by Borrower in favor of Lender, at a rate in excess of the maximum interest that may be lawfully charged under applicable law; and that the provisions of this Section shall control over all other provisions of the Note, this Loan Agreement and any other instruments now or hereafter securing the Note or executed in connection herewith or any other oral or written agreements which may be in apparent conflict herewith. Lender expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of the Note is accelerated. If the maturity of the Note shall be accelerated for any reason or if the principal of the Note is paid prior to the end of the term of the Note, and as a result thereof the interest received for the actual period of existence of the Loan exceeds the applicable maximum lawful rate, Lender shall, at its option, either refund to Borrower the amount of such excess or credit the amount of such excess against the principal balance of the Note then outstanding and thereby shall render inapplicable any and all penalties of any kind provided by applicable law as a result of such excess interest. In the event that Lender shall contract for, charge or receive any amounts AMENDED AND RESTATED LOAN AGREEMENT Page 26 27 and/or any other thing of value which are determined to constitute interest which would increase the effective interest rate on the Note or the other indebtedness secured by the Loan Documents to a rate in excess of that permitted to be charged by applicable law, an amount equal to interest in excess of the lawful rate shall, upon such determination, at the option of Lender, be either immediately returned to Borrower or credited against the principal balance of the Note then outstanding or the other indebtedness secured by the Loan Documents, in which event any and all penalties of any kind under applicable law as a result of such excess interest shall be inapplicable. By execution of this Loan Agreement, Borrower acknowledges that it believes the Loan to be non-usurious and agrees that if, at any time, Borrower should have reason to believe, that the Loan is in fact usurious, it will give Lender notice of such condition and Borrower agrees that Lender shall have ninety (90) days after receipt of such notice in which to make appropriate refund or other adjustment in order to correct such condition if in fact such exists. The term "applicable law" as used in this Section shall mean the laws of the State of Texas or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future. 8.7 No Third Party Beneficiary. This Loan Agreement is for the sole benefit of Lender, its successors and assigns, and Borrower, and is not for the benefit of any third party. 8.8 Number and Gender. Whenever used herein the singular number shall include the plural and the singular, and the use of any gender shall be applicable to all genders. The duties, covenants, obligations, and warranties of Borrower in this Loan Agreement shall be joint and several obligations of Borrower, and of each Borrower, if more than one. 8.9 Captions. The captions, headings, and arrangements used in this Loan Agreement are for convenience only and do not in any way affect, limit, amplify, or modify the terms and provisions hereof. 8.10 APPLICABLE LAW. THIS LOAN AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES APPLICABLE TO TRANSACTIONS WITHIN SUCH STATE. THIS LOAN AGREEMENT IS FULLY PERFORMABLE IN DALLAS COUNTY, TEXAS. 8.11 Entire Agreement. The Loan Documents constitute the entire understanding and agreement between Borrower and Lender with respect to the transactions arising in connection with the Loan and supersede all prior written or oral understandings and agreements between Borrower and Lender with respect to the matters addressed in the Loan Documents. Borrower hereby acknowledges that, except as incorporated in writing in the Loan Documents, there are not, and were not, and no persons are or were authorized by Lender to make, any representations, understandings, stipulations, agreements or promises, oral or written, with respect to the matters addressed in the Loan Documents. AMENDED AND RESTATED LOAN AGREEMENT Page 27 28 8.12 Lender Not a Joint Venturer. Notwithstanding anything to the contrary herein contained, Lender, by entering into this Agreement or by any action taken pursuant hereto, will not be deemed a partner or joint venturer with Borrower, and Borrower will indemnify and hold Lender harmless from any and all damages resulting from such a construction of the parties and their relationship. 8.13 Loan Participation. Borrower acknowledges and agrees that Lender may, from time to time, sell or offer to sell interests in the Loan and Loan Documents to one or more participants; provided, however, Lender shall continue to be responsible for administration of the Loan. Borrower authorizes Lender to disseminate to such participant or prospective participant, any information it has pertaining to the Loan, including without limitation, complete and current credit information on the Borrower, any of its principals and any guarantor. THE WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 8.14 Renewal and Modification. This Loan Agreement is being executed in renewal and modification of the First Agreement, Second Agreement and Third Agreement. To the extent the terms and provisions of this Loan Agreement conflict with or otherwise contradict the terms and provisions of the First Agreement, Second Agreement, Third Agreement or Assumption and Modification, Borrower and Lender hereby agree that this Loan Agreement shall be controlling. 8.15 Extension of Loan. At any time during the term of the Loan, Borrower may request an extension of the maturity date of the Loan, which maturity date is December 10, 2000. Lender, in its sole discretion, may reject such request or may approve such request upon such terms and conditions as it deems advisable. A request for extension shall be in writing and submitted on the form attached as Exhibit "F". 8.16 Release of Original Borrower. As of this date, Lender hereby releases and discharges the Original Borrower from any and all liability or obligation relating to the Loan and the Loan Documents. AMENDED AND RESTATED LOAN AGREEMENT Page 28 29 EXECUTED and DELIVERED as of the date first recited. LENDER BANK ONE, TEXAS, N.A. By: /s/ CRAIG F. HARTBERG ----------------------------------- Name: Craig F. Hartberg Title: Senior Vice President BORROWER: CAPITAL SENIOR LIVING PROPERTIES, INC., a Texas corporation By: /s/ DAVID R. BRICKMAN ----------------------------------- Name: David R. Brickman Title: Vice President AMENDED AND RESTATED LOAN AGREEMENT Page 29 30 THE STATE OF TEXAS ) ) COUNTY OF DALLAS ) This instrument was acknowledged before me on December ____, 1997, by Craig F. Hartberg, Senior Vice President of BANK ONE, TEXAS, N.A., a national banking association, on behalf of said association. ----------------------------------- Notary Public, State of Texas ----------------------------------- (printed name) My Commission Expires: - --------------------- THE STATE OF TEXAS ) ) COUNTY OF DALLAS ) This instrument was acknowledged before me on December ____, 1997, by David R. Brickman, Vice President of CAPITAL SENIOR LIVING PROPERTIES, INC., a Texas corporation, on behalf of said corporation. ----------------------------------- Notary Public, State of Texas ----------------------------------- (printed name) My Commission Expires: - --------------------- AMENDED AND RESTATED LOAN AGREEMENT Page 30 31 RELEASE BY ORIGINAL BORROWER In consideration of the agreements of Lender in Section 8.16, Original Borrower hereby releases, remises, acquits and forever discharges Lender, together with its employees, agents, representatives, consultants, attorneys, fiduciaries, servants, officers, directors, partners, predecessors (including, without limitation, Lehman), successors and assigns, subsidiary corporations, parent corporations, and related corporate divisions (all of the foregoing hereinafter called the "Released Parties"), from any and all actions and causes of action, judgments, executions, suits, debts, claims, demands, liabilities, obligations, damages and expenses of any and every character, known or unknown, direct and/or indirect, at law or in equity, of whatsoever kind or nature, whether heretofore or hereafter accruing, for or because of any matter or things done, omitted or suffered to be done by any of the Released Parties prior to and including the date hereof, and in any way directly or indirectly arising out of or in any way connected to the Loan Documents, or any of the transactions associated therewith, or the Property, including specifically but not limited to claims of usury. CAPITAL SENIOR LIVING COMMUNITIES, L.P., a Delaware limited partnership By: Retirement Living Communities, L.P., an Indiana limited partnership, General Partner By: Capital Retirement Group, Inc., a Texas corporation, General Partner By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ AMENDED AND RESTATED LOAN AGREEMENT Page 31 32 THE STATE OF TEXAS ) ) COUNTY OF DALLAS ) This instrument was acknowledged before me on December ____, 1997, by ___________________, ____________________ of Capital Retirement Group Inc., a Texas corporation, on behalf of said corporation, in its capacity as General Partner of Retirement Living Communities, L.P., an Indiana limited partnership, on behalf of said limited partnership, in its capacity as General Partner of Capital Senior Living Communities, L.P., a Delaware limited partnership, on behalf of said limited partnership. ----------------------------------- Notary Public, State of Texas ----------------------------------- (printed name) My Commission Expires: - --------------------- AMENDED AND RESTATED LOAN AGREEMENT Page 32 33 EXHIBIT "B" Application for Advance LENDER: Bank One, Texas, N.A. REQUEST FOR ADVANCE NO. ----------------------- BORROWER: Capital Senior Living Properties, Inc. AMOUNT: $ ---------------- DATE: , 19 --------------------- ---- (a) This application and the items accompanying this application (which are incorporated herein for all purposes) are delivered pursuant to the Amended and Restated Loan Agreement (the "Loan Agreement") dated as of December 10, 1997, between Lender and Borrower, each of the defined terms of which has the same meaning when used herein or in the attachments unless indicated otherwise. Borrower hereby certifies to Lender that this application is true and correct in all respects and that this application and every item incor porated herein are genuine and in all respects what they purport and appear to be, and Borrower agrees that Lender may rely upon same in making the requested Advance. (b) Borrower hereby requests to borrow the principal amount of $____________ (the "Requested Advance") from Lender, during normal banking business hours on ____________________, 19_____ (which date is not less than two Business Days hence and not less than 30 days since the date of the most recent Advance under the Loan Agreement), which when borrowed will cause the principal amount then outstanding on the Note to be $______________. (c) On the date hereof, and at the time the Requested Advance is to be made, (a) the representations and warranties made in all of the Loan Documents and certificates delivered pursuant thereto are and will be true and correct in all material respects, (b) no Default or Event of Default has or will have occurred and is or will be continuing, (c) Borrower has performed all acts required by the Loan Documents to have been previously performed by Borrower, and (d) no material adverse change in the financial condition of Borrower has occurred and is continuing on the date hereof. (d) The purpose of this Requested Advance is: _________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ _______________________________________________________________________________. All proceeds of all previous Advances have been, and the process of the requested Advance Exhibit "B" - Page 1 34 will be, spent only for the purposes permitted by the Loan Agreement and only for the purposes specified in all Applications for Advances, and accompanying items, heretofore or herewith delivered to Lender. (e) All obligations for labor, materials, and other costs theretofore incurred by or on behalf of Borrower in connection with the development and construction of the improve ments and included (a) in any previous Advance have been paid, and (b) in the Requested Advance will be promptly paid upon disbursement of the Requested Advance. Absolute ownership of all materials, equipment, fixtures and other property heretofore incorporated in the construction of the Improvement or otherwise installed therein or on the Land is vested in Borrower, free and clear of all rights therein of others except Lender. Neither Borrower, nor any agent of Borrower, has been served with any notice, written or oral, that a Lien will be claimed for any amount unpaid for materials delivered, labor performed, or services provided in connection with the construction of all or any portion of the Improvements, other than those bonded against pursuant to the Loan Agreement, a complete description of which, if any, is set forth on a schedule annexed hereto and, to the best of the undersigned's knowledge, no basis exists for the filing of any other mechanic's or materialman's Liens with respect to all or any part of the Property. AS A FURTHER CONDITION TO ANY REQUEST FOR ADVANCE, AND IN ORDER FOR SUCH REQUEST TO BE EFFECTIVE, THE ORIGINAL NOTARIZED SIGNATURES OF BOTH JEFFREY L. BECK AND JAMES A. STROUD (OFFICERS OF CSLC) MUST APPEAR BELOW. The address of Borrower Borrower: for notice is: CAPITAL SENIOR LIVING PROPERTIES, INC., 14160 Dallas Parkway a Texas corporation Suite 300 Dallas, Texas 75240 By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- Exhibit "B" - Page 2 35 [ADD NOTARY ACKNOWLEDGMENTS] Exhibit "B" - Page 3 36 EXHIBIT "C" Lake County, Indiana Mortgage Security Agreement Assignment of Rents and Fixture Filing dated July 29, 1994, recorded as Instrument No. 94054609 in the office of Recorder of Lake County, Indiana, as modified by Modification and Extension of Lien dated June 30, 1995, recorded as Instrument No. 95041757 in the office of Recorder of Lake County, Indiana, further modified by Second Modification and Extension of Lien dated June 30, 1997, recorded as Instrument No. 97044593 in the office of Recorder of Lake County, Indiana, and further modified by Extension, Assumption and Modification Agreement between Bank One, Texas, N.A. and Capital Senior Living Properties, Inc., dated December 10, 1997. Marion County, Indiana Mortgage Security Agreement Assignment of Rents and Fixture Filing dated July 29, 1994, recorded as Instrument No. 1994-0119830 in the office of Recorder of Marion County, Indiana, as modified by Modification and Extension of Lien dated June 30, 1995, recorded as Instrument No. 1995-0095291 in the office of Recorder of Marion County, Indiana, further modified by Second Modification and Extension of Lien dated June 30, 1997, recorded as Instrument No. 97-92756 in the office of Recorder of Marion County, Indiana, and further modified by Extension, Assumption and Modification Agreement between Bank One, Texas, N.A. and Capital Senior Living Properties, Inc., dated December 10, 1997. Stark County, Ohio Open End Mortgage dated July 29, 1994, recorded in Volume 1688, Page 222 in the office of Recorder of Stark County, Ohio, as modified by Modification and Extension of Lien dated June 30, 1995, recorded as Instrument No. 95033519 in the office of Recorder of Stark County, Ohio, further modified by Second Modification and Extension of Lien dated June 30, 1997, recorded as Instrument No. 97036695 in the office of Recorder of Stark County, Ohio, and further modified by Extension, Assumption and Modification Agreement between Bank One, Texas, N.A. and Capital Senior Living Properties, Inc., dated December 10, 1997. Exhibit "C" - Page 1 37 EXHIBIT "D" COMPLIANCE CERTIFICATE Bank One, Texas, N.A. 1717 Main Street Dallas, Texas 75201 Attn: Health Care Lending RE: Amended and Restated Loan Agreement dated December 10, 1997 (together with amendments, if any, the "Loan Agreement"), by and between Bank One, Texas, N.A., as Lender, and Capital Senior Living Properties, Inc., as Borrower The undersigned officer of __________, does hereby certify that for the quarterly financial period ending _____________: 1. No Event of Default has occurred or exists except ____________________________. 2. The Current Ratio of Borrower (Section 4.15(a)) is _______ to 1.0. 3. The Tangible Net Worth of Borrower (Section 4.15(b)) is $___________. 4. The Loan to Value Ratio (Section 4.15(c)) is _______ to 1.0. 5. The Leverage Ratio (Section 4.15(d)) is _______ to 1.0. 6. The Market Capitalization of CSLC (Section 4.15(d) is _______________. 7. The Cash Flow Coverage of the Property (Section 4.15(e)) is _______ to 1.0. 8. All representations and warranties contained in the Loan Agreement and other Loan Documents are true and correct in all material respects as though given on the date hereof, except ______________________________. 9. All information provided herein is true and correct. Exhibit "D" - Page 1 38 10. Capitalized terms not defined herein shall have the meanings given to such terms in the Loan Agreement. CAPITAL SENIOR LIVING PROPERTIES, INC., a Texas corporation By: -------------------------------- Name: --------------------------- Title: -------------------------- Dated this day of , . ----- -------------------- ---- Exhibit "D" - Page 2 39 EXHIBIT "E" FINANCIAL REPORTS Exhibit "E" - Page 1 40 EXHIBIT "F" REQUEST FOR EXTENSION Bank One, Texas, N.A. 1717 Main Street Dallas, Texas 75201 Attn: Health Care Lending RE: Amended and Restated Loan Agreement dated December 10, 1997 (together with amendments, if any, the "Loan Agreement"), by and between Bank One, Texas, N.A., as Lender, and Capital Senior Living Properties, Inc., as Borrower Borrower hereby requests that the maturity date of the Loan be extended from December 10, 2000 to ____________________. Borrower acknowledges that Lender has no obligation to approve this request and Lender, in its sole discretion, may reject this request. Borrower agrees to submit to Lender such information, if any, as may be requested by Lender in considering this request. Capitalized terms not defined herein shall have the meanings given to such terms in the Loan Agreement. CAPITAL SENIOR LIVING PROPERTIES, INC., a Texas corporation By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ Dated this day of , . ----- -------------------- ---- Exhibit "F" - Page 1 EX-10.34 3 ALLIANCE AGREEMENT DATED 12/10/97 1 EXHIBIT 10.34 ALLIANCE AGREEMENT OF LCOR INCORPORATED, a Pennsylvania corporation and CAPITAL SENIOR LIVING CORPORATION, a Delaware Corporation DATED AS OF DECEMBER 10, 1997 2 ALLIANCE AGREEMENT This ALLIANCE AGREEMENT (this "Agreement") is made and entered into as of December 10, 1997, by and between LCOR INCORPORATED, a Pennsylvania corporation ("LCOR"), and CAPITAL SENIOR LIVING CORPORATION, a Delaware corporation ("CSL"). WHEREAS, LCOR and its Affiliates contemplate acquiring sites ("Sites") upon which it proposes to develop, construct, own, operate and sell or otherwise dispose of senior living facilities (the "Improvements") within the United States (any applicable Site, together with the related Improvements, being herein referred to as a "Facility"), including but not limited to, facilities to be constructed at Trumbull, Connecticut, Montclaire, New Jersey, Summit, New Jersey and Libertyville, Illinois (the "Initial Facilities"); WHEREAS, CSL has represented (a) that CSL and its Affiliates have experience in performing certain feasibility, predevelopment, premarketing, preleasing and other preopening activities and analysis with regard to senior living facilities (the "Feasibility Services") and in the development, management, marketing, leasing, opening and operational aspects of senior living facilities ("Management Services") and (b) that the owners and employees of CSL are qualified consultation professionals with significant senior living facility experience and/or qualified management, leasing and marketing professionals with significant senior living facility experience capable of performing the Feasibility Services and the Management Services; WHEREAS, the parties hereto desire to enter into this Agreement to provide the basis upon which certain senior living facilities will be constructed, owned, operated and managed in the United States. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows: I. SERVICES 1.01 CONSULTING AND MANAGEMENT SERVICES: Except as provided below in Section 1.02, with regard to each Facility to be developed and constructed by LCOR or any of its Affiliates within the United States, LCOR shall be obligated to offer to CSL the opportunity to provide the Feasibility Services and the Management Services in accordance with the terms of this Agreement. In the event LCOR or any of its Affiliates desire to develop and construct a Facility within the United States, LCOR shall provide to CSL written notice of such intention after (a) LCOR has provided to CSL an initial demographic analysis and a preliminary market study from a party or parties who are not Affiliates of LCOR and (b) LCOR or any of its Affiliates (i) has executed a letter of intent to purchase the Site or (ii) is negotiating an agreement to purchase the Site, or (c) has previously acquired the Site. As promptly as practicable after the receipt of such notice from LCOR (but in any event within 30 days), CSL shall give written notice to LCOR which states whether CSL elects to perform the Feasibility Services and the Management Services with regard to such Facility. 3 In the event CSL elects to perform the Feasibility Services and the Management Services, then, with regard to such Facility, CSL or its Affiliate and LCOR or its Affiliate shall enter into (A) a Consulting Agreement in the form attached hereto as Exhibit "A" ("Consulting Agreement"), and (B) a Management and Marketing Agreement in the form attached hereto as Exhibit "B" ("Management Agreement"). In the event CSL fails to timely elect to participate or elects not to participate in such Facility as aforesaid, then, except as provided in Section 1.03(b) below, LCOR may freely and without restriction develop, construct, own, manage and operate such Facility on its own account or with any other provider of Feasibility Services, Management Services, or similar services and without any obligation to CSL or its Affiliates, except that LCOR shall reimburse CSL for the reasonable out of pocket expenses of CSL and its Affiliates expended in connection with the determination by CSL and its Affiliates of whether or not to perform the Feasibility Services and the Management Services with respect to such Facility. 1.02 LAND OWNED BY OPERATOR: The provisions of Section 1.01 shall not restrict or prevent LCOR or any of its Affiliates from constructing, owning and operating senior living facilities on land which has been owned by a person or entity (which is not an Affiliate of LCOR) which under new ownership arrangements will manage the facility upon completion of construction. Nothing shall prevent LCOR or any of its Affiliates from directly or indirectly owning a portion (but not all) of such entity which will manage such facility or otherwise participate in the economic benefits of such facility in whatever form, provided such facility is not within a five-mile radius of any senior living facility owned by CSL or any of its Affiliates or for which CSL and/or its Affiliates is (are) providing the same level of feasibility services and/or the same level of management services. 1.03 LCOR PROHIBITED MANAGEMENT SERVICES AND DEVELOPMENT: (a) Except as set forth in Section 1.02, during the term of this Agreement, neither LCOR nor of its Affiliates may, directly or indirectly, manage a senior living facility. (b) During the term of this Agreement, neither LCOR nor any of its Affiliates may, directly or indirectly, develop any senior living facility for its own account which will be operated by an operator other than CSL, if such facility is within a 5-mile radius of any senior living facility owned by CSL or any of its Affiliates or for which CSL and/or its Affiliates is (are) providing the same level of Feasibility Services and/or the same level of Management Services for an owner other than LCOR or one or more of its Affiliates. 1.04 LCOR ROFO: During the term of this Agreement, if CSL or any of its Affiliates owns a parcel of land in metropolitan New York, Washington, Philadelphia or Chicago and CSL or any of its Affiliates desires for a senior living facility to be developed on such site by a third party other than Tri Point Communities, L.P. and operated by CSL or any of its Affiliates (not including a senior living facility to be owned and operated by CSL or any of its Affiliates), CSL must first offer LCOR the right to develop such facility for management by CSL or any of its Affiliates on the terms which CSL proposes to offer to another developer which is not an Affiliate of CSL. 2 4 II. TERM AND TERMINATION 2.01 TERM: The term of this Agreement shall commence on the date of this Agreement and continue for a period of five years thereafter unless LCOR and CSL agree to extend the date to a later date acceptable to LCOR and CSL, or unless this Agreement is earlier terminated pursuant to the terms of this Agreement. 2.02 TERMINATION: Either LCOR or CSL may at any time terminate this Agreement upon not less than 30 days prior written notice. Upon termination of this Agreement, the terms, conditions and provisions of this Agreement shall cease to apply and neither party shall thereafter have any continuing obligation to the other under this Agreement, except that (a) Sections 5.01(f), 5.11 and 5.13 shall survive the termination of this Agreement for four years and (b) Article III shall survive the termination of this Agreement until less than two Management Agreements remain in full force and effect. 2.03 EXISTING AGREEMENTS: Termination of this Agreement will have no effect upon and will not terminate any existing Consulting Agreement or Management Agreement entered into prior to the date of termination of this Agreement and all of such Consulting Agreements and Management Agreements shall continue in full force and effect in accordance with their respective terms, conditions and provisions. III. RIGHT OF FIRST REFUSAL 3.01 RIGHT OF FIRST REFUSAL: (a) In the event that a bona fide offer is received by LCOR for the purchase or other disposition of two or more Facilities owned by LCOR and its Affiliates (all of which are covered by Management Agreements which are then in full force and effect) (the "Sale Facilities") from a party which is not an Affiliate of LCOR, and LCOR is willing to accept such offer ("Bona Fide Offer") substantially in accordance with the terms and conditions of such Bona Fide Offer, LCOR shall deliver a copy of such Bona Fide Offer to CSL (the "BFO Notice"). At any time within the Response Period (as defined below), CSL shall have the right, exercisable by delivery of written notice ("Election Notice") to LCOR, to either: (i) Authorize LCOR to accept the Bona Fide Offer; or (ii) Agree to purchase the Sale Facilities for the purchase price set forth in, and subject to the other terms and conditions of, the Bona Fide Offer, such election to be made by delivering to LCOR the Election Notice which shall affirmatively state that CSL is exercising such option. Within five business days after delivery to LCOR of an Election Notice pursuant to this Section 3.01(a)(ii), CSL shall establish any escrow deposit set forth in the Bona Fide Offer on the same terms and conditions as provided in the Bona Fide Offer. (b) As used herein, the term "Response Period" shall mean the 30-day period, commencing with the first day after CSL shall have received a copy of the Bona Fide Offer. If during the Response Period, CSL neither (i) authorizes LCOR to accept the Bona Fide Offer to purchase 3 5 the Sale Facilities nor (ii) agrees to purchase the Sale Facilities by delivering the Election Notice, then CSL shall be deemed to have authorized and to have approved the sale of the Sale Facilities to the offeree specified in such Bona Fide Offer on economic terms which are the same and on other terms which are substantially the same as those contained in such Bona Fide Offer. If CSL has authorized or is deemed to have authorized the sale of the Sale Facilities on economic terms which are the same and on other terms which are substantially the same terms as those contained in such Bona Fide Offer, LCOR may consummate the sale of the Sale Facilities to the offeree specified in the Bona Fide Offer without the requirement of any consent or approval of CSL provided such sale must be consummated within 180 days after the date on which CSL authorized or was deemed to have authorized such sale. The failure of such sale to occur within the 180-day period referred to in the immediately preceding sentence shall require LCOR to deliver to CSL another BFO Notice in accordance with the terms of this Section 3.01. (c) If CSL timely delivers an Election Notice, the closing on the sale of the Sale Facilities to CSL shall take place on the closing date specified in the Bona Fide Offer on the same economic terms and on materially the same other terms and conditions as set forth in the Bona Fide Offer. (d) If LCOR is required to convey the Sale Facilities to CSL pursuant to the foregoing provisions, LCOR shall convey the Sale Facilities to CSL by a special warranty deed, subject only to those exceptions permitted pursuant to the terms of the Bona Fide Offer. Transfer taxes, title insurance premiums, escrow fees and all other closing costs, including ad valorem and real property taxes, in connection with such conveyance shall be allocated between and paid by the purchaser and seller in the usual and customary manner for the locality in which one of the Sale Facilities is located (as selected by LCOR). The closing of such sale shall be held at such place as LCOR shall elect and which is reasonably satisfactory to CSL. At such place and at the time set forth above, CSL shall tender the cash portion of the purchase price by certified or cashiers check, or wire transfer of immediately available federal funds. (e) If the provisions of this Article III are applicable to the sale of the Sale Facilities, the provisions of Section VI.B of the Management Agreements covering the Sale Facilities shall not be applicable to the sale of any of the Sale Facilities. If there is any conflict between the provisions of this Article III and the provisions of Section VI.B of the Management Agreements covering the Sale Facilities, the provisions of this Article III shall control with respect to the sale of the Sale Facilities. IV. ARBITRATION In the event of any dispute, claim or controversy of any kind between the parties concerning this Agreement or the terms of this Agreement, the matter shall be submitted to binding arbitration in accordance with the rules of the American Arbitration Association. The parties shall jointly agree on one arbitrator. If the parties are unable to agree, in good faith, on the selection of one arbitrator within 30 days of an arbitrator being proposed by one party, either party may request appointment of one arbitrator chosen by the American Arbitration Association who shall be the selected arbitrator. Such arbitrator shall be limited in his decision to a choice between the final position as requested by each party. Said arbitration shall be held in Delaware or such other place as is mutually agreeable. The arbitration award made by the arbitrator shall be final and binding on both parties, unless the 4 6 arbitration is fraudulent or so grossly erroneously as to necessarily imply bad faith. Costs of arbitration are to be shared by both parties equally, provided that the arbitrator may choose to award the cost of arbitration against the losing party, if the arbitrator determines that the final position urged by the losing party was not reasonable. V. MISCELLANEOUS 5.01 COVENANTS, REPRESENTATIONS AND WARRANTIES OF LCOR AND CSL: LCOR and CSL each represents and warrants to the other as follows: (a) It is duly organized, validly existing and in good standing under the laws of its jurisdiction of formation with all requisite power and authority to enter into this Agreement and to conduct its business. (b) This Agreement constitutes the legal, valid and binding obligation of such party enforceable in accordance with its terms, subject to the application of principles of equity and laws governing insolvency and creditors' rights generally. (c) No consents or approvals are required from any governmental authority or other person or entity for such party to enter into this Agreement. All corporate action on the part of such party necessary for the authorization, execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby, have been duly taken. (d) The execution and delivery of this Agreement by such party, and the consummation of the transactions contemplated hereby, do not conflict with or contravene the provisions of its organization documents or any agreement or instrument to which it is a party or by which it or its properties are bound or any law, rule, regulation, order or decree to which it or its properties are subject. (e) Such party has not retained any broker, finder or other commission or fee agent, and no such person has acted on its behalf in connection with the execution and delivery of this Agreement. (f) Each party agrees to indemnify and hold harmless each other and their respective officers, directors, shareholders, employees, successors and assigns from and against any and all loss, damage, liability or expense (including costs and attorneys fees) which they may incur by reason of, or in connection with, any material breach of the foregoing representations and warranties by the indemnifying party and all such representations and warranties shall survive the execution and delivery of this Agreement and the termination of this Agreement. 5.02 FURTHER ASSURANCES: LCOR and CSL each agrees to execute, acknowledge, deliver, file, record and publish such further instruments and documents, and do all such other acts and things as may be required by law, or as may be reasonably required to carry out the intent and purposes of this Agreement. 5 7 5.03 NOTICES: All notices, demands, consents, approvals, requests or other communications which any of the parties to this Agreement may desire or be required to give hereunder (collectively, "Notices") shall be in writing and shall be given by (A) personal delivery, (B) facsimile transmission or (C) a nationally recognized overnight courier service, fees prepaid, addressed as follows: IF TO LCOR: 300 Berwyn Park, Suite 104 Berwyn, Pennsylvania 19312 Attn: Peter DiLullo Facsimile No.: 610/408-4420 WITH A COPY TO: Jones, Day, Reavis & Pogue 77 West Wacker, Suite 3500 Chicago, Illinois 60601 Attn: Dan B. Miller, Esq. Facsimile No.: 312/782-8585 IF TO CSL: 237 Park Avenue, 21st Floor New York, New York 10017 Attn: Lawrence A. Cohen Facsimile No.: 212/551-1774 WITH A COPY TO: David R. Brickman, Esq. Capital Senior Living, Inc. 14160 Dallas Parkway, Suite 300 Dallas, Texas 75240 Facsimile No.: 972/770-5666 WITH A COPY TO: Jenkens & Gilchrist 1445 Ross Avenue, Suite 3200 Dallas, Texas 75202 Attn: Winston W. Walp, II, Esq. Facsimile No.: 214/855-4300 Any party may designate another addressee (and/or change its address) for Notices hereunder by a Notice given pursuant to this Section 5.03. A Notice sent in compliance with the provisions of this Section 5.03 shall be deemed given on the date of receipt. 5.04 GOVERNING LAW: This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed wholly within that State. 5.05 CAPTIONS: All titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision in this Agreement. 6 8 5.06 PRONOUNS: All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, and neuter, singular and plural, as the identity of the party or parties may require. 5.07 SUCCESSORS AND ASSIGNS: This Agreement shall be binding upon the parties hereto and their respective legal representatives, successors and assigns, and shall inure to the benefit of the parties hereto and, except as otherwise provided herein, their respective legal representatives, successors and assigns. 5.08 EXTENSION NOT A WAIVER: No delay or omission in the exercise of any power, remedy or right herein provided or otherwise available to any party shall impair or affect the right of such party thereafter to exercise the same. Any extension of time or other indulgence granted to any party hereunder shall not otherwise alter or affect any power, remedy or right of any other party, or the obligations of any party to whom such extension or indulgence is granted. 5.09 SEVERABILITY: In case any one or more of the provisions contained in this Agreement or any application thereof shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and other application thereof shall not in any way be affected or impaired thereby. 5.10 ENTIRE AGREEMENT: This Agreement, together with any applicable Consulting Agreements and Management Agreements, contains the entire agreement between the parties relating to the subject matter hereof and all prior agreements relative hereto which are not contained herein or therein are terminated. Amendments, variations, modifications or changes herein may be made effective and binding upon the parties hereto by, and only by, the setting forth of same in a document duly executed by each party to this Agreement, and any alleged amendment, variation, modification or change herein which is not so documented shall not be effective as to any party to this Agreement. 5.11 PUBLICITY: Neither CSL nor LCOR nor any of their respective advisors, employees or agents shall issue any press release or otherwise publicize or disclose the terms of this Agreement or the proposed terms of any acquisition, development or disposition of any Facility or any portion thereof, without the express written consent of the other party to this Agreement, which consent shall not be unreasonably withheld, or except as such disclosure may be made in the course of normal reporting practices to the disclosing party's shareholders, to prospective lenders or to investors in the disclosing party or as otherwise required by law (it being specifically understood and agreed that anything set forth in a registration statement or any other document filed pursuant to the securities laws will be deemed required by law). A disclosing party will provide the other party with a copy of any such disclosure either before or after such disclosure is made. 5.12 COUNTERPARTS: This Agreement may be executed in multiple counterparts, each of which shall be an original but all of which together shall constitute but one and the same agreement. 5.13 CONFIDENTIALITY: (a) The terms of this Agreement, the identity of any person with whom LCOR or CSL may be holding discussions with respect to any investment, acquisition, disposition or other transaction, and all other business, financial or other information relating directly 7 9 to any Facility or the conduct of the business and affairs of LCOR or CSL or the relative or absolute rights or interests of LCOR or CSL (collectively, the "Confidential Information") that has not been publicly disclosed pursuant to authorization by LCOR or CSL, as applicable, is confidential and proprietary information of LCOR or CSL, as applicable, the disclosure of which would cause irreparable harm to LCOR or CSL, as applicable. Accordingly, each of LCOR and CSL represents that it has not and agrees that it shall not and will direct its shareholders, directors, officers, agents, advisors and Affiliates not to, disclose to any person any Confidential Information or confirm any statement made by third persons regarding Confidential Information until LCOR or CSL, as applicable, has publicly disclosed the Confidential Information and has notified the other party that it has done so; provided, however, that LCOR or CSL, as applicable (or their Affiliates) may disclose such Confidential Information to any prospective lenders or to investors in the disclosing party and if necessary for it to perform any of its duties or obligations hereunder or required by law (it being specifically understood and agreed that anything set forth in a registration statement or any other document filed pursuant to the securities laws shall be deemed required by law). A disclosing party will provide the other party with a copy of such disclosure either before or immediately after such disclosure is made. (b) Subject to the provisions of Section 5.13(a), each of LCOR and CSL agrees not to disclose any Confidential Information to any person (other than a person agreeing to maintain all Confidential Information in strict confidence or a judge, magistrate or referee in any action, suit or proceeding relating to or arising out of this Agreement or otherwise), and to keep confidential all documents (including, without limitation, responses to discovery requests) containing any Confidential Information. Each of LCOR and CSL hereby consents in advance to any motion for any protective order brought by the other party to this Agreement and represented as being intended by the movant to implement the purposes of this Section 5.13. If LCOR or CSL, as the case may be, receives a request to disclose any Confidential Information under the terms of a valid and effective order issued by a court or governmental agency and the order was not sought by or on behalf of or consented to by the party receiving the request, then the party receiving the request may disclose the Confidential Information to the extent required, if the party receiving the request as promptly as practicable (i) notifies the other party to this Agreement of the existence, terms and circumstances of the order, (ii) if disclosure of the Confidential Information is required, and the party receiving the request reasonably cooperates with the other party in any attempts by the other party to obtain a protective order or other reliable assurance that confidential treatment will be accorded to the portion of the disclosed Confidential Information that such other party designates. The cost (including, without limitation, attorneys' fees and expenses) of obtaining a protective order covering Confidential Information designated by the party requesting the protective order will be borne by such party. (c) The covenants contained in this Section 5.13 will survive the termination of this Agreement for four years. 5.14 DEFINITION OF AFFILIATE: For the purposes of this Agreement, the term "Affiliate" shall have the same meaning as is ascribed to such term in the Management Agreement. [THE REST OF THIS PAGE LEFT INTENTIONALLY BLANK.] [SIGNATURES BEGIN ON NEXT PAGE.] 8 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth in the introductory paragraph hereof. LCOR: LCOR INCORPORATED, a Pennsylvania corporation By: /s/ PETER DILULLO ------------------------------------------ Name: Peter Dilullo ---------------------------------- Title: President and CEO ---------------------------------- CSL: CAPITAL SENIOR LIVING CORPORATION, a Delaware corporation By: /s/ DAVID R. BRICKMAN ------------------------------------------ Name: David R. Brickman ---------------------------------- Title: Vice President ---------------------------------- EX-10.35 4 DEVELOPMENT AGREEMENT DATED 12/10/97 1 EXHIBIT 10.35 San Antonio (Huebner Road) DEVELOPMENT AGREEMENT THIS DEVELOPMENT AGREEMENT (this "Agreement") is by and between Capital Senior Development, Inc., a Texas corporation (the "Developer"), and Tri Point Communities, L.P., a Texas limited partnership (the "Owner"), and is entered into for the purpose of reducing to a formal writing all of the parties understandings with respect to the development and construction of a proposed senior living project to be comprised of 120 units (the "Project") to be located on land as described below (the "Property"). In consideration of the undertakings of each of the parties to the other IT IS AGREED: ARTICLE I Representations The parties make each of the following representations: Section 1.1 - Title to Property. The Owner shall have or acquire good and indefeasible title in fee simple to the Property consisting of approximately 5.845 acres of land as more fully described in Exhibit "A". Exhibit "A" and each of the other Exhibits referred to in this Agreement shall be incorporated into this Agreement by such reference as if fully set forth in this Agreement. Section 1.2 - Encumbrances. (a) The Owner and the Developer acknowledge that the Property will be subject to the easements, assessments, conditions, contracts, rights, claims, encroachments, restrictions and other encumbrances as set forth on Exhibit "B" (the "Existing Encumbrances"), to physical conditions disclosed by a boundary survey to be prepared by Paul A. Wilkinson of Baker Surveying, Inc. entitled "ALTA/ACSM Land Title Survey" dated October 6, 1997, as revised (Map No. 97-200 DWG) for the Property, and will be subject to those easements, conditions, contracts, rights, licenses, encroachments, restrictions and other encumbrances resulting from the Developer securing regulatory, development and construction approvals for the Project and attendant site improvements. The Owner and the Developer each represents to the other that it has reviewed the boundary survey and the topographical survey of the Property and has made a physical inspection of the Property and is satisfied with the Property as to the site characteristics and attributes in all material respects. (b) Concurrently with the execution of this Agreement, the Owner shall provide the Developer with copies of all engineering, architectural and any other plans, studies and surveys title reports, environmental assessments, appraisals and other information regarding the Property or the Project which are in the Owner's possession, custody or control. 2 (c) The Owner represents, to the best of its knowledge, that the Property has only the apparent site and off-site conditions, if any, as set forth on Exhibit "C" which require the implementation of the measures, if any, as set forth on Exhibit "C". (d) Commencing on the date the Developer elects to commence construction in accordance with this Agreement, the Owner shall provide the Developer with full possession and complete control of the Property for purposes of performing the Developer's obligations hereunder. Section 1.3 - Permit and Approvals. (a) The Developer represents that it shall use its best efforts to obtain all state, federal, county and municipal land use approvals and permits, licenses, easements, and utility agreements which are necessary for the development, construction and opening of the Project on the Property (the "Approvals"). The Developer covenants to diligently use its best efforts to obtain all of the Approvals in an expeditious manner. In the event that the Developer is unable to obtain the Approvals, the Developer shall have no liability whatsoever to the Owner, or any other party and at the Owner's or the Developer's option, this Agreement shall be terminated without recourse to either party hereto at law or in equity. (b) The Owner represents that it shall cooperate with Developer in obtaining the Approvals. (c) For the sole purpose of permitting the Developer to construct the Project, the Owner grants to the Developer, to the extent required by the Developer in order that the purpose of this Agreement be effectuated, the rights under the Approvals obtained in the name of Owner and any other grants of rights, permits, approvals, or licenses, which may be necessary to complete the performance of the Developer's obligations hereunder; provided, however that no grant of any of the foregoing shall occur which is prohibited by applicable law or the respective terms hereof. Section 1.4 - Documentation. The Owner shall provide or obtain construction and permanent financing for the Property, the Project, the Personal Property (herein so called) related to the Project and related development costs (collectively, the "Project Loan") which shall be sufficient, together with the Owner's equity contributions, if necessary (which shall in no event exceed fifteen percent (15%) of the Contract Price (as hereinafter defined) if the Project Loan is intended to fund 85% of Project costs and which shall in no event exceed twenty percent (20%) of the Contract Price if the Project Loan is intended to fund 80% of Project costs), to pay the full amount of the Contract Price. The Owner shall provide to Developer a complete set of all project loan documents (collectively, the "Project Loan Documents") required by the Owner's lender ("Lender") in connection with the Project Loan. Developer shall assist Owner in obtaining all reasonable documentation required by Lender. Such documentation shall include, but is not limited to, all zoning and plan approvals, all utility letters indicating positive availability of service, inventory of concessions made to and agreements with any or all municipal bodies, site plans, title policies, and all other regulatory body approvals. The Owner also covenants that it will, in a timely manner, provide whatever financial or other information the Lender might 2 3 reasonably require in connection with the applications for financing for the construction of the Project and as required by the Lender in connection with the Project Loan. The Owner will use its best efforts to pursue its application for construction and permanent financing for the Project. Section 1.5 - Other Agreements. The Owner and the Developer each represents to the other that neither entering into this Agreement nor performing their respective obligations hereunder will violate any other agreements or documents by which either may be bound. Section 1.6 - Utility Services. The Owner represents that, to the best of its knowledge, all utility services required to construct and operate the Project (including, without limitation, public water, sewer and electricity) are currently available to the Property in the capacities required to operate the Project. No work need be performed by or on behalf of the Developer to make such utilities available to the Property for the construction or operation of the Project, except for the matters, if any, set forth on Exhibit "C". Copies of letters from the providers of such utility services confirming such availability are annexed hereto as Exhibit "D". Section 1.7 - Good Standing of the Developer. The Developer represents that it is duly organized, validly existing and in good standing under the laws of the State of Texas. The Developer represents that it is empowered and authorized to execute, deliver and perform its obligations under this Agreement, and, upon such execution and delivery and subject to the conditions subsequent set forth in Section 5.1, this Agreement shall be valid, binding and legal obligation of the Developer, enforceable in accordance with its terms and, duly authorized by a vote of its Board of Directors in compliance with its articles of incorporation and bylaws and all applicable laws of the State of Texas. Section 1.8 - Good Standing of the Owner. The Owner represents that it is duly organized and validly existing under the laws of the State of Texas. The Owner represents that it is empowered and authorized to execute, deliver and perform its obligations under this Agreement, and upon such execution and delivery and subject to Section 5.1, this Agreement shall be the valid, binding and legal obligation of the Owner, enforceable in accordance with its terms and duly authorized by its general partner in compliance with its limited partnership agreement and all applicable laws of the State of Texas. ARTICLE II Construction of the Project Section 2.1 - Control of Construction. Subject to the express provisions contained herein, it is the intention of the parties that the Developer shall have sole, complete and absolute authority and discretion to decide any and all issues pertaining to the construction of the Project, including, without limitation, the expenditure of funds, the incurring of costs and all of the other matters referred to herein, so long as the same are in compliance with the Approvals, the Final Plans (as defined below) all applicable laws and the Project Loan Documents. Section 2.2 - Architectural and Engineering Services. The parties acknowledge that WSI Architects and their consulting engineers (the "Architect and Engineers") have or will be retained 3 4 by the Owner. The Owner will be responsible for payment of the architectural fees due to the Architect, pursuant to the contract with respect to the Project dated August 4, 1997 (said contracts herein collectively, the "Architectural Contract"). The Owner represents and warrants to the Developer that a true, accurate and complete copy of the Architectural Contract is attached hereto as Exhibit "E". The Developer shall not be responsible to the Owner, or any other party for any errors, omissions, breaches or failures thereof, or any damages resulting from the acts or omissions of the Architect. Section 2.3 - Other Professionals and General Assumed Obligations. The Owner represents that it has not engaged any architects or any engineers, consultants, accountants, or other professionals with respect to the Project, other than the Architect and Engineers, which the Owner shall be obligated to pay. Section 2.4 - Plans and Specifications. (a) The Architect and Engineers retained by the Owner shall, under the direction of the Developer and after consultation with the Owner, prepare basic design plans (the "Basic Plans"). As a part of this process, the Developer may engage engineers, including the site engineers, to perform test borings and other soil testing at the Property for purposes of properly locating the Project on the Property. The Developer, the Architects and the Engineers shall consult with the Owner during the process of preparing the Basic Plans. The Developer, Architect and the Engineers shall have access to the Project for all such tests and surveys. (b) Within two (2) weeks after the date of the Architect's and the Engineer's completion of the Basic Plans and delivery to the Owner, the Developer, the Owner, and the Architect and Engineers shall meet to review and approve the Basic Plans. The parties shall initial the Basic Plans to indicate their approval of such Basic Plans. (c) Upon the approval by the parties of the Basic Plans, the Developer shall direct the Architect and the Engineers to prepare final plans, specifications and a site plan (collectively the "Final Plans") based on the Basic Plans. Within two (2) weeks after the completion of the Final Plans and their delivery to the Owner, the parties will meet to review and approve the same, and make any necessary revisions. The Owner agrees that it will not unreasonably withhold its approval of the Final Plans if they conform in all respects to the Basic Plans. The parties agree to use their best efforts to reasonably determine the acceptability of the Final Plans and Personal Property (see Section 2.6). The parties shall initial the Final Plans as an indication of their approval of the same. Section 2.5 - Construction. The Developer shall perform such duties as may be necessary to complete construction of the Project in a workmanlike manner and in accordance with the Final Plans, all applicable laws and the Project Loan Documents subject to field changes and minor design changes approved by the Owner and if required by the Project Loan Documents, by Lender. The Project is to be licensed for the unit complement described above and shall be constructed in accordance with the requirements in effect on the date of this Agreement as set forth by all federal, state and local governmental agencies having jurisdiction of the Project, including Life Safety Code requirements imposed by the Federal Department of Health and Human Services. 4 5 Section 2.6 - Personal Property. (a) The Developer will furnish the specific items of personal property contained in Exhibit "F" (the "Furniture, Furnishings & Equipment" or "F F & E") required for the Project within the allowance (defined below). The allowance for the "F F & E" is Four Hundred Sixty-Seven Thousand Three Hundred Fifty and No/100 Dollars ($467,350.00) (the"F F & E Allowance"), which F F & E Allowance shall be included in the Contract Price. (b) The Owner shall make selections of F F & E in a timely fashion and all items of F F & E shall be ordered by the Developer. Section 2.7 - Changes. Subject to the provisions of the Project Loan Documents, the Owner agrees that the Developer shall also have the right to make changes in the Final Plans and in the Personal Property, subject to the approval of Owner, only if required by any federal, state or local governmental authority having jurisdiction over the Project, or if required due to the unavailability of any construction materials or Personal Property. The Owner shall be notified of any such changes in the Final Plans or substitutions in the Personal Property, provided, that, such changes result in construction, space, design, personal property, equipment and interior and exterior design comparable in overall design and quality to that shown on the Final Plans and Owner must approve such changes. Section 2.8 - Commencement of Construction. Construction of the Project will start on or prior to the date which is thirty (30) days after the date the Project Loan Documents are executed and delivered. Section 2.9 - Continuity of Construction. Construction, once undertaken, shall proceed in a continuous and reasonably expeditious manner until Physical Completion (as such term is defined in Section 2.10) is achieved, which shall not occur later than sixteen (16) months after the date the Project Loan Documents are executed and delivered. Section 2.10 - Completion of Construction. (a) For the purposes of this Agreement, the terms "Physical Completion" or "Physically Completed" shall mean the date on which the building and improvements described and set forth in the Final Plans have been completed and the Project shall have been approved for and received a certificate for temporary or permanent occupancy by the local building inspector, and by the State Fire Marshall in the event his or her approval is required (the "Certificate of Occupancy"). Physical Completion shall be deemed to have been achieved notwithstanding that any of such officials or agencies have issued a Certificate of Occupancy with conditions or a Punch-List listing items requiring completion or correction, so long as such conditions or Punch-List items do not prevent or prohibit occupancy as determined by the Owner, in its sole discretion. 5 6 (b) The Developer will use its reasonable best efforts to notify the Owner at least ninety (90) days prior to the time that the Developer estimates that the Project will be Physically Completed, whereupon the Owner will diligently proceed to fulfill all other conditions necessary for licensure and the Owner will apply in a timely manner for all licenses and permits necessary to commence operation of the Project. After such notice from the Developer, the Owner, to the extent necessary to perform administrative activities may, so long as it does not interfere with completion of construction, enter upon the Property in an effort to coordinate initial licensure. Section 2.11 - The Owner's Noninvolvement. The Owner shall have access to the construction site while construction is in progress, but it shall not be empowered to interfere with construction, provided, however that the Owner's and Lender's agents shall have the right to view the construction in progress and shall have access to the site for the purpose of equipping the Project and preparing the Project for operation. Section 2.12 - Punch List. If, at any time after the Project has been Physically Completed, there shall exist any item or items requiring completion or correction, then the Developer agrees to use all reasonable diligence to complete or correct such item or items so that each conforms to the Final Plans. The parties shall make a Punch List of the items requiring completion or correction (the "Punch List"). Each item on the Punch List shall be assigned a reasonable value based upon the reasonable cost of completion or correction of the same or such other value as may be required by the Lender ("Punch List Amount"). The Developer shall give its written undertaking to complete each Punch List item within forty-five (45) days (or such other period of time as is mutually agreed upon by the parties) after Physical Completion, further agreeing to permit the Owner to complete any such items, at the Developer's expense, if the Developer has failed to complete the same within the forty-five (45) day time period. Section 2.13 - Work and Warranties. Upon completion of construction, landscaping and installation of Personal Property, the Developer will assign to the Owner, in addition to all warranties created by law, all warranties and guarantees received from designers, the general contractor and suppliers of equipment and furnishings, to the extent assignable. The Developer will agree to remedy any defect in construction caused by poor workmanship or materials which are brought to its attention by written notice within a period of one (1) year from the date of the issuance of the Certificate of Occupancy. Section 2.14 - Subcontractors. The Developer agrees to indemnify and save the Owner harmless from claims for payment by any subcontractor who furnishes materials or supplies or performs labor or services in the prosecution of the work pursuant to this Agreement. The Developer will select subcontractors acceptable to Owner in its sole discretion. Section 2.15 - Financing Arrangements. (a) The Owner will obtain the Project Loan which shall be sufficient, together with the Owner's equity contributions, if necessary (which shall in no event exceed the amounts referenced in Section 1.4 hereof) to pay the full amount of the Contract Price. This Agreement may be terminated by either the Developer or the Owner without further recourse to either party (except for reimbursement of Project related expenses) in the event that the closing and funding of the construction loan financing with respect to the Project pursuant to the Project Loan (with all 6 7 conditions precedent to such closing either satisfied or irrevocably waived by the lender) shall not have occurred by January 31, 1998. The Owner and the Developer also contemplate that the Property and Project, together with all Personal Property now owned or hereafter acquired by the Owner which are or may be attached to or used in connection with the Property or Project, together with any and all replacements thereto and substitutions therefor, and all proceeds thereof; and all present and future rents, issues, leases, and profits of the Property and Project will serve as security for the payment obligations to the Lender relating to the Project Loan or otherwise, and that the Owner will be the principal obligor for the repayment of all financial obligations thereunder. ARTICLE III Contract Price Section 3.1 - Contract Price. The Contract Price ("Contract Price") to be paid by Owner for the construction and furnishing of the Project shall be an amount equal to the costs incurred in the development and construction of the Project plus a developer fee for overhead and profit equal to seven percent (7%) of the costs incurred. Section 3.2 - Construction Contract. Owner shall execute a construction contract with a general contractor approved by Owner and Developer. The construction contract will be a fixed price or guaranteed maximum cost construction contract covering completion of all construction anticipated at the Project. The construction contract shall require a payment bond and a performance bond acceptable to Developer and Owner and in accordance with the Project Loan Documents. Section 3.3 - Commencement and Completion of Construction. With the reasonable cooperation of Owner, Developer shall commence or cause commencement of construction of the Project no later than thirty (30) days from the date of execution and delivery of the Project Loan Documents and shall diligently pursue said construction to completion, and shall perform such duties as may be necessary to complete the construction of the Project pursuant to and in conformity with the Final Plans and in accordance with good building practice and in full compliance with all terms and conditions of the Project Loan Documents, all of which shall be accomplished on or before the applicable completion deadline, and without liens, claims or assessments asserted against the Project for any material, labor or other items furnished in connection therewith, and all in full compliance with all governmental requirements. Developer will provide to Owner upon request therefor evidence of satisfactory compliance with all of the foregoing. [Texas properties: Developer and if necessary, Owner, together with the general contractor, shall jointly file an Affidavit of Commencement of construction using a form satisfactory to Lender with the county clerk of the county in which the Project is located not later than the thirtieth day after the date of actual commencement of construction of the Project or delivery of materials to the Project. Such affidavit shall contain the information required by ss. 53.124(c) of the Texas Property Code, shall not be filed prior to approval thereof in writing by Lender and shall be filed showing a date of commencement of construction which is after the 7 8 filing of the mortgage which is one of the Project Loan Documents with the county clerk of the county where the Project is located.] Section 3.4 - Payment of Contract Price. The Contract Price shall be paid through requisitions pursuant to the Project Loan Documents and from funds provided by Owner, less any Punch List Amounts or retainage required by the Project Loan Documents or other construction documents. Section 3.5 - Adjustments to Contract Price. (a) If any changes to the Final Plans are approved by Owner in accordance with Section 2.7 hereof, the Contract Price shall be adjusted accordingly. (b) The Contract Price for the Project includes a specific amount for F F & E equal to the F F & E Allowance as provided in Section 2.6 hereof. Any amounts expended for F F & E above the F F & E Allowance will be an increase to the Contract Price, the cost of which will be passed through to Owner at actual cost without any developer fee. Developer will endeavor to obtain the lowest possible cost for F F & E. Prior to incurring any costs in excess of the F F & E Allowance, Developer shall notify Owner in writing of the estimated amount of such excess. Developer will, upon request, provide Owner with documentation of the costs incurred by Developer for which reimbursement is sought. (c) The costs by Developer in remedying unusual site conditions will be an increase to the Contract Price for the Project to the extent that such costs exceed an agreed upon allowance therefor and are the result of unusual site conditions not identifiable by Developer after the exercise of reasonable diligence at the time the Project was acquired. At such time as Developer becomes aware of any such unusual site conditions, Developer shall promptly notify Owner of the same and of the amount by which the estimated cost to correct said site conditions shall exceed such allowance. Developer will endeavor to obtain the lowest possible cost in remedying such unusual site conditions and will charge Owner for Developer's actual cost incurred, except that an unusual site condition which should have been identified by Developer in exercising reasonable diligence at the time the Project was acquired will be at Developer's cost. ARTICLE IV Additional Responsibilities of Parties Section 4.1 - The Developer's Responsibilities. In addition to its obligations elsewhere expressed in this Agreement, the Developer shall have the following responsibilities: (a) To obtain all necessary building permits and the Certificate of Occupancy; (b) To arrange for all labor and material required to develop, construct and furnish the Project in accordance with the Final Plans (except as otherwise expressly set forth herein) and to purchase the Personal Property to be provided; 8 9 (c) The Developer shall at all times, commencing with the date upon which construction begins, carry the following types of insurance specified in the Project Loan Documents with an insurance carrier or carriers acceptable to the Owner and Lender, which insurance may include the following: (i) workman's compensation insurance fully covering all persons engaged in the performance of this Agreement, in accordance with applicable law. (ii) Public liability insurance covering death or bodily injury with limits of not less than $300,000 for one person and $1,000,000 for any one accident or disaster; and property damage coverage limits of not less than $100,000; all of which insurance shall name the Owner and Lender as an additional insured. (iii) "Builders Risk" insurance against damage or destruction by fire and full extended coverage, including vandalism and malicious mischief, covering all improvements to be erected hereunder and all materials for the same which are on or about the Property, in an amount equal to the full insurable value of such improvements and materials; such insurance to be payable to the Owner, the Developer and the Lender as their interests may appear, with a standard mortgagee endorsement to the Lender or its assigns as mortgagee. The Developer shall furnish to the Owner and the Lender if required by the Lender, duplicate policies of insurance or certificates of insurance as set forth in subparagraphs (i), (ii), and (iii) hereof. Each of such policies shall, if the insurance carriers so permit, contain a provision to the effect that they may not be canceled except upon ten (10) days prior written notice to the Owner and the Lender. (d) In preparation for each disbursement under the Project Loan Documents, the Developer shall deliver to the Owner, at the Owner's request, such documents as required under the Project Loan Documents, including without limitation: (i) duly executed waivers of mechanic's liens signed by each subcontractor which provided labor or materials on the Project; and (ii) reasonable proof of payment or proof of a provision for payment to such subcontractors. Section 4.2 - The Owner's Responsibilities. In addition to its obligations elsewhere expressed in this Agreement, the Owner shall have the following responsibilities: (a) To expeditiously pursue obtaining commitments for financing the contemplated construction, including the furnishing of financial statements, providing an appraisal of the Property and Project and by execution of applications, notes, mortgages, assumption agreements and other documents reasonably necessary to effectuate such financing or the financing of the Personal Property. 9 10 (b) To pay for all professional and other staff personnel required for the pre-opening and operation of the Project in sufficient time to permit licensure, if required, by the applicable state agency at the date of Physical Completion. (c) To pay the costs approved by Owner for correcting unusual site conditions. For the purpose of this Agreement, the term unusual site conditions shall include, without limitation, any of the following which have not been noted in the Final Plans or otherwise identifiable by the Developer in exercising reasonable diligence: (i) unusual soil or water conditions requiring extraordinary preparation, i.e., piles, curtain drains, retaining walls, blasting or rip-rap; (ii) tying in of water, sewer or other utility services beyond the locations as shown in the Final Plans; (iii) holding tanks and pumps for the water system or the sprinkler system; (iv) water purification or filter system; (v) leaching field; and (vi) any requirement imposed upon the Developer by governmental agencies having jurisdiction, if not provided for in the Final Plans, because of reasons other than errors or omissions in such Final Plans, such as requirements imposed as conditions for the granting of any of the Approvals. Section 4.3 - Indemnification. The Developer hereby agrees to indemnify and hold the Owner harmless from all liabilities, claims, and demands for personal injury or property damage arising out of or caused by any act or omission of the Developer, its subcontractors, agents, or employees, or arising in or about the Property at any time from the date of this Agreement. The Developer further covenants to use proper care and caution in the performance of its work hereunder so as not to cause damage to any adjoining or adjacent property, and the Developer shall indemnify and hold the Owner harmless from any liabilities, claims, or demands for damage to such adjoining or adjacent property. ARTICLE V Contingencies Section 5.1 - Required Occurrences. This Agreement and the undertakings of the Developer shall, at the election of the Owner, be contingent upon the occurrence of each of the following: (a) Approvals. All of the Approvals and current utility availability letters shall have been obtained. 10 11 (b) Title. An Owner's title insurance policy commitment and ALTA survey, satisfactory to the Developer, in its sole discretion, shall have been obtained by the Owner which confirms that there are no exceptions or conditions which would render title to the Property defeasible or which will prohibit or restrict the construction or operation of the Project or which would prevent an institutional lender from closing a construction or permanent mortgage loan for the Project in the usual course of its business. (c) Additional Due Diligence Regarding the Property. The Developer shall have received due diligence information concerning the Property, satisfactory to the Developer, in its sole discretion, including, without limitation, soil tests and utility service confirmations to the extent not currently available. On or before the expiration of any inspection periods regarding the Property, the Developer shall notify the Owner of any issues. (d) Purchase of the Property. The Owner shall have purchased good and indefeasible fee simple title to the Property as set forth in Section 1.1. (e) Construction Financing. The Owner shall have received construction financing in the full amount of the Contract Price. Section 5.2 - Failure of Contingencies. In the event that any one or more of the contingencies set forth in this Article is not satisfied, waived or deferred by the parties in writing, within a reasonable period of time, then, upon Notice, either party may terminate this Agreement. In such event, neither party shall have any further responsibility or liability to the other. The Developer reserves the right, at its option, to waive or defer any one or more of the conditions precedent. ARTICLE VI Additional Covenants of The Owner and The Developer Section 6.1 - Indemnification by The Owner. The Owner hereby indemnities and defends the Developer against any claims for unpaid fees or costs associated with the Property or the Project incurred by or on behalf of the Owner or the Developer as a result of any claim by any broker. Section 6.2 - Confidentiality. The Owner, its partners, affiliates, agents, servants and employees and the Developer, its affiliates, agents, servants and employees hereby agree: (a) To maintain in the strictest confidence the identity of the other party; the contents of this Agreement; the negotiations between the parties on the terms of this Agreement; and any of the Owner's proprietary information, including, without limitation, architectural designs and plans, construction plans and specifications and standards, financing sources, and other information regarding the Project and the business affairs and operations of the Owner and the Developer's proprietary information, including, without limitation, financial information, projects, copies of leases, real estate appraisals, and other information regarding the Project and the business affairs and operations of the Developer which any of said parties obtain from the other party in the course of negotiations for or performance of the transactions contemplated hereby (the "Confidential Information"); 11 12 (b) Not to disclose, without the other party's prior written consent (except to the extent disclosure is required by applicable law or regulation), any Confidential Information, except to such parties, agents, servants and employees, bankers, including specifically the Lender, consultants and other advisors to whom disclosure is necessary in order to effectuate the transactions contemplated hereby; and (c) To comply therewith for a period of two (2) years commencing on the date of this Agreement. Section 6.3 - Provision of Further Information. The Developer agrees to supply complete financial information and any other data required in connection with the construction or permanent financing for the Project and to execute, and cause to execute, any and all documents which are required by the terms thereof. Section 6.4 - Management Agreement. Provided there is no default hereunder then existing, the Owner agrees that the Developer or its affiliate shall have the right to manage the Project beginning approximately one hundred twenty (120) days prior to completion pursuant to the terms of a Management Agreement, substantially in the form attached hereto as Exhibit "F". ARTICLE VII Concluding Provisions Section 7.1 - Entire Agreement. All prior understandings, letters of intent, and agreements between the parties are merged in and superseded by this Agreement (including all Exhibits hereto). Section 7.2 - Representations. None of the parties shall be bound by any promises, representations, or agreements except as herein expressly set forth. Section 7.3 - Amendments. This Agreement may not be amended, waived, modified, altered or changed in any respect whatsoever except by a further agreement, in writing, executed by each of the parties and consented to by the Owner. Section 7.4 - Joint Effort. The preparation of this Agreement has been a joint effort of the parties, and the resulting document shall not be construed more severely against one of the parties than the other. Section 7.5 - No Brokers. Each of the Owner and the Developer represents and warrants to the other that no broker or finder has acted on its behalf in connection with this Agreement or the transactions contemplated hereby or referred to herein; and each agrees to indemnify and hold and save the other harmless from any claim or demand for commission or other compensation by any broker, finder or similar agent claiming to have been employed by or on behalf of such party. Section 7.6 - Assignment. The Developer shall have no right to assign its rights nor delegate its obligations under this Agreement to another entity or person without the prior written consent of the Owner except that the Developer shall have the right to assign this Agreement to, 12 13 merge with or consolidate with an "Affiliate" (defined herein as defined in the Securities and Exchange Act of 1934 and the regulations thereunder) in connection with a public offering, merger or transfer. Section 7.7 - Notices, All notices which may be given to any of the parties hereunder shall be in writing and shall be hand delivered or sent by registered or certified mail, return receipt requested, or by Federal Express, and postage prepaid as follows: (a) In the event that notice is directed to the Owner, it shall be sent to Tri Point Communities, L.P., 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, Attn: David R. Brickman, Vice President, or at such other address or addresses the Owner shall from time to time designate by notice to the Developer. (b) In the event that notice is directed to the Developer, it shall be sent to Capital Senior Development, Inc., 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, Attn: Charles Allison, at the same address; or at such other address or addresses as the Developer shall from time-to-time designate by notice to the Owner. The effective date of any such notice shall be the earlier of actual receipt by the addressee or three (3) days after such notice is properly deposited for mailing. Section 7.8 - Arbitration. Any dispute or controversy arising between the parties involving the interpretation or application of any provisions of the Agreement, or arising out of this Agreement, or concerning the construction of the proposed Project or the furbishing thereof shall be submitted to and determined by arbitration in accordance with the rules of the American Arbitration Association then in effect. Section 7.9 - Captions. The captions of this Agreement are for convenience and reference only and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provision hereof. Section 7.10 - Successors. This Agreement shall be binding upon the parties hereto, their respective heirs, executors, administrators, successors, and assigns. Section 7.11 - Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original. Section 7.12 - Severability. The invalidity or unenforceability of one or more of the phrases, sentences, provisions, clauses, Sections or Articles contained in this Agreement shall not affect the validity or enforceability of this remaining portions so long as the material purposes of this Agreement can be determined and effectuated. Section 7.13 - Effective Date. This Agreement shall be deemed to be effective as of the date set forth below. 13 14 Section 7.14 - No Offer. The delivery of an unexecuted copy of this Agreement shall not be deemed an offer. No rights are to be conferred upon any party until this Agreement has been executed and delivered to each party. Section 7.15 - Governing Law. This Agreement shall be governed by the laws of the State of Texas. Section 7.16 - Control Over Other Agreement. In the event that any of the terms or conditions set forth herein are inconsistent with or contrary to any of the terms and conditions set forth in the Development and Turnkey Services Agreement dated September 16, 1997 between the Owner and Capital Senior Living Corporation, then the terms and conditions set forth herein shall control. Dated this 1st day of December, 1997 and executed under seal. TRI POINT COMMUNITIES, L.P. By: Capital Retirement Group, Inc., Its general partner By: /s/ DAVID R. BRICKMAN -------------------------------- Name: David R. Brickman ------------------------------ Title: Vice President ----------------------------- CAPITAL SENIOR DEVELOPMENT, INC. By: /s/ CHUCK ALLISON ----------------------------------------- Name: Chuck Allison --------------------------------------- Title: Vice President -------------------------------------- 14 EX-10.36 5 DEVELOPMENT AGREEMENT DATED 2/3/98 1 EXHIBIT 10.36 Shreveport, LA DEVELOPMENT AGREEMENT THIS DEVELOPMENT AGREEMENT (this "Agreement") is by and between Capital Senior Development, Inc., a Texas corporation (the "Developer"), and Tri Point Communities, L.P., a Texas limited partnership (the "Owner"), and is entered into for the purpose of reducing to a formal writing all of the parties understandings with respect to the development and construction of a proposed senior living project to be comprised of 120 units (the "Project") to be located on land as described below (the "Property"). In consideration of the undertakings of each of the parties to the other IT IS AGREED: ARTICLE I Representations The parties make each of the following representations: Section 1.1 - Title to Property. The Owner shall have or acquire good and indefeasible title in fee simple to the Property consisting of approximately 10.552 acres of land as more fully described in Exhibit "A". Exhibit "A" and each of the other Exhibits referred to in this Agreement shall be incorporated into this Agreement by such reference as if fully set forth in this Agreement. Section 1.2 - Encumbrances. (a) The Owner and the Developer acknowledge that the Property will be subject to the easements, assessments, conditions, contracts, rights, claims, encroachments, restrictions and other encumbrances as set forth on Exhibit "B" (the "Existing Encumbrances"), to physical conditions disclosed by a boundary survey to be prepared by Michael D. Bowman of John R. Bowman & Assoc., Inc., dated October 14, 1997, as revised (Book No. SDR33) for the Property, and will be subject to those easements, conditions, contracts, rights, licenses, encroachments, restrictions and other encumbrances resulting from the Developer securing regulatory, development and construction approvals for the Project and attendant site improvements. The Owner and the Developer each represents to the other that it has reviewed the boundary survey and the topographical survey of the Property and has made a physical inspection of the Property and is satisfied with the Property as to the site characteristics and attributes in all material respects. (b) Concurrently with the execution of this Agreement, the Owner shall provide the Developer with copies of all engineering, architectural and any other plans, studies and surveys title reports, environmental assessments, appraisals and other information regarding the Property or the Project which are in the Owner's possession, custody or control. 2 (c) The Owner represents, to the best of its knowledge, that the Property has only the apparent site and off-site conditions, if any, as set forth on Exhibit "C" which require the implementation of the measures, if any, as set forth on Exhibit "C". (d) Commencing on the date the Developer elects to commence construction in accordance with this Agreement, the Owner shall provide the Developer with full possession and complete control of the Property for purposes of performing the Developer's obligations hereunder. Section 1.3 - Permit and Approvals. (a) The Developer represents that it shall use its best efforts to obtain all state, federal, county and municipal land use approvals and permits, licenses, easements, and utility agreements which are necessary for the development, construction and opening of the Project on the Property (the "Approvals"). The Developer covenants to diligently use its best efforts to obtain all of the Approvals in an expeditious manner. In the event that the Developer is unable to obtain the Approvals, the Developer shall have no liability whatsoever to the Owner, or any other party and at the Owner's or the Developer's option, this Agreement shall be terminated without recourse to either party hereto at law or in equity. (b) The Owner represents that it shall cooperate with Developer in obtaining the Approvals. (c) For the sole purpose of permitting the Developer to construct the Project, the Owner grants to the Developer, to the extent required by the Developer in order that the purpose of this Agreement be effectuated, the rights under the Approvals obtained in the name of Owner and any other grants of rights, permits, approvals, or licenses, which may be necessary to complete the performance of the Developer's obligations hereunder; provided, however that no grant of any of the foregoing shall occur which is prohibited by applicable law or the respective terms hereof. Section 1.4 - Documentation. The Owner shall provide or obtain construction and permanent financing for the Property, the Project, the Personal Property (herein so called) related to the Project and related development costs (collectively, the "Project Loan") which shall be sufficient, together with the Owner's equity contributions, if necessary (which shall in no event exceed fifteen percent (15%) of the Contract Price (as hereinafter defined) if the Project Loan is intended to fund 85% of Project costs and which shall in no event exceed twenty percent (20%) of the Contract Price if the Project Loan is intended to fund 80% of Project costs), to pay the full amount of the Contract Price. The Owner shall provide to Developer a complete set of all project loan documents (collectively, the "Project Loan Documents") required by the Owner's lender ("Lender") in connection with the Project Loan. Developer shall assist Owner in obtaining all reasonable documentation required by Lender. Such documentation shall include, but is not limited to, all zoning and plan approvals, all utility letters indicating positive availability of service, inventory of concessions made to and agreements with any or all municipal bodies, site plans, title policies, and all other regulatory body approvals. The Owner also covenants that it will, in a timely manner, provide whatever financial or other information the Lender might 2 3 reasonably require in connection with the applications for financing for the construction of the Project and as required by the Lender in connection with the Project Loan. The Owner will use its best efforts to pursue its application for construction and permanent financing for the Project. Section 1.5 - Other Agreements. The Owner and the Developer each represents to the other that neither entering into this Agreement nor performing their respective obligations hereunder will violate any other agreements or documents by which either may be bound. Section 1.6 - Utility Services. The Owner represents that, to the best of its knowledge, all utility services required to construct and operate the Project (including, without limitation, public water, sewer and electricity) are currently available to the Property in the capacities required to operate the Project. No work need be performed by or on behalf of the Developer to make such utilities available to the Property for the construction or operation of the Project, except for the matters, if any, set forth on Exhibit "C". Copies of letters from the providers of such utility services confirming such availability are annexed hereto as Exhibit "D". Section 1.7 - Good Standing of the Developer. The Developer represents that it is duly organized, validly existing and in good standing under the laws of the State of Texas. The Developer represents that it is empowered and authorized to execute, deliver and perform its obligations under this Agreement, and, upon such execution and delivery and subject to the conditions subsequent set forth in Section 5.1, this Agreement shall be valid, binding and legal obligation of the Developer, enforceable in accordance with its terms and, duly authorized by a vote of its Board of Directors in compliance with its articles of incorporation and bylaws and all applicable laws of the State of Texas. Section 1.8 - Good Standing of the Owner. The Owner represents that it is duly organized and validly existing under the laws of the State of Texas. The Owner represents that it is empowered and authorized to execute, deliver and perform its obligations under this Agreement, and upon such execution and delivery and subject to Section 5.1, this Agreement shall be the valid, binding and legal obligation of the Owner, enforceable in accordance with its terms and duly authorized by its general partner in compliance with its limited partnership agreement and all applicable laws of the State of Texas. ARTICLE II Construction of the Project Section 2.1 - Control of Construction. Subject to the express provisions contained herein, it is the intention of the parties that the Developer shall have sole, complete and absolute authority and discretion to decide any and all issues pertaining to the construction of the Project, including, without limitation, the expenditure of funds, the incurring of costs and all of the other matters referred to herein, so long as the same are in compliance with the Approvals, the Final Plans (as defined below) all applicable laws and the Project Loan Documents. Section 2.2 - Architectural and Engineering Services. The parties acknowledge that WSI Architects and their consulting engineers (the "Architect and Engineers") have been retained by 3 4 the Owner. The Owner will be responsible for payment of the architectural fees due to the Architect, pursuant to the contract with respect to the Project dated December 10, 1997 (said contract herein, the "Architectural Contract"). The Owner represents and warrants to the Developer that a true, accurate and complete copy of the Architectural Contract is attached hereto as Exhibit "E". The Developer shall not be responsible to the Owner, or any other party for any errors, omissions, breaches or failures thereof, or any damages resulting from the acts or omissions of the Architect. Section 2.3 - Other Professionals and General Assumed Obligations. The Owner represents that it has not engaged any architects or any engineers, consultants, accountants, or other professionals with respect to the Project, other than the Architect and Engineers, which the Owner shall be obligated to pay. Section 2.4 - Plans and Specifications. (a) The Architect and Engineers retained by the Owner shall, under the direction of the Developer and after consultation with the Owner, prepare basic design plans (the "Basic Plans"). As a part of this process, the Developer may engage engineers, including the site engineers, to perform test borings and other soil testing at the Property for purposes of properly locating the Project on the Property. The Developer, the Architects and the Engineers shall consult with the Owner during the process of preparing the Basic Plans. The Developer, Architect and the Engineers shall have access to the Project for all such tests and surveys. (b) Within two (2) weeks after the date of the Architect's and the Engineer's completion of the Basic Plans and delivery to the Owner, the Developer, the Owner, and the Architect and Engineers shall meet to review and approve the Basic Plans. The parties shall initial the Basic Plans to indicate their approval of such Basic Plans. (c) Upon the approval by the parties of the Basic Plans, the Developer shall direct the Architect and the Engineers to prepare final plans, specifications and a site plan (collectively the "Final Plans") based on the Basic Plans. Within two (2) weeks after the completion of the Final Plans and their delivery to the Owner, the parties will meet to review and approve the same, and make any necessary revisions. The Owner agrees that it will not unreasonably withhold its approval of the Final Plans if they conform in all respects to the Basic Plans. The parties agree to use their best efforts to reasonably determine the acceptability of the Final Plans and Personal Property (see Section 2.6). The parties shall initial the Final Plans as an indication of their approval of the same. Section 2.5 - Construction. The Developer shall perform such duties as may be necessary to complete construction of the Project in a workmanlike manner and in accordance with the Final Plans, all applicable laws and the Project Loan Documents subject to field changes and minor design changes approved by the Owner and if required by the Project Loan Documents, by Lender. The Project is to be licensed for the unit complement described above and shall be constructed in accordance with the requirements in effect on the date of this Agreement as set forth by all federal, state and local governmental agencies having jurisdiction of the Project, including Life Safety Code requirements imposed by the Federal Department of Health and Human Services. 4 5 Section 2.6 - Personal Property. (a) The Developer will furnish the specific items of personal property contained in Exhibit "F" (the "Furniture, Furnishings & Equipment" or "F F & E") required for the Project within the allowance (defined below). The allowance for the "F F & E" is Four Hundred Eighty-Eight Thousand Eight Hundred Fifty and No/100 Dollars ($488,850.00) (the"F F & E Allowance"), which F F & E Allowance shall be included in the Contract Price. (b) The Owner shall make selections of F F & E in a timely fashion and all items of F F & E shall be ordered by the Developer. Section 2.7 - Changes. Subject to the provisions of the Project Loan Documents, the Owner agrees that the Developer shall also have the right to make changes in the Final Plans and in the Personal Property, subject to the approval of Owner, only if required by any federal, state or local governmental authority having jurisdiction over the Project, or if required due to the unavailability of any construction materials or Personal Property. The Owner shall be notified of any such changes in the Final Plans or substitutions in the Personal Property, provided, that, such changes result in construction, space, design, personal property, equipment and interior and exterior design comparable in overall design and quality to that shown on the Final Plans and Owner must approve such changes. Section 2.8 - Commencement of Construction. Construction of the Project will start on or prior to the date which is thirty (30) days after the date the Project Loan Documents are executed and delivered. Section 2.9 - Continuity of Construction. Construction, once undertaken, shall proceed in a continuous and reasonably expeditious manner until Physical Completion (as such term is defined in Section 2.10) is achieved, which shall not occur later than sixteen (16) months after the date the Project Loan Documents are executed and delivered. Section 2.10 - Completion of Construction. (a) For the purposes of this Agreement, the terms "Physical Completion" or "Physically Completed" shall mean the date on which the building and improvements described and set forth in the Final Plans have been completed and the Project shall have been approved for and received a certificate for temporary or permanent occupancy by the local building inspector, and by the State Fire Marshall in the event his or her approval is required (the "Certificate of Occupancy"). Physical Completion shall be deemed to have been achieved notwithstanding that any of such officials or agencies have issued a Certificate of Occupancy with conditions or a Punch-List listing items requiring completion or correction, so long as such conditions or Punch-List items do not prevent or prohibit occupancy as determined by the Owner, in its sole discretion. (b) The Developer will use its reasonable best efforts to notify the Owner at least ninety (90) days prior to the time that the Developer estimates that the Project will be Physically Completed, whereupon the Owner will diligently proceed to fulfill all other conditions necessary 5 6 for licensure and the Owner will apply in a timely manner for all licenses and permits necessary to commence operation of the Project. After such notice from the Developer, the Owner, to the extent necessary to perform administrative activities may, so long as it does not interfere with completion of construction, enter upon the Property in an effort to coordinate initial licensure. Section 2.11 - The Owner's Noninvolvement. The Owner shall have access to the construction site while construction is in progress, but it shall not be empowered to interfere with construction, provided, however that the Owner's and Lender's agents shall have the right to view the construction in progress and shall have access to the site for the purpose of equipping the Project and preparing the Project for operation. Section 2.12 - Punch List. If, at any time after the Project has been Physically Completed, there shall exist any item or items requiring completion or correction, then the Developer agrees to use all reasonable diligence to complete or correct such item or items so that each conforms to the Final Plans. The parties shall make a Punch List of the items requiring completion or correction (the "Punch List"). Each item on the Punch List shall be assigned a reasonable value based upon the reasonable cost of completion or correction of the same or such other value as may be required by the Lender ("Punch List Amount"). The Developer shall give its written undertaking to complete each Punch List item within forty-five (45) days (or such other period of time as is mutually agreed upon by the parties) after Physical Completion, further agreeing to permit the Owner to complete any such items, at the Developer's expense, if the Developer has failed to complete the same within the forty-five (45) day time period. Section 2.13 - Work and Warranties. Upon completion of construction, landscaping and installation of Personal Property, the Developer will assign to the Owner, in addition to all warranties created by law, all warranties and guarantees received from designers, the general contractor and suppliers of equipment and furnishings, to the extent assignable. The Developer will agree to remedy any defect in construction caused by poor workmanship or materials which are brought to its attention by written notice within a period of one (1) year from the date of the issuance of the Certificate of Occupancy. Section 2.14 - Subcontractors. The Developer agrees to indemnify and save the Owner harmless from claims for payment by any subcontractor who furnishes materials or supplies or performs labor or services in the prosecution of the work pursuant to this Agreement. The Developer will select subcontractors acceptable to Owner in its sole discretion. Section 2.15 - Financing Arrangements. (a) The Owner will obtain the Project Loan which shall be sufficient, together with the Owner's equity contributions, if necessary (which shall in no event exceed the amounts referenced in Section 1.4 hereof) to pay the full amount of the Contract Price. This Agreement may be terminated by either the Developer or the Owner without further recourse to either party (except for reimbursement of Project related expenses) in the event that the closing and funding of the construction loan financing with respect to the Project pursuant to the Project Loan (with all conditions precedent to such closing either satisfied or irrevocably waived by the lender) shall not have occurred by February 28, 1998. 6 7 The Owner and the Developer also contemplate that the Property and Project, together with all Personal Property now owned or hereafter acquired by the Owner which are or may be attached to or used in connection with the Property or Project, together with any and all replacements thereto and substitutions therefor, and all proceeds thereof; and all present and future rents, issues, leases, and profits of the Property and Project will serve as security for the payment obligations to the Lender relating to the Project Loan or otherwise, and that the Owner will be the principal obligor for the repayment of all financial obligations thereunder. ARTICLE III Contract Price Section 3.1 - Contract Price. The Contract Price ("Contract Price") to be paid by Owner for the construction and furnishing of the Project shall be an amount equal to the costs incurred in the development and construction of the Project plus a developer fee for overhead and profit equal to seven percent (7%) of the costs incurred. Section 3.2 - Construction Contract. Owner shall execute a construction contract with a general contractor approved by Owner and Developer. The construction contract will be a fixed price or guaranteed maximum cost construction contract covering completion of all construction anticipated at the Project. The construction contract shall require a payment bond and a performance bond acceptable to Developer and Owner and in accordance with the Project Loan Documents. Section 3.3 - Commencement and Completion of Construction. With the reasonable cooperation of Owner, Developer shall commence or cause commencement of construction of the Project no later than thirty (30) days from the date of execution and delivery of the Project Loan Documents and shall diligently pursue said construction to completion, and shall perform such duties as may be necessary to complete the construction of the Project pursuant to and in conformity with the Final Plans and in accordance with good building practice and in full compliance with all terms and conditions of the Project Loan Documents, all of which shall be accomplished on or before the applicable completion deadline, and without liens, claims or assessments asserted against the Project for any material, labor or other items furnished in connection therewith, and all in full compliance with all governmental requirements. Developer will provide to Owner upon request therefor evidence of satisfactory compliance with all of the foregoing. [Texas properties: Developer and if necessary, Owner, together with the general contractor, shall jointly file an Affidavit of Commencement of construction using a form satisfactory to Lender with the county clerk of the county in which the Project is located not later than the thirtieth day after the date of actual commencement of construction of the Project or delivery of materials to the Project. Such affidavit shall contain the information required by ss.53.124(c) of the Texas Property Code, shall not be filed prior to approval thereof in writing by Lender and shall be filed showing a date of commencement of construction which is after the filing of the mortgage which is one of the Project Loan Documents with the county clerk of the county where the Project is located.] 7 8 Section 3.4 - Payment of Contract Price. The Contract Price shall be paid through requisitions pursuant to the Project Loan Documents and from funds provided by Owner, less any Punch List Amounts or retainage required by the Project Loan Documents or other construction documents. Section 3.5 - Adjustments to Contract Price. (a) If any changes to the Final Plans are approved by Owner in accordance with Section 2.7 hereof, the Contract Price shall be adjusted accordingly. (b) The Contract Price for the Project includes a specific amount for F F & E equal to the F F & E Allowance as provided in Section 2.6 hereof. Any amounts expended for F F & E above the F F & E Allowance will be an increase to the Contract Price, the cost of which will be passed through to Owner at actual cost without any developer fee. Developer will endeavor to obtain the lowest possible cost for F F & E. Prior to incurring any costs in excess of the F F & E Allowance, Developer shall notify Owner in writing of the estimated amount of such excess. Developer will, upon request, provide Owner with documentation of the costs incurred by Developer for which reimbursement is sought. (c) The costs by Developer in remedying unusual site conditions will be an increase to the Contract Price for the Project to the extent that such costs exceed an agreed upon allowance therefor and are the result of unusual site conditions not identifiable by Developer after the exercise of reasonable diligence at the time the Project was acquired. At such time as Developer becomes aware of any such unusual site conditions, Developer shall promptly notify Owner of the same and of the amount by which the estimated cost to correct said site conditions shall exceed such allowance. Developer will endeavor to obtain the lowest possible cost in remedying such unusual site conditions and will charge Owner for Developer's actual cost incurred, except that an unusual site condition which should have been identified by Developer in exercising reasonable diligence at the time the Project was acquired will be at Developer's cost. ARTICLE IV Additional Responsibilities of Parties Section 4.1 - The Developer's Responsibilities. In addition to its obligations elsewhere expressed in this Agreement, the Developer shall have the following responsibilities: (a) To obtain all necessary building permits and the Certificate of Occupancy; (b) To arrange for all labor and material required to develop, construct and furnish the Project in accordance with the Final Plans (except as otherwise expressly set forth herein) and to purchase the Personal Property to be provided; (c) The Developer shall at all times, commencing with the date upon which construction begins, carry the following types of insurance specified in the Project Loan Documents with an insurance carrier or carriers acceptable to the Owner and Lender, which insurance may include the following: 8 9 (i) workman's compensation insurance fully covering all persons engaged in the performance of this Agreement, in accordance with applicable law. (ii) Public liability insurance covering death or bodily injury with limits of not less than $300,000 for one person and $1,000,000 for any one accident or disaster; and property damage coverage limits of not less than $100,000; all of which insurance shall name the Owner and Lender as an additional insured. (iii) "Builders Risk" insurance against damage or destruction by fire and full extended coverage, including vandalism and malicious mischief, covering all improvements to be erected hereunder and all materials for the same which are on or about the Property, in an amount equal to the full insurable value of such improvements and materials; such insurance to be payable to the Owner, the Developer and the Lender as their interests may appear, with a standard mortgagee endorsement to the Lender or its assigns as mortgagee. The Developer shall furnish to the Owner and the Lender if required by the Lender, duplicate policies of insurance or certificates of insurance as set forth in subparagraphs (i), (ii), and (iii) hereof. Each of such policies shall, if the insurance carriers so permit, contain a provision to the effect that they may not be canceled except upon ten (10) days prior written notice to the Owner and the Lender. (d) In preparation for each disbursement under the Project Loan Documents, the Developer shall deliver to the Owner, at the Owner's request, such documents as required under the Project Loan Documents, including without limitation: (i) duly executed waivers of mechanic's liens signed by each subcontractor which provided labor or materials on the Project; and (ii) reasonable proof of payment or proof of a provision for payment to such subcontractors. Section 4.2 - The Owner's Responsibilities. In addition to its obligations elsewhere expressed in this Agreement, the Owner shall have the following responsibilities: (a) To expeditiously pursue obtaining commitments for financing the contemplated construction, including the furnishing of financial statements, providing an appraisal of the Property and Project and by execution of applications, notes, mortgages, assumption agreements and other documents reasonably necessary to effectuate such financing or the financing of the Personal Property. (b) To pay for all professional and other staff personnel required for the pre-opening and operation of the Project in sufficient time to permit licensure, if required, by the applicable state agency at the date of Physical Completion. (c) To pay the costs approved by Owner for correcting unusual site conditions. For the purpose of this Agreement, the term unusual site conditions shall include, without limitation, 9 10 any of the following which have not been noted in the Final Plans or otherwise identifiable by the Developer in exercising reasonable diligence: (i) unusual soil or water conditions requiring extraordinary preparation, i.e., piles, curtain drains, retaining walls, blasting or rip-rap; (ii) tying in of water, sewer or other utility services beyond the locations as shown in the Final Plans; (iii) holding tanks and pumps for the water system or the sprinkler system; (iv) water purification or filter system; (v) leaching field; and (vi) any requirement imposed upon the Developer by governmental agencies having jurisdiction, if not provided for in the Final Plans, because of reasons other than errors or omissions in such Final Plans, such as requirements imposed as conditions for the granting of any of the Approvals. Section 4.3 - Indemnification. The Developer hereby agrees to indemnify and hold the Owner harmless from all liabilities, claims, and demands for personal injury or property damage arising out of or caused by any act or omission of the Developer, its subcontractors, agents, or employees, or arising in or about the Property at any time from the date of this Agreement. The Developer further covenants to use proper care and caution in the performance of its work hereunder so as not to cause damage to any adjoining or adjacent property, and the Developer shall indemnify and hold the Owner harmless from any liabilities, claims, or demands for damage to such adjoining or adjacent property. ARTICLE V Contingencies Section 5.1 - Required Occurrences. This Agreement and the undertakings of the Developer shall, at the election of the Owner, be contingent upon the occurrence of each of the following: (a) Approvals. All of the Approvals and current utility availability letters shall have been obtained. (b) Title. An Owner's title insurance policy commitment and ALTA survey, satisfactory to the Developer, in its sole discretion, shall have been obtained by the Owner which confirms that there are no exceptions or conditions which would render title to the Property defeasible or which will prohibit or restrict the construction or operation of the Project or which would prevent an institutional lender from closing a construction or permanent mortgage loan for the Project in the usual course of its business. 10 11 (c) Additional Due Diligence Regarding the Property. The Developer shall have received due diligence information concerning the Property, satisfactory to the Developer, in its sole discretion, including, without limitation, soil tests and utility service confirmations to the extent not currently available. On or before the expiration of any inspection periods regarding the Property, the Developer shall notify the Owner of any issues. (d) Purchase of the Property. The Owner shall have purchased good and indefeasible fee simple title to the Property as set forth in Section 1.1. (e) Construction Financing. The Owner shall have received construction financing in the full amount of the Contract Price. Section 5.2 - Failure of Contingencies. In the event that any one or more of the contingencies set forth in this Article is not satisfied, waived or deferred by the parties in writing, within a reasonable period of time, then, upon Notice, either party may terminate this Agreement. In such event, neither party shall have any further responsibility or liability to the other. The Developer reserves the right, at its option, to waive or defer any one or more of the conditions precedent. ARTICLE VI Additional Covenants of The Owner and The Developer Section 6.1 - Indemnification by The Owner. The Owner hereby indemnities and defends the Developer against any claims for unpaid fees or costs associated with the Property or the Project incurred by or on behalf of the Owner or the Developer as a result of any claim by any broker. Section 6.2 - Confidentiality. The Owner, its partners, affiliates, agents, servants and employees and the Developer, its affiliates, agents, servants and employees hereby agree: (a) To maintain in the strictest confidence the identity of the other party; the contents of this Agreement; the negotiations between the parties on the terms of this Agreement; and any of the Owner's proprietary information, including, without limitation, architectural designs and plans, construction plans and specifications and standards, financing sources, and other information regarding the Project and the business affairs and operations of the Owner and the Developer's proprietary information, including, without limitation, financial information, projects, copies of leases, real estate appraisals, and other information regarding the Project and the business affairs and operations of the Developer which any of said parties obtain from the other party in the course of negotiations for or performance of the transactions contemplated hereby (the "Confidential Information"); (b) Not to disclose, without the other party's prior written consent (except to the extent disclosure is required by applicable law or regulation), any Confidential Information, except to such parties, agents, servants and employees, bankers, including specifically the Lender, consultants and other advisors to whom disclosure is necessary in order to effectuate the transactions contemplated hereby; and 11 12 (c) To comply therewith for a period of two (2) years commencing on the date of this Agreement. Section 6.3 - Provision of Further Information. The Developer agrees to supply complete financial information and any other data required in connection with the construction or permanent financing for the Project and to execute, and cause to execute, any and all documents which are required by the terms thereof. Section 6.4 - Management Agreement. Provided there is no default hereunder then existing, the Owner agrees that the Developer or its affiliate shall have the right to manage the Project beginning approximately one hundred twenty (120) days prior to completion pursuant to the terms of a Management Agreement executed contemporaneously herewith. ARTICLE VII Concluding Provisions Section 7.1 - Entire Agreement. All prior understandings, letters of intent, and agreements between the parties are merged in and superseded by this Agreement (including all Exhibits hereto). Section 7.2 - Representations. None of the parties shall be bound by any promises, representations, or agreements except as herein expressly set forth. Section 7.3 - Amendments. This Agreement may not be amended, waived, modified, altered or changed in any respect whatsoever except by a further agreement, in writing, executed by each of the parties and consented to by the Owner. Section 7.4 - Joint Effort. The preparation of this Agreement has been a joint effort of the parties, and the resulting document shall not be construed more severely against one of the parties than the other. Section 7.5 - No Brokers. Each of the Owner and the Developer represents and warrants to the other that no broker or finder has acted on its behalf in connection with this Agreement or the transactions contemplated hereby or referred to herein; and each agrees to indemnify and hold and save the other harmless from any claim or demand for commission or other compensation by any broker, finder or similar agent claiming to have been employed by or on behalf of such party. Section 7.6 - Assignment. The Developer shall have no right to assign its rights nor delegate its obligations under this Agreement to another entity or person without the prior written consent of the Owner except that the Developer shall have the right to assign this Agreement to, merge with or consolidate with an "Affiliate" (defined herein as defined in the Securities and Exchange Act of 1934 and the regulations thereunder) in connection with a public offering, merger or transfer. Section 7.7 - Notices, All notices which may be given to any of the parties hereunder shall be in writing and shall be hand delivered or sent by registered or certified mail, return receipt requested, or by Federal Express, and postage prepaid as follows: 12 13 (a) In the event that notice is directed to the Owner, it shall be sent to Tri Point Communities, L.P., 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, Attn: David R. Brickman, Vice President, or at such other address or addresses the Owner shall from time to time designate by notice to the Developer. (b) In the event that notice is directed to the Developer, it shall be sent to Capital Senior Development, Inc., 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, Attn: Charles Allison, at the same address; or at such other address or addresses as the Developer shall from time-to-time designate by notice to the Owner. The effective date of any such notice shall be the earlier of actual receipt by the addressee or three (3) days after such notice is properly deposited for mailing. Section 7.8 - Arbitration. Any dispute or controversy arising between the parties involving the interpretation or application of any provisions of the Agreement, or arising out of this Agreement, or concerning the construction of the proposed Project or the furbishing thereof shall be submitted to and determined by arbitration in accordance with the rules of the American Arbitration Association then in effect. Section 7.9 - Captions. The captions of this Agreement are for convenience and reference only and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provision hereof. Section 7.10 - Successors. This Agreement shall be binding upon the parties hereto, their respective heirs, executors, administrators, successors, and assigns. Section 7.11 - Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original. Section 7.12 - Severability. The invalidity or unenforceability of one or more of the phrases, sentences, provisions, clauses, Sections or Articles contained in this Agreement shall not affect the validity or enforceability of this remaining portions so long as the material purposes of this Agreement can be determined and effectuated. Section 7.13 - Effective Date. This Agreement shall be deemed to be effective as of the date set forth below. Section 7.14 - No Offer. The delivery of an unexecuted copy of this Agreement shall not be deemed an offer. No rights are to be conferred upon any party until this Agreement has been executed and delivered to each party. Section 7.15 - Governing Law. This Agreement shall be governed by the laws of the State of Texas. 13 14 Section 7.16 - Control Over Other Agreement. In the event that any of the terms or conditions set forth herein are inconsistent with or contrary to any of the terms and conditions set forth in the Development and Turnkey Services Agreement dated September 16, 1997 between the Owner and Capital Senior Living Corporation, then the terms and conditions set forth herein shall control. Dated this 3rd day of February, 1998 and executed under seal. TRI POINT COMMUNITIES, L.P. By: Capital Retirement Group, Inc., Its general partner By: /s/ DAVID R. BRICKMAN ----------------------------- Name: David R. Brickman ------------------------ Title: Vice President ------------------------ CAPITAL SENIOR DEVELOPMENT, INC. By: /s/ CHUCK ALLISON ------------------------------------- Name: Chuck Allison -------------------------------- Title: Vice President -------------------------------- 14 EX-10.37 6 MANAGEMENT AGREEMENT DATED 12/23/97 1 EXHIBIT 10.37 San Antonio (Huebner Road) MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT (the "Agreement") entered into this 23rd day of December, 1997 by and between TRI POINT COMMUNITIES, L.P., ("Owner"), a limited partnership organized under the laws of the State of Texas, and CAPITAL SENIOR LIVING, INC. ("Capital"), a corporation organized under the laws of the State of Texas. PREAMBLE OWNER by this Agreement is engaging Capital to provide management services relating to the operation of a senior living community to be located in San Antonio, Texas on the land identified in Exhibit A. This Agreement is founded on the following assumptions: Owner retains primary responsibility to: (a) Establish the policies of the Facility and to plan for its short-range and long-range goals. (b) Review and evaluate the performance of Capital in carrying out the established policies and in attaining the goals established by Owner. (c) Annually review and approve the budget. (d) Annually review the policies and goals which have been established. Capital assumes primary responsibility to: (a) Implement the policies established by Owner. (b) Supervise the day-to-day management of the Facility, including all resident activities. (c) Provide to Owner full, timely and accurate information as to past operations. 2 (d) Provide to Owner projections and recommendations relating to the future operations of the Facility. The parties therefore agree as follows: I. RESPONSIBILITIES OF CAPITAL A. RECOMMENDED POLICIES. Capital shall recommend policies and goals to be established by Owner and shall evaluate such policies and goals on an ongoing basis. B. MANAGEMENT DUTIES. Capital shall supervise the operation of the Facility, provide management services, install operating procedures and oversee day-to-day operations, all subject to and in accordance with the budgets approved by and policies established by Owner. C. MARKETING DUTIES. Capital shall manage and supervise the marketing program. Capital shall establish and periodically review the residency agreement and if required, recommend changes thereof. D. EMPLOYEES. All Facility-based Employees, including the administrative employees, shall be employees of Capital. Capital shall have sole authority over Facility-based Employees and Non-Facility-based Employees who are directly responsible for the Facility and all matters pertaining thereto and shall be responsible for all actions and omissions of such employees. All costs of hiring, equipping and providing the services of Facility-based Employees, including, but not limited to, compensation, health insurance, employer liability insurance, payroll taxes, bonding, workers compensation insurance, benefits and vacations shall be an expense of Capital. To the extent the above-stated expenses are incurred in accordance with the Facility Budget or approved by Owner, they shall be reimbursed from the Facility operations or Owner as the case may be. E. OPERATING PROCEDURES. Capital shall develop, install and maintain operating procedures, systems and controls. F. FACILITY EXPANSION. Capital shall make recommendations regarding remodeling or expansion of the Facility. G. BUDGETS. Capital shall prepare for review and approval by Owner based on reasonable standards annual operating budgets for revenue, expense and cash flow of the Facility and a capital expenditures budget. Budgets shall be prepared in advance of each fiscal year. Cash flow projections shall accompany each operating budget. Any changes to the budgets must be approved by Owner. 2 3 H. FINANCIAL CONTROLS. Capital shall establish and maintain a system of financial controls for the Facility. I. MONTHLY FINANCIAL STATEMENTS. Capital shall provide to Owner, on a monthly basis, financial statements and related financial reports. Such statements and reports shall be provided by the 20th day after the end of the month. These reports shall be in the form attached as Exhibit "A." J. MARKETING REPORTS. Capital shall, on a weekly and monthly basis, provide sales and occupancy reports to Owner, as well as the results of the annual resident satisfaction survey. K. LEGAL COUNSEL. Capital, at Facility expense, shall coordinate with Owner the utilization of legal counsel relating to Facility operations. L. RENTAL COLLECTIONS AND DISBURSEMENTS. Capital shall collect the revenues from the residents and, on behalf of Owner, deposit all such funds in a residential depository account at a FDIC insured bank approved by Owner. The style of the account shall be in the name of the Facility with designated representatives from Owner and Capital being the only parties authorized to draw from said account. On an as needed basis, Capital shall transfer the funds from the above stated account into an Operating Expense Account in the name of the Facility. The account shall be in a FDIC insured bank approved by Owner. The style of the account shall be in the name of the Facility with designated representatives from Owner and Capital being the only parties authorized to draw from said account. Capital shall pay out of such Operating Expense Account all operating expenses for which payment has been approved in accordance with the budget or approved by Owner (including Capital's Management Fee and any other sums due to Capital from Owner), and all other sums properly payable pursuant to any of the provisions of this Agreement. Capital shall hold, remit or expend the balance of such funds, if any, as Owner may direct. These funds shall not be co-mingled with funds from any other projects and/or facilities managed and/or operated by Capital. M. ACCOUNTING SYSTEMS AND SOFTWARE. Capital shall provide to Owner, during the term of this Agreement, appropriate on-site accounting systems and software, which shall include complete accounting, bookkeeping and record keeping services for the Facility, specifically including, but not limited to, resident billings, accounts payable, accounts receivable, general ledger and inventory records and maintain demographic information on the residents. Acquisition of software for Facility based operations, software maintenance and update charges will be budgeted expenses of the Facility. Payroll processing may be delegated to a third party, the cost of which will be the responsibility of the Facility. 3 4 II. OWNER'S RESPONSIBILITIES A. POLICIES. Owner shall establish the policies for the Facility. B. GOALS. Owner shall establish the short range and long range goals of the Facility. C. BUDGETS. Owner shall review and approve budgets for the operation of the Facility. D. CAPITAL'S PERFORMANCE. Owner shall review and evaluate the performance of Capital in carrying out the policies for the Facility. E. LEGAL COUNSEL. Owner shall obtain legal counsel to perform all necessary legal services relating to Owner's ownership of the Facility. F. AUDITS. Owner, at its discretion, may engage certified public accountants to perform annual audits of the Facility as well as prepare any other reports required for federal or state regulatory agencies which require licensure and/or certification. Every quarter, upon receipt of reasonable notice to Capital, all financial records pertaining to the Facility will be open for inspection and review by Owner's representatives. All labor and expense associated with such review shall be borne by Owner. G. DIRECTIVES. In order to assure proper coordination, Owner shall issue any directions concerning the operations of the Facility only through the President or Vice President of Capital. H. OPERATING REPORTS. During the term of this Agreement, Owner shall, within fourteen (14) days of issuance, furnish to Capital copies of any and all Facility-related reports, including the annual audit (if any). I. CHANGE OF RESIDENCY AGREEMENT. Owner shall not change the Residency Agreement without consulting with and seeking approval of Capital unless required to do so to comply with any applicable law or regulation. J. DECISIONS. Owner shall examine documents submitted by Capital and render decisions pertaining thereto promptly to avoid unreasonable delay. K. UNIFORM ACCOUNTS. Facility shall use the uniform chart of accounts recommended by Capital. 4 5 L. FURNISHING INFORMATION. Owner agrees at its expense to install and maintain a computer terminal at the Facility compatible with the mainframe computer currently in use by Capital and to transmit data to Capital via telephone lines. M. PURCHASE OF THE FACILITY. 1. The Owner hereby agrees that so long as Capital is not in default in the performance of any duty or any obligation hereunder, Capital shall have the option exercisable on not less than two (2) months nor more than four (4) months notice to purchase the Facility at a purchase price equal to the Fair Market Value of the Facility. In the event Capital purchases the Facility pursuant to this option, the Owner shall, upon receipt from Capital of the applicable purchase price, deliver to Capital a deed with covenants only against acts of the Owner conveying the entire interest of the Owner in and to the Facility to Capital subject to all Legal Requirements, permitted encumbrances, the claims of all persons claiming by, through or under Capital, any other matters assented to by Capital and all matters for which Capital has responsibility under this Agreement, and any encumbrance which Capital elects to assume. The applicable purchase price shall be paid in cash to the Owner, or as the Owner may direct, in federal or other immediately available funds except as otherwise mutually agreed by the Owner and Capital. All expenses of such conveyance, including, without limitation, title examination costs, standard (and extended) coverage title insurance premiums, attorneys, fees incurred by the Owner in connection with such conveyance, recording and transfer taxes and recording fees and other similar charges shall be paid by Capital. 2. The Owner agrees that Owner shall give written notice to Capital of receipt by Owner of an offer to purchase the Facility at least ninety (90) days before closing the sale related to such offer. Such notice shall specify all of the terms and conditions of such offer. 3. In the event that it becomes necessary to determine the Fair Market Value of the Facility for any purpose of this Agreement, the party required or permitted to give notice of such required determination shall include in the notice the name of a person selected to act as appraiser on its behalf. Within ten (10) days after receipt of any such notice, the Owner (or Capital, as the case may be) shall by notice to Capital (or the Owner, as the case may be) appoint a second person as appraiser on its behalf. 5 6 4. The appraisers thus appointed, each of whom must be a member of the American Institute of Real Estate Appraisers (or any successor organization thereto), shall, within forty-five (45) days after the date of the notice appointing the first appraiser, proceed to appraise the Facility to determine the Fair Market Value of the Facility as of the relevant date (giving effect to the impact, if any, of inflation from the date of their decision to the relevant date); provided, however, that if only one appraiser shall have been so appointed, or if two appraisers shall have been so appointed but only one such appraiser shall have made such determination within fifty (50) days after the making of Capital's or the Owner's request, then the determination of such appraiser shall be final and binding upon the parties. If two appraisers shall have been appointed and shall have made their determinations within the respective requisite periods set forth above and if the difference between the amounts so determined shall not exceed ten percent (10%) of the lesser of such amounts, then the Fair Market Value of the Facility shall be an amount equal to fifty percent (50%) of the sum of the amounts so determined. If the difference between the amounts so determined shall exceed ten percent (10%) of the lesser of such amounts, then such two appraisers shall have twenty (20) days to appoint a third appraiser, but if such appraisers fail to do so, then either party may request the American Arbitration Association or any successor organization thereto to appoint an appraiser within twenty (20) days of such request, and both parties shall be bound by any appointment so made within such twenty (20) day period. If no such appraiser shall have been appointed within such twenty (20) days or within ninety (90) days of the original request for a determination of Fair Market Value of the Facility, whichever is earlier, either the Owner or Capital may apply to any court having jurisdiction to have such appointment made by such court. Any appraiser appointed by the original appraisers, by the American Arbitration Association or by such court shall be instructed to determine the Fair Market Value of the Facility within thirty (30) days after appointment of such Appraiser. The determination of the appraiser which differs most in terms of dollar amount from the determinations of the other two appraisers shall be excluded, and fifty percent (50%) of the sum of the remaining two determinations shall be final and binding upon the Owner and Capital as the Fair Market Value of the Facility. 5. This provision for determination by appraisal shall be specifically enforceable to the extent such remedy is available under applicable law, and any determination hereunder shall be final and binding upon the parties except as otherwise provided by applicable law. The Owner and Capital shall each pay the fees and expenses of the appraiser appointed by it and each shall pay one-half of the fees and expenses of the third appraiser and one-half of all 6 7 other cost and expenses incurred in connection with each appraisal. 6. Capital shall agree to enter into a Subordination Agreement on reasonable terms and conditions with any lender from whom Owner obtains a loan secured by the Facility. 7. For purposes of this Paragraph II.M., except as otherwise expressly provided in this Agreement, the terms defined in this Paragraph II.M. shall have the following meanings assigned to them: Fair Market Value: The fair market value of the Facility shall not be less than Owner's cost basis (to include all hard and soft costs) plus lease-up costs in the Facility, including all capital additions, and including the land and all other portions of the Facility, and (a) determined in accordance with the appraisal procedures set forth in Paragraphs II.M. 2 and 3 or in such other manner as shall be mutually acceptable to Owner and Capital (including, without limitations as a negotiated percentage of total project costs) and (b) not taking into account any reduction in value resulting from any lien to which the Facility, the Owner or Capital is otherwise required to remove of the transaction. However, the positive or negative effect on the value of the Facility attributable to the interest rate, amortization schedule, maturity date, prepayment provisions and other terms and conditions of any lien on the Facility which is not so required or agreed to be removed shall be taken into account in determining the Fair Market Value of the Facility. The Fair Market Value shall be determined as the overall value based on due consideration of the "income" approach, the "comparable sales" approach, and the "replacement cost" approach. Legal Requirements: Collectively, all statues, ordinances, by-laws, codes, rules, regulations, restrictions, orders, judgments, decrees and injunctions (including, without limitation, all applicable building, environmental, health code, zoning, subdivision, and other land use and health-care licensing statutes, ordinances, by-laws, codes, rules and regulations), whether now or hereafter enacted, promulgated or issued by any governmental authority or accreditation body. III. INSURANCE A. Capital shall maintain, in full force and effect, at the Facility's expense, the following insurance protecting Owner and Capital and their officers and employees: 7 8 1. Employee's fidelity insurance 2. Workers compensation and employers liability insurance 3. Professional liability insurance 4. Comprehensive general public liability insurance and overlying umbrella liability coverage against loss or liability for damages for personal injury or death occurring on, in or about the Facility. Such policy or policies shall be written by a responsible insurance company or companies satisfactory to Owner and in kind and amounts satisfactory to Owner. Certificates of insurance showing compliance with the foregoing requirements shall be furnished by Capital to Owner. Certificates shall state that the policy or policies will not be canceled or altered without at least 30 days prior written notice to Owner. B. Owner shall procure and maintain, in full force and effect, at Owner's expense the following insurance protecting Owner and Capital and their officers and employees: 1. Property Insurance for loss or damage by fire and other perils insurable under the broad form of extended coverage insurance available in the area where the Facility is located, and improvements, and contents thereof, constituting all or any portion of the Facility. 2. Insurance for automobiles owned or hired by Owner and used in connection with the Facility. Such policy or policies shall be written by a responsible insurance company or companies satisfactory to Capital in kind and amounts satisfactory to Capital. Certificates of insurance showing compliance with the foregoing requirements shall be furnished by Owner to Capital. Certificates shall state that the policy or policies will not be canceled or altered without at lease thirty (30) days prior written notice to Capital. IV. TERM AND TERMINATION OF THIS AGREEMENT A. TERM AND TERMINATION WITHOUT CAUSE. This Agreement shall commence on the date set forth on the first page hereof. Payment under Section V shall commence on the date of the first resident move-in. The term of this Agreement shall continue for a period of ten (10) years from the date of the first resident move-in (the "Initial 8 9 Term") and continue for the Initial Term unless terminated by law or otherwise according to its terms. Capital shall have the option to extend the term of this Agreement for an additional five (5) year renewal option on the same terms and conditions as herein provided (the "Extended Term"). B. If Owner terminates the Agreement prior to the expiration of the Initial Term without cause or if Capital terminates this Agreement during the Initial Term for cause as provided in Paragraph IV. B. below, severance compensation in an amount equal to the then-current monthly management fee times the number of months remaining in the Initial Term shall be paid to Capital upon the effective date of termination. Any such termination shall be effective upon the expiration of the ninety (90) day period following the giving of the notice or on such later date as may be specified in the notice. C. TERMINATION FOR CAUSE. 1. This Agreement may be terminated by Owner for cause for the following reasons: a. In the event of material breach by Capital of a material term hereof, which breach is not cured within sixty (60) days after notice by Owner. b. In the event that a petition in bankruptcy is filed by Capital or its permitted assignee, or in the event Capital or its permitted assignee makes an assignment for the benefit of creditors or takes advantage of an insolvency act, by notice to Capital or assignee. c. In the event that (i) Capital's or any permitted assignee's corporate existence is dissolved and the duties under this Agreement are not assumed by Capital or an affiliate of Capital (ii), Capital or any permitted assignee ceases to do business for any reason, by notice to Capital or such assignee and the duties under this Agreement are not assumed by Capital or Capital's Affiliate. d. At any time after the Initial Term, with or without cause. e. In the event that the Facility is sold or otherwise transferred to any third party which is not an affiliate of Owner. 9 10 2. This Agreement may be terminated for cause by Capital in the event that Capital fails to receive reimbursement of reimbursable expenses or any compensation due Capital pursuant to the terms of this Agreement or any other compensation due Capital, and such failure continues for a period of sixty (60) days after Capital's written notice thereof to Owner; provided however, that this Agreement shall not be so terminated if Owner pays Capital all such expenses and compensation then due and payable on or before the expiration of said sixty (60) day period. Capital shall have the right to terminate this Agreement if Capital fails to receive reimbursements or compensation as a result of a subordination agreement by Capital in favor of a lender of Owner, but such termination shall not be considered for cause and shall not entitle Capital to the severance compensation provided for in Section IV.B. hereof. 3. No termination of this Agreement shall affect any obligation owing by either party hereto to the other which accrued prior to the effective date of such termination. D. COVENANTS SURVIVING TERMINATION. The termination of this Agreement shall not terminate the right of Owner or Capital to indemnification relating to events occurring during the term of this Agreement under Article VI. K. and to protection of Owner's or Capital's property rights under Article VI.B. V. COMPENSATION A. OPERATIONS MANAGEMENT FEES. Owner shall pay to Capital a fee in the amount set forth below, payable by the fifteenth day of each month. Payment shall commence on the date of the first resident move-in. 1. The amount to be paid monthly shall be 5% of Gross Revenues generated during the immediately proceeding month provided that the monthly management fee shall not be less than Five Thousand Dollars ($5,000.00) ("Monthly Management Fee"). "Gross Revenues" shall be as defined in Section V.B. The Monthly Management Fee for the Facility shall be payable monthly in arrears following calculations thereof upon submission of a monthly statement for such Facility from Capital. It is agreed between Owner and Capital that if the Gross Revenues of the Facility are insufficient to pay all disbursements, including the Monthly Management Fee or any portion thereof, then Owner shall remain responsible for such disbursements. It is further agreed between Owner and Capital that in no event will any disbursement be made to Owner from any Facility Account until all accrued 10 11 and unpaid fees to Capital and repayments, if any, to Capital for Capital's advancement of funds to cover any insufficiencies in such Facility's Rental or Payroll Account have been paid in full. 2. In addition to the Monthly Management Fee stated above, Owner shall also pay Capital a marketing lease-up fee of $500.00 for each unit leased at the time the unit is initially occupied. B. INCENTIVE MANAGEMENT FEE. In addition to the Monthly Management Fee stated above, as additional compensation for the services to be rendered by Capital during the Term, Capital shall be paid a fee (the "Incentive Management Fee") based upon performance standards which shall be mutually agreed upon by Owner and Capital. Unless otherwise mutually agreed upon by Owner and Capital, the Incentive Management Fee shall equal 25% of the amount, if any, by which Net Cash Flow for any annual or shorter period during the Term ending December 31 of any year or for the last period in the Term ending on the last day of the Term exceeds the agreed upon performance standards. For purposes of this Section V.B., "Net Cash Flow" shall mean, for any period for which such sum is being computed, the excess of (a) Gross Revenues for the Facility during such period over (b) Operating Expenses for the Facility during such period. "Gross Revenues" shall mean and refer, for any period for which such Gross Revenues are being determined, the sum of the total gross revenues of the Facility from operations received during such period, including all receipts from (i) rent of units at the Facility, (ii) rent or business interruption insurance, if any, (iii) revenue of the Facility for or on account of any and all goods provided and services rendered or activities during such period, (iv) reimbursements of expenses paid by the Facility which are to be borne by others, (v) deposits in the event of forfeiture thereof to the Facility and (vi) other revenues and receipts realized by the Facility from operations and customarily included in Net Cash Flow; Gross Revenues shall not include (i) security deposits received from residents and, if applicable, interest accrued thereon for the benefit of the residents until such deposits or interest are applied for rental payments; (ii) proceeds from the sale or dispositions of all or any part of such Facility; (iii) insurance proceeds received by Owner as a result of any insured loss (except proceeds for rent loss insurance) and proceeds from any condemnation action; (iv) capital contributions made by any partner of Owner; (v) loans by Owner or its partners; (vi) proceeds from capital, financing and any other transactions not in the ordinary course of operation of such Facility and (vii) advance rentals paid (until such time as they are earned). "Operating Expenses" shall mean, for any period for which such Operating Expenses are being determined, the sum of the total gross expenditures 11 12 of the Facility for operations during such period, including (A) all cash operating expenses (including the Monthly Management Fee, any Incentive Management Fee, all commissions and other fees, expenses and allowances paid to Capital), (B) any other expenditures of the Facility which are not treated as capital expenditures under generally accepted accounting practices, and (C) real estate taxes, personal property taxes and sales taxes; provided however, that Operating Expenses shall not include any payments or expenditures to the extent the sources or funds used for such payments or expenditures are not included in Gross Revenues. C. CERTAIN EXPENSES. In accordance with the Annual Budgets, the Facility will reimburse Capital for the cost of reasonable transportation, lodging and meal expenses for non-Facility-based employees of Capital or its outside consultants when traveling in connection with the performance of the services being performed pursuant to this Agreement, together with any reasonable long distance telephone expenses, copying, mailing or express shipments and other miscellaneous out of pocket expenses that relate to the marketing and management of the Facility. Relocation, education, professional memberships and licensing expenses of the Facility-based administrative employees shall also be an expense of the Facility subject to Owner's prior approval. VI. MISCELLANEOUS A. INSURANCE-SUBROGATION. No indemnity shall be paid to the other party under this Agreement where the claim, damage, liability, loss or expense incurred was required to be insured against by such other party. Any insurance policies obtained by the parties pursuant to this Agreement shall contain provisions or have the effect of waiving any right of subrogation by the insurer of one party against the other party or its insurer. B. PROPERTY OF CAPITAL. Trade names, including the name "The Waterford," architectural and design concepts and plans, ideas and documents, forms, occupancy development material, specifically for and related to Owner and/or its Facility shall be the exclusive property of Owner. Trade names, ideas and documents, forms and occupancy development material, not directly related to the Facility and supplied by Capital are to be considered proprietary and will remain the property of Capital. Either party may only use such materials which are the property of the other and information in the operation and management of the Facility, and may not use such materials or information after termination of this Agreement for the development or expansion of the Facility or for new projects for itself or others without the written consent of the party owning such material or information. C. STATUS OF PARTIES. It is expressly understood and agreed that Capital shall act as an independent contractor in the performance of this Agreement. No provision hereof 12 13 shall be deemed or construed to create a partnership or a joint venture between Owner with respect to the Facility or otherwise. D. ADDITIONAL ACTION. In order to carry out the intent and spirit of this Agreement, Owner and Capital will do all acts and things necessary including the execution of other agreements. E. ENTIRE AGREEMENT. This Agreement sets forth the entire Agreement between Capital and Owner. Any change or modification of this Agreement must be in writing and signed by all parties hereto. F. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their successors and assigns. G. ASSIGNMENT, ETC. Except for an assignment by Capital to an affiliate, Capital shall not, without Owner's prior written approval (which approval shall not be unreasonably withheld), assign any of its rights or obligations under this Agreement. H. GOVERNING LAW. This Agreement, its interpretation, validity and performance shall be governed by the laws of the State of Texas. I. NON-COMPETE. Without the prior written consent of Capital, for a period of three years following termination of this Agreement, Owner will not employ or engage any person who was a Capital employee assigned to the administrative staff of the Facility at any time during the last twelve (12) months of the term of this Agreement. This section shall not apply to Owner upon sale of the Facility or termination of the Agreement by Owner for cause and shall not apply to any lender of Owner which takes over control of the Facility. J. CONDITIONS BEYOND CONTROL OF PARTIES. Neither party shall be held liable for failure to comply with any of the terms of this Agreement when such failure has been caused solely by fire, labor dispute, strike, war, insurrection, government restrictions, force majeure, or act of God beyond the control and without fault on the part of the party involved, provided such party uses due diligence to remedy such default. Circumstances are likely to arise from time to time which may require that budgets be exceeded, and Capital shall not be liable for budget overruns. K. INDEMNIFICATION. Owner will indemnify and hold harmless Capital from any and all liability arising incident to Owner's performance of its duties under this Agreement. Capital will indemnify and hold harmless Owner from any and all liabilities arising incident to Capital's performance of its duties under this Agreement. 13 14 Owner shall also indemnify and hold Capital harmless against any and all losses, costs or expenses incurred by Capital by reason of, arising out of or in any way related to noncompliance by the Facility with all applicable state, federal and local laws, ordinances, rules and regulations relating to the physical condition of the property of the Facility, provided Capital shall promptly notify Owner of Capital's knowledge of any such noncompliance. L. ARBITRATION. In the event of any dispute, claim or controversy of any kind between the parties, concerning this Agreement or the termination of this Agreement, the matter shall be submitted to arbitration in accordance with rules of the American Arbitration Association. The parties jointly shall agree on an arbitrator. If the parties are unable to agree, in good faith within a reasonable time, on the selection of an arbitrator, either party may request appointment of an arbitrator chosen by the American Arbitration Association who shall be the Selected Arbitrator. Such arbitrator shall be limited in his decision to a choice between the final position as requested by each party. Said arbitration shall be held in Dallas/Ft. Worth, Texas or such other place as is mutually agreeable. The arbitration decision shall be final and binding on both parties unless the arbitration is fraudulent or so grossly erroneous as to necessarily imply bad faith. Costs of arbitration are to be shared by both parties equally, provided that the arbitrator may choose to award the costs of arbitration against the losing party if the arbitrator determined that the final position urged by the losing party was not reasonable. M. CONTROL OVER OTHER AGREEMENT. In the event that any of the terms or conditions set forth herein are inconsistent with or contrary to any of the terms and conditions set forth in the Development and Turnkey Services Agreement dated September 16, 1997 between Owner and Capital Senior Living Corporation, then the terms and conditions set forth herein shall control. TRI POINT COMMUNITIES, L.P. CAPITAL SENIOR LIVING, INC. By: Capital Retirement Group, Inc. Its General Partner By: /s/ DAVID. R. BRICKMAN By: /s/ DAVID R. BRICKMAN --------------------------------- ------------------------------- Name: David R. Brickman Name: David R. Brickman Title: Vice President Title: Vice President 14 EX-10.38 7 MANAGEMENT AGREEMENT DATED 2/3/98 1 EXHIBIT 10.38 Shreveport, LA MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT (the "Agreement") entered into this 3rd day of February 1998, by and between TRI POINT COMMUNITIES, L.P., ("Owner"), a limited partnership organized under the laws of the State of Texas, and CAPITAL SENIOR LIVING, INC. ("Capital"), a corporation organized under the laws of the State of Texas. PREAMBLE OWNER by this Agreement is engaging Capital to provide management services relating to the operation of a senior living community to be located in Shreveport, Louisiana on the land identified in Exhibit A. This Agreement is founded on the following assumptions: Owner retains primary responsibility to: (a) Establish the policies of the Facility and to plan for its short-range and long-range goals. (b) Review and evaluate the performance of Capital in carrying out the established policies and in attaining the goals established by Owner. (c) Annually review and approve the budget. (d) Annually review the policies and goals which have been established. Capital assumes primary responsibility to: (a) Implement the policies established by Owner. (b) Supervise the day-to-day management of the Facility, including all resident activities. (c) Provide to Owner full, timely and accurate information as to past operations. (d) Provide to Owner projections and recommendations relating to the future operations of the Facility. The parties therefore agree as follows: 2 I. RESPONSIBILITIES OF CAPITAL A. RECOMMENDED POLICIES. Capital shall recommend policies and goals to be established by Owner and shall evaluate such policies and goals on an ongoing basis. B. MANAGEMENT DUTIES. Capital shall supervise the operation of the Facility, provide management services, install operating procedures and oversee day-to-day operations, all subject to and in accordance with the budgets approved by and policies established by Owner. C. MARKETING DUTIES. Capital shall manage and supervise the marketing program. Capital shall establish and periodically review the residency agreement and if required, recommend changes thereof. D. EMPLOYEES. All Facility-based Employees, including the administrative employees, shall be employees of Capital. Capital shall have sole authority over Facility-based Employees and Non-Facility-based Employees who are directly responsible for the Facility and all matters pertaining thereto and shall be responsible for all actions and omissions of such employees. All costs of hiring, equipping and providing the services of Facility-based Employees, including, but not limited to, compensation, health insurance, employer liability insurance, payroll taxes, bonding, workers compensation insurance, benefits and vacations shall be an expense of Capital. To the extent the above-stated expenses are incurred in accordance with the Facility Budget or approved by Owner, they shall be reimbursed from the Facility operations or Owner as the case may be. E. OPERATING PROCEDURES. Capital shall develop, install and maintain operating procedures, systems and controls. F. FACILITY EXPANSION. Capital shall make recommendations regarding remodeling or expansion of the Facility. G. BUDGETS. Capital shall prepare for review and approval by Owner based on reasonable standards annual operating budgets for revenue, expense and cash flow of the Facility and a capital expenditures budget. Budgets shall be prepared in advance of each fiscal year. Cash flow projections shall accompany each operating budget. Any changes to the budgets must be approved by Owner. H. FINANCIAL CONTROLS. Capital shall establish and maintain a system of financial controls for the Facility. I. MONTHLY FINANCIAL STATEMENTS. Capital shall provide to Owner, on a monthly basis, financial statements and related financial reports. Such statements and reports shall be provided by the 20th day after the end of the month. These reports shall be in the form attached as Exhibit "B." 2 3 J. MARKETING REPORTS. Capital shall, on a weekly and monthly basis, provide sales and occupancy reports to Owner, as well as the results of the annual resident satisfaction survey. K. LEGAL COUNSEL. Capital, at Facility expense, shall coordinate with Owner the utilization of legal counsel relating to Facility operations. L. RENTAL COLLECTIONS AND DISBURSEMENTS. Capital shall collect the revenues from the residents and, on behalf of Owner, deposit all such funds in a residential depository account at a FDIC insured bank approved by Owner. The style of the account shall be in the name of the Facility with designated representatives from Owner and Capital being the only parties authorized to draw from said account. On an as needed basis, Capital shall transfer the funds from the above stated account into an Operating Expense Account in the name of the Facility. The account shall be in a FDIC insured bank approved by Owner. The style of the account shall be in the name of the Facility with designated representatives from Owner and Capital being the only parties authorized to draw from said account. Capital shall pay out of such Operating Expense Account all operating expenses for which payment has been approved in accordance with the budget or approved by Owner (including Capital's Management Fee and any other sums due to Capital from Owner), and all other sums properly payable pursuant to any of the provisions of this Agreement. Capital shall hold, remit or expend the balance of such funds, if any, as Owner may direct. These funds shall not be co-mingled with funds from any other projects and/or facilities managed and/or operated by Capital. M. ACCOUNTING SYSTEMS AND SOFTWARE. Capital shall provide to Owner, during the term of this Agreement, appropriate on-site accounting systems and software, which shall include complete accounting, bookkeeping and record keeping services for the Facility, specifically including, but not limited to, resident billings, accounts payable, accounts receivable, general ledger and inventory records and maintain demographic information on the residents. Acquisition of software for Facility based operations, software maintenance and update charges will be budgeted expenses of the Facility. Payroll processing may be delegated to a third party, the cost of which will be the responsibility of the Facility. II. OWNER'S RESPONSIBILITIES A. POLICIES. Owner shall establish the policies for the Facility. B. GOALS. Owner shall establish the short range and long range goals of the Facility. C. BUDGETS. Owner shall review and approve budgets for the operation of the Facility. D. CAPITAL'S PERFORMANCE. Owner shall review and evaluate the performance of Capital in carrying out the policies for the Facility. 3 4 E. LEGAL COUNSEL. Owner shall obtain legal counsel to perform all necessary legal services relating to Owner's ownership of the Facility. F. AUDITS. Owner, at its discretion, may engage certified public accountants to perform annual audits of the Facility as well as prepare any other reports required for federal or state regulatory agencies which require licensure and/or certification. Every quarter, upon receipt of reasonable notice to Capital, all financial records pertaining to the Facility will be open for inspection and review by Owner's representatives. All labor and expense associated with such review shall be borne by Owner. G. DIRECTIVES. In order to assure proper coordination, Owner shall issue any directions concerning the operations of the Facility only through the President or Vice President of Capital. H. OPERATING REPORTS. During the term of this Agreement, Owner shall, within fourteen (14) days of issuance, furnish to Capital copies of any and all Facility-related reports, including the annual audit (if any). I. CHANGE OF RESIDENCY AGREEMENT. Owner shall not change the Residency Agreement without consulting with and seeking approval of Capital unless required to do so to comply with any applicable law or regulation. J. DECISIONS. Owner shall examine documents submitted by Capital and render decisions pertaining thereto promptly to avoid unreasonable delay. K. UNIFORM ACCOUNTS. Facility shall use the uniform chart of accounts recommended by Capital. L. FURNISHING INFORMATION. Owner agrees at its expense to install and maintain a computer terminal at the Facility compatible with the mainframe computer currently in use by Capital and to transmit data to Capital via telephone lines. M. PURCHASE OF THE FACILITY. 1. The Owner hereby agrees that so long as Capital is not in default in the performance of any duty or any obligation hereunder, Capital shall have the option exercisable on not less than two (2) months nor more than four (4) months notice to purchase the Facility at a purchase price equal to the Fair Market Value of the Facility. In the event Capital purchases the Facility pursuant to this option, the Owner shall, upon receipt from Capital of the applicable purchase price, deliver to Capital a deed with covenants only against acts of the Owner conveying the entire interest of the Owner in and to the Facility to Capital subject to all Legal Requirements, permitted encumbrances, the claims of all persons claiming by, through or under Capital, 4 5 any other matters assented to by Capital and all matters for which Capital has responsibility under this Agreement, and any encumbrance which Capital elects to assume. The applicable purchase price shall be paid in cash to the Owner, or as the Owner may direct, in federal or other immediately available funds except as otherwise mutually agreed by the Owner and Capital. All expenses of such conveyance, including, without limitation, title examination costs, standard (and extended) coverage title insurance premiums, attorneys, fees incurred by the Owner in connection with such conveyance, recording and transfer taxes and recording fees and other similar charges shall be paid by Capital. 2. The Owner agrees that Owner shall give written notice to Capital of receipt by Owner of an offer to purchase the Facility at least ninety (90) days before closing the sale related to such offer. Such notice shall specify all of the terms and conditions of such offer. 3. In the event that it becomes necessary to determine the Fair Market Value of the Facility for any purpose of this Agreement, the party required or permitted to give notice of such required determination shall include in the notice the name of a person selected to act as appraiser on its behalf. Within ten (10) days after receipt of any such notice, the Owner (or Capital, as the case may be) shall by notice to Capital (or the Owner, as the case may be) appoint a second person as appraiser on its behalf. 4. The appraisers thus appointed, each of whom must be a member of the American Institute of Real Estate Appraisers (or any successor organization thereto), shall, within forty-five (45) days after the date of the notice appointing the first appraiser, proceed to appraise the Facility to determine the Fair Market Value of the Facility as of the relevant date (giving effect to the impact, if any, of inflation from the date of their decision to the relevant date); provided, however, that if only one appraiser shall have been so appointed, or if two appraisers shall have been so appointed but only one such appraiser shall have made such determination within fifty (50) days after the making of Capital's or the Owner's request, then the determination of such appraiser shall be final and binding upon the parties. If two appraisers shall have been appointed and shall have made their determinations within the respective requisite periods set forth above and if the difference between the amounts so determined shall not exceed ten percent (10%) of the lesser of such amounts, then the Fair Market Value of the Facility shall be an amount equal to fifty percent (50%) of the sum of the amounts so determined. If the difference between the amounts so determined shall exceed ten percent (10%) of the lesser of such amounts, then such two appraisers shall have twenty (20) days to appoint a third appraiser, but if such appraisers fail to do so, then either party may request the American Arbitration Association or any successor 5 6 organization thereto to appoint an appraiser within twenty (20) days of such request, and both parties shall be bound by any appointment so made within such twenty (20) day period. If no such appraiser shall have been appointed within such twenty (20) days or within ninety (90) days of the original request for a determination of Fair Market Value of the Facility, whichever is earlier, either the Owner or Capital may apply to any court having jurisdiction to have such appointment made by such court. Any appraiser appointed by the original appraisers, by the American Arbitration Association or by such court shall be instructed to determine the Fair Market Value of the Facility within thirty (30) days after appointment of such Appraiser. The determination of the appraiser which differs most in terms of dollar amount from the determinations of the other two appraisers shall be excluded, and fifty percent (50%) of the sum of the remaining two determinations shall be final and binding upon the Owner and Capital as the Fair Market Value of the Facility. 5. This provision for determination by appraisal shall be specifically enforceable to the extent such remedy is available under applicable law, and any determination hereunder shall be final and binding upon the parties except as otherwise provided by applicable law. The Owner and Capital shall each pay the fees and expenses of the appraiser appointed by it and each shall pay one-half of the fees and expenses of the third appraiser and one-half of all other cost and expenses incurred in connection with each appraisal. 6. Capital shall agree to enter into a Subordination Agreement on reasonable terms and conditions with any lender from whom Owner obtains a loan secured by the Facility. 7. For purposes of this Paragraph II.M., except as otherwise expressly provided in this Agreement, the terms defined in this Paragraph II.M. shall have the following meanings assigned to them: Fair Market Value: The fair market value of the Facility shall not be less than Owner's cost basis (to include all hard and soft costs) plus lease-up costs in the Facility, including all capital additions, and including the land and all other portions of the Facility, and (a) determined in accordance with the appraisal procedures set forth in Paragraphs II.M. 2. and 3. or in such other manner as shall be mutually acceptable to Owner and Capital (including, without limitations as a negotiated percentage of total project costs) and (b) not taking into account any reduction in value resulting from any lien to which the Facility, the Owner or Capital is otherwise required to remove of the transaction. However, the positive or negative effect on the value of the Facility attributable to the interest rate, amortization schedule, maturity date, prepayment provisions and other terms and conditions of any lien on the Facility which is not so required or agreed to be removed shall be taken into 6 7 account in determining the Fair Market Value of the Facility. The Fair Market Value shall be determined as the overall value based on due consideration of the "income" approach, the "comparable sales" approach, and the "replacement cost" approach. Legal Requirements: Collectively, all statues, ordinances, by-laws, codes, rules, regulations, restrictions, orders, judgments, decrees and injunctions (including, without limitation, all applicable building, environmental, health code, zoning, subdivision, and other land use and health-care licensing statutes, ordinances, by-laws, codes, rules and regulations), whether now or hereafter enacted, promulgated or issued by any governmental authority or accreditation body. III. INSURANCE. A. Capital shall maintain, in full force and effect, at the Facility's expense, the following insurance protecting Owner and Capital and their officers and employees: 1. Employee's fidelity insurance; 2. Workers compensation and employers liability insurance; 3. Professional liability insurance; and 4. Comprehensive general public liability insurance and overlying umbrella liability coverage against loss or liability for damages for personal injury or death occurring on, in or about the Facility. Such policy or policies shall be written by a responsible insurance company or companies satisfactory to Owner and in kind and amounts satisfactory to Owner. Certificates of insurance showing compliance with the foregoing requirements shall be furnished by Capital to Owner. Certificates shall state that the policy or policies will not be canceled or altered without at least 30 days prior written notice to Owner. B. Owner shall procure and maintain, in full force and effect, at Owner's expense the following insurance protecting Owner and Capital and their officers and employees: 1. Property Insurance for loss or damage by fire and other perils insurable under the broad form of extended coverage insurance available in the area where the Facility is located, and improvements, and contents thereof, constituting all or any portion of the Facility. 2. Insurance for automobiles owned or hired by Owner and used in connection with the Facility. 7 8 Such policy or policies shall be written by a responsible insurance company or companies satisfactory to Capital in kind and amounts satisfactory to Capital. Certificates of insurance showing compliance with the foregoing requirements shall be furnished by Owner to Capital. Certificates shall state that the policy or policies will not be canceled or altered without at lease thirty (30) days prior written notice to Capital. IV. TERM AND TERMINATION OF THIS AGREEMENT. A. TERM AND TERMINATION WITHOUT CAUSE. This Agreement shall commence on the date set forth on the first page hereof. Payment under Section V shall commence on the date of the first resident move-in. The term of this Agreement shall continue for a period of ten (10) years from the date of the first resident move-in (the "Initial Term") and continue for the Initial Term unless terminated by law or otherwise according to its terms. Capital shall have the option to extend the term of this Agreement for an additional five (5) year renewal option on the same terms and conditions as herein provided (the "Extended Term"). B. If Owner terminates the Agreement prior to the expiration of the Initial Term without cause or if Capital terminates this Agreement during the Initial Term for cause as provided in Paragraph IV. B. below, severance compensation in an amount equal to the then-current monthly management fee times the number of months remaining in the Initial Term shall be paid to Capital upon the effective date of termination. Any such termination shall be effective upon the expiration of the ninety (90) day period following the giving of the notice or on such later date as may be specified in the notice. C. TERMINATION FOR CAUSE. 1. This Agreement may be terminated by Owner for cause for the following reasons: a. In the event of material breach by Capital of a material term hereof, which breach is not cured within sixty (60) days after notice by Owner. b. In the event that a petition in bankruptcy is filed by Capital or its permitted assignee, or in the event Capital or its permitted assignee makes an assignment for the benefit of creditors or takes advantage of an insolvency act, by notice to Capital or assignee. c. In the event that (i) Capital's or any permitted assignee's corporate existence is dissolved and the duties under this Agreement are not 8 9 assumed by Capital or an affiliate of Capital (ii), Capital or any permitted assignee ceases to do business for any reason, by notice to Capital or such assignee and the duties under this Agreement are not assumed by Capital or Capital's Affiliate. d. At any time after the Initial Term, with or without cause. e. In the event that the Facility is sold or otherwise transferred to any third party which is not an affiliate of Owner. 2. This Agreement may be terminated for cause by Capital in the event that Capital fails to receive reimbursement of reimbursable expenses or any compensation due Capital pursuant to the terms of this Agreement or any other compensation due Capital, and such failure continues for a period of sixty (60) days after Capital's written notice thereof to Owner; provided however, that this Agreement shall not be so terminated if Owner pays Capital all such expenses and compensation then due and payable on or before the expiration of said sixty (60) day period. Capital shall have the right to terminate this Agreement if Capital fails to receive reimbursements or compensation as a result of a subordination agreement by Capital in favor of a lender of Owner, but such termination shall not be considered for cause and shall not entitle Capital to the severance compensation provided for in Section IV.B. hereof. 3. No termination of this Agreement shall affect any obligation owing by either party hereto to the other which accrued prior to the effective date of such termination. C. COVENANTS SURVIVING TERMINATION. The termination of this Agreement shall not terminate the right of Owner or Capital to indemnification relating to events occurring during the term of this Agreement under Article VI. K. and to protection of Owner's or Capital's property rights under Article VI.B. V. COMPENSATION A. OPERATIONS MANAGEMENT FEES. Owner shall pay to Capital a fee in the amount set forth below, payable by the fifteenth day of each month. Payment shall commence on the date of the first resident move-in. 1. The amount to be paid monthly shall be 5% of Gross Revenues generated during the immediately proceeding month provided that the monthly management fee shall not be less than Five Thousand Dollars ($5,000.00) 9 10 ("Monthly Management Fee"). "Gross Revenues" shall be as defined in Section V.B. The Monthly Management Fee for the Facility shall be payable monthly in arrears following calculations thereof upon submission of a monthly statement for such Facility from Capital. It is agreed between Owner and Capital that if the Gross Revenues of the Facility are insufficient to pay all disbursements, including the Monthly Management Fee or any portion thereof, then Owner shall remain responsible for such disbursements. It is further agreed between Owner and Capital that in no event will any disbursement be made to Owner from any Facility Account until all accrued and unpaid fees to Capital and repayments, if any, to Capital for Capital's advancement of funds to cover any insufficiencies in such Facility's Rental or Payroll Account have been paid in full. 2. In addition to the Monthly Management Fee stated above, Owner shall also pay Capital a marketing lease-up fee of $500.00 for each unit leased at the time the unit is initially occupied. B. INCENTIVE MANAGEMENT FEE. In addition to the Monthly Management Fee stated above, as additional compensation for the services to be rendered by Capital during the Term, Capital shall be paid a fee (the "Incentive Management Fee") based upon performance standards which shall be mutually agreed upon by Owner and Capital. Unless otherwise mutually agreed upon by Owner and Capital, the Incentive Management Fee shall equal 25% of the amount, if any, by which Net Cash Flow for any annual or shorter period during the Term ending December 31 of any year or for the last period in the Term ending on the last day of the Term exceeds the agreed upon performance standards. For purposes of this Section V.B., "Net Cash Flow" shall mean, for any period for which such sum is being computed, the excess of (a) Gross Revenues for the Facility during such period over (b) Operating Expenses for the Facility during such period. "Gross Revenues" shall mean and refer, for any period for which such Gross Revenues are being determined, the sum of the total gross revenues of the Facility from operations received during such period, including all receipts from (i) rent of units at the Facility, (ii) rent or business interruption insurance, if any, (iii) revenue of the Facility for or on account of any and all goods provided and services rendered or activities during such period, (iv) reimbursements of expenses paid by the Facility which are to be borne by others, (v) deposits in the event of forfeiture thereof to the Facility and (vi) other revenues and receipts realized by the Facility from operations and customarily included in Net Cash Flow; Gross Revenues shall not include (i) security deposits received from residents and, if applicable, interest accrued thereon for the benefit of the residents until such deposits or interest are applied for rental payments; (ii) proceeds from the sale or dispositions of all or any part of such Facility; (iii) insurance proceeds 10 11 received by Owner as a result of any insured loss (except proceeds for rent loss insurance) and proceeds from any condemnation action; (iv) capital contributions made by any partner of Owner; (v) loans by Owner or its partners; (vi) proceeds from capital, financing and any other transactions not in the ordinary course of operation of such Facility and (vii) advance rentals paid (until such time as they are earned). "Operating Expenses" shall mean, for any period for which such Operating Expenses are being determined, the sum of the total gross expenditures of the Facility for operations during such period, including (A) all cash operating expenses (including the Monthly Management Fee, any Incentive Management Fee, all commissions and other fees, expenses and allowances paid to Capital), (B) any other expenditures of the Facility which are not treated as capital expenditures under generally accepted accounting practices, and (C) real estate taxes, personal property taxes and sales taxes; provided however, that Operating Expenses shall not include any payments or expenditures to the extent the sources or funds used for such payments or expenditures are not included in Gross Revenues. C. CERTAIN EXPENSES. In accordance with the Annual Budgets, the Facility will reimburse Capital for the cost of reasonable transportation, lodging and meal expenses for non-Facility-based employees of Capital or its outside consultants when traveling in connection with the performance of the services being performed pursuant to this Agreement, together with any reasonable long distance telephone expenses, copying, mailing or express shipments and other miscellaneous out of pocket expenses that relate to the marketing and management of the Facility. Relocation, education, professional memberships and licensing expenses of the Facility-based administrative employees shall also be an expense of the Facility subject to Owner's prior approval. VI. MISCELLANEOUS A. INSURANCE-SUBROGATION. No indemnity shall be paid to the other party under this Agreement where the claim, damage, liability, loss or expense incurred was required to be insured against by such other party. Any insurance policies obtained by the parties pursuant to this Agreement shall contain provisions or have the effect of waiving any right of subrogation by the insurer of one party against the other party or its insurer. B. PROPERTY OF CAPITAL. Trade names, including the name "The Waterford," architectural and design concepts and plans, ideas and documents, forms, occupancy development material, specifically for and related to Owner and/or its Facility shall be the exclusive property of Owner. Trade names, ideas and documents, forms and occupancy development material, not directly related to the Facility and supplied by Capital are to be considered proprietary and will remain the property of Capital. Either party may only use such materials which are the property of the other and information in the operation and management of the Facility, and may not use such materials or information after termination of this Agreement for the development or 11 12 expansion of the Facility or for new projects for itself or others without the written consent of the party owning such material or information. C. STATUS OF PARTIES. It is expressly understood and agreed that Capital shall act as an independent contractor in the performance of this Agreement. No provision hereof shall be deemed or construed to create a partnership or a joint venture between Owner with respect to the Facility or otherwise. D. ADDITIONAL ACTION. In order to carry out the intent and spirit of this Agreement, Owner and Capital will do all acts and things necessary including the execution of other agreements. E. ENTIRE AGREEMENT. This Agreement sets forth the entire Agreement between Capital and Owner. Any change or modification of this Agreement must be in writing and signed by all parties hereto. F. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their successors and assigns. G. ASSIGNMENT, ETC. Except for an assignment by Capital to an affiliate, Capital shall not, without Owner's prior written approval (which approval shall not be unreasonably withheld), assign any of its rights or obligations under this Agreement. H. GOVERNING LAW. This Agreement, its interpretation, validity and performance shall be governed by the laws of the State of Texas. I. NON-COMPETE. Without the prior written consent of Capital, for a period of three years following termination of this Agreement, Owner will not employ or engage any person who was a Capital employee assigned to the administrative staff of the Facility at any time during the last twelve (12) months of the term of this Agreement. This section shall not apply to Owner upon sale of the Facility or termination of the Agreement by Owner for cause and shall not apply to any lender of Owner which takes over control of the Facility. J. CONDITIONS BEYOND CONTROL OF PARTIES. Neither party shall be held liable for failure to comply with any of the terms of this Agreement when such failure has been caused solely by fire, labor dispute, strike, war, insurrection, government restrictions, force majeure, or act of God beyond the control and without fault on the part of the party involved, provided such party uses due diligence to remedy such default. Circumstances are likely to arise from time to time which may require that budgets be exceeded, and Capital shall not be liable for budget overruns. K. INDEMNIFICATION. Owner will indemnify and hold harmless Capital from any and all liability arising incident to Owner's performance of its duties under this Agreement. 12 13 Capital will indemnify and hold harmless Owner from any and all liabilities arising incident to Capital's performance of its duties under this Agreement. Owner shall also indemnify and hold Capital harmless against any and all losses, costs or expenses incurred by Capital by reason of, arising out of or in any way related to noncompliance by the Facility with all applicable state, federal and local laws, ordinances, rules and regulations relating to the physical condition of the property of the Facility, provided Capital shall promptly notify Owner of Capital's knowledge of any such noncompliance. L. ARBITRATION. In the event of any dispute, claim or controversy of any kind between the parties, concerning this Agreement or the termination of this Agreement, the matter shall be submitted to arbitration in accordance with rules of the American Arbitration Association. The parties jointly shall agree on an arbitrator. If the parties are unable to agree, in good faith within a reasonable time, on the selection of an arbitrator, either party may request appointment of an arbitrator chosen by the American Arbitration Association who shall be the Selected Arbitrator. Such arbitrator shall be limited in his decision to a choice between the final position as requested by each party. Said arbitration shall be held in Dallas/Ft. Worth, Texas or such other place as is mutually agreeable. The arbitration decision shall be final and binding on both parties unless the arbitration is fraudulent or so grossly erroneous as to necessarily imply bad faith. Costs of arbitration are to be shared by both parties equally, provided that the arbitrator may choose to award the costs of arbitration against the losing party if the arbitrator determined that the final position urged by the losing party was not reasonable. M. CONTROL OVER OTHER AGREEMENT. In the event that any of the terms or conditions set forth herein are inconsistent with or contrary to any of the terms and conditions set forth in the Development and Turnkey Services Agreement dated September 16, 1997, between Owner and Capital Senior Living Corporation, then the terms and conditions set forth herein shall control. TRI POINT COMMUNITIES, L.P. CAPITAL SENIOR LIVING, INC. By: Capital Retirement Group, Inc. Its General Partner By: /s/ DAVID R. BRICKMAN By: /s/ CHARLES ALLISON ---------------------------- -------------------------- Name: David R. Brickman Name: Charles Allison --------------------- --------------------- Title: Vice President Title: Vice President --------------------- -------------------- 13 EX-21.1 8 SUBSIDIARIES OF THE COMPANY 1 Exhibit 21.1 - Subsidiaries
- -------------------------------------------------------------------------------------------------- Jurisdiction of Name Organization Percentage 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% - -------------------------------------------------------------------------------------------------- HealthCare Properties, L.P. Delaware 56% - --------------------------------------------------------------------------------------------------
EX-27.1 9 FINANCIAL DATA SCHEDULE
5 0001043000 CAPITAL SENIOR LIVING CORPORATION 1 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 48,125,225 13,741,940 2,294,095 (301,042) 0 50,607,707 54,780,266 (13,659,818) 117,370,910 7,747,755 0 0 0 197,173 92,362,447 117,370,910 0 34,335,704 0 25,903,401 1,936,122 0 2,022,494 4,473,687 792,524 0 0 0 0 3,681,163 0.33 0.33
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