UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 29, 2003
Capital Senior Living Corporation
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(Exact name of registrant as specified in its charter)
Delaware 1-13445 75-2678809
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification No.)
14160 Dallas Parkway
Suite 300
Dallas Texas 75254
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 770-5600
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(Former name or former address, if changed since last report)
This amendment (the "Amendment") to the Current Report on Form 8-K, dated
July 28, 2003, and filed on July 29, 2003 (the "Original Form 8-K") by Capital
Senior Living Corporation (the "Company") is submitted to amend and restate Item
7 of the Original Form 8-K to provide financial data related to the purchase of
the remaining interest in Triad Senior Living II, LP, Triad Senior Living III,
LP, Triad Senior Living IV, LP and Triad Senior Living V, LP (the "Triad
Entities") pursuant to the terms of Partnership Interest Purchase Agreements.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of the Businesses Acquired. The following audited
financial statements of the Triad Entities are hereby included as part of this
report:
(i) Financial Statements of Triad Senior Living II, LP
Balance Sheets as of June 30, 2003 and December 31, 2002 A-1
Unaudited Statements of Operations for three and six months
ended June 30, 2003 and 2002 A-2
Unaudited Statements of Partners' Deficit and Comprehensive Loss for the
six months ended June 30, 2003 A-3
Unaudited Statements of Cash Flows for the six months ended
June 30, 2003 and 2002 A-4
Notes to Unaudited Financial Statements for the six months ended
June 30, 2003 A-5
Report of Independent Certified Public Accountants B-1
Balance Sheets as of December 31, 2002 and 2001 B-2
Statements of Operations for the years ended December 31, 2002
and 2001 B-4
Statements of Partners' Deficit and Comprehensive Loss for the years
ended December 31, 2002 and 2001 B-5
Statements of Cash Flows for the years ended
December 31, 2002 and 2001 B-6
Notes to Financial Statements B-8
(ii) Financial Statements of Triad Senior Living III, LP
Balance Sheets as of June 30, 2003 and December 31, 2002 C-1
Unaudited Statements of Operations for three and six months
ended June 30, 2003 and 2002 C-2
Unaudited Statements of Partners' Deficit for the six months
ended June 30, 2003 C-3
Unaudited Statements of Cash Flows for the six months ended
June 30, 2003 and 2002 C-4
Notes to Unaudited Financial Statements for the six months ended
June 30, 2003 C-5
Report of Independent Certified Public Accountants D-1
Balance Sheets as of December 31, 2002 and 2001 D-2
Statements of Operations for the years ended December 31, 2002 and 2001 D-4
Statements of Partners' Deficit for the years
ended December 31, 2002 and 2001 D-5
Statements of Cash Flows for the years ended
December 31, 2002 and 2001 D-6
Notes to Financial Statements D-7
(iii) Financial Statements of Triad Senior Living IV, LP
Balance Sheets as of June 30, 2003 and December 31, 2002 E-1
Unaudited Statements of Operations for the three and six months
ended June 30, 2003 and 2002 E-2
Unaudited Statements of Partners' Deficit for the six months
ended June 30, 2003 E-3
2
Unaudited Statements of Cash Flows for the six months ended
June 30, 2003 and 2002 E-4
Notes to Unaudited Financial Statement for the six months ended
June 30, 2003 E-5
Report of Independent Certified Public Accountants F-1
Balance Sheets as of December 31, 2002 and 2001 F-2
Statements of Operations for the years ended December 31, 2002 and 2001 F-4
Statements of Partners' Deficit for the years
ended December 31, 2002 and 2001 F-5
Statements of Cash Flows for the years ended
December 31, 2002 and 2001 F-6
Notes to Financial Statements F-8
(iv) Financial Statements of Triad Senior Living V, LP
Balance Sheets as of June 30, 2003 and December 31, 2002 G-1
Unaudited Statements of Operations for three and six months
ended June 30, 2003 and 2002 G-2
Unaudited Statements of Partners' Deficit for the six months
ended June 30, 2003 G-3
Unaudited Statements of Cash Flows for the six months ended
June 30, 2003 and 2002 G-4
Notes to Unaudited Financial Statement for the six months ended
June 30, 2003 G-5
Report of Independent Certified Public Accountants H-1
Balance Sheets as of December 31, 2002 and 2001 H-2
Statements of Operations for the years ended December 31, 2002 and 2001 H-3
Statements of Partners' Deficit for the years
ended December 31, 2002 and 2001 H-4
Statements of Cash Flows for the years ended
December 31, 2002 and 2001 H-5
Notes to Financial Statements H-7
(b) Pro Forma Financial Information. The pro forma financial statements of
the Company are hereby included as part of this report:
Introduction to Pro Forma Consolidated Financial Statements PF-1
Unaudited Pro Forma Consolidated Balance Sheets as of June 30, 2003 PF-2
Unaudited Pro Forma Statements of Income for six months
ended June 30, 2003 PF-3
Unaudited Pro Forma Statements of Income for year ended December 31, 2002 PF-4
Notes to Unaudited Pro Forma Combined Financial Statements PF-5
(c) Exhibits.
10.1 Form of Partnership Interest Purchase Agreements, dated as of
March 25, 2003, between Capital Senior Living Properties, Inc.
and the Triad Entities, regarding the exercise of the
registrant's options to purchase the partnership interests in
the Triad Entities owned by non-registrant parties
(incorporated by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K, filed by the registrant with the
Securities and Exchange Commission on July 29, 2003)
The following exhibit to this Current Report on Form 8-K is not being
filed but is being furnished pursuant to Item 9 and Item 12 below:
99.1 Press Release dated July 29, 2003 (incorporated by reference
to Exhibit 99.1 to the registrant's Current Report on Form
8-K, filed by the registrant with the Securities and Exchange
Commission on July 29, 2003)
3
(a) Financial Statements of the Businesses Acquired (i) Financial
Statements of Triad Senior Living II, LP
TRIAD SENIOR LIVING II, LP
BALANCE SHEETS
June 30, December 31,
2003 2002
----------------- ----------------
(Unaudited) (Audited)
ASSETS
PROPERTY HELD FOR INVESTMENT - AT COST
Land $ 2,591,286 $ 2,591,286
Buildings and improvements 32,147,546 32,144,792
Furniture and fixtures 1,202,370 1,199,283
Vehicles 25,385 25,385
----------------- ----------------
35,966,587 35,960,746
Accumulated depreciation (2,418,068) (1,952,095)
----------------- ----------------
Net property held for investment 33,548,519 34,008,651
----------------- ----------------
OTHER ASSETS
Cash 278,276 396,692
Accounts receivable - insurance - 19,860
Accounts receivable - other 13,010 26,814
Interest receivable 1,131 4,596
Inventories 17,409 25,814
Prepaid expenses - 157,671
Investment in available-for-sale securities 1,302,728 400,784
Investment in held-to-maturity securities 2,612,000 3,487,000
Deposits 3,386 3,386
Debt issue costs - net of accumulated amortization
of $338,480 and $316,253 at June 30, 2003 and
December 31, 2002, respectively 127,621 123,629
----------------- ----------------
Total other assets 4,355,561 4,646,246
----------------- ----------------
$ 37,904,080 $ 38,654,897
================= ================
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Accounts payable - related party $ 10,673 $ 20,135
Accounts payable 130,640 280,871
Accrued interest - related party 4,244,528 3,371,076
Accrued interest 83,966 36,361
Accrued interest - swap agreements 7,484,727 7,484,727
Accrued property taxes 241,264 127,986
Accrued expenses - related party 21,549 20,180
Accrued expenses 87,727 86,574
Security deposits 197,749 202,944
Deferred income - 5,764
Notes payable - related party 21,977,727 21,018,240
Notes payable 26,002,485 26,322,698
----------------- ----------------
Total liabilities 60,483,035 58,977,556
----------------- ----------------
PARTNERS' DEFICIT
Partners' deficit (15,094,228) (12,837,932)
Accumulated other comprehensive loss (7,484,727) (7,484,727)
----------------- ----------------
(22,578,955) (20,322,659)
----------------- ----------------
$ 37,904,080 $ 38,654,897
================= ================
The accompanying notes are an integral part of these financial statements.
A-1
TRIAD SENIOR LIVING II, LP
STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
---------------- -------------- ---------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Rental income $ 1,255,508 $ 792,281 $ 2,446,258 $ 1,501,480
Resident and healthcare income 15,156 12,802 28,329 25,950
---------------- -------------- ---------------- --------------
Total revenues 1,270,664 805,083 2,474,587 1,527,430
---------------- -------------- ---------------- --------------
COSTS AND EXPENSES 1,565,049 1,299,808 3,086,097 2,655,072
---------------- -------------- ---------------- --------------
OPERATING LOSS (294,385) (494,725) (611,510) (1,127,642)
OTHER INCOME AND (EXPENSE)
Interest and other income 251,460 22,259 266,253 43,002
Interest expense (938,039) (883,631) (1,911,039) (1,724,570)
---------------- -------------- ---------------- --------------
Total other income and (expense) (686,579) (861,372) (1,644,786) (1,681,568)
---------------- -------------- ---------------- --------------
NET LOSS $ (980,964) $ (1,356,097) $ (2,256,296) $ (2,809,210)
================ ============== ================ ==============
The accompanying notes are an integral part of these financial statements.
A-2
TRIAD SENIOR LIVING II, LP
STATEMENTS OF PARTNERS' DEFICIT AND COMPREHENSIVE LOSS
Year Ended December 31, 2002 and Six Months Ended June 30, 2003
(Unaudited)
Accumulated Current
Other Year
General Limited Comprehensive Comprehensive
Partner Partners Total Loss Loss
------------------ ------------- --------------- --------------- -----------------
Partners' deficit at January 1, 2002 $ (7,236,441) $ - $ (7,236,441)
Net loss $ (5,601,491) - $ (5,601,491) $ (5,601,491)
------------------ ------------- --------------- --------------- -----------------
Other comprehensive loss:
Fair market value adjustments on
swap agreements - - - (7,484,727) (7,484,727)
Total comprehensive loss (13,086,218)
================
Partners' deficit at December 31, 2002 (12,837,932) - (12,837,932) (7,484,727)
Net loss (2,256,296) - (2,256,296) (2,256,296)
------------------ ------------- --------------- --------------- -----------------
Total comprehensive loss $ (2,256,296)
=================
Partners' deficit at June 30, 2003 $ (15,094,228) $ - $(15,094,228) $(7,484,727)
================== ============= =============== ==============
The accompanying notes are an integral part of these financial statements.
A-3
TRIAD SENIOR LIVING II, LP
STATEMENTS OF CASH FLOWS
Six Months Ended Six Months Ended
June 30, June 30,
2003 2002
----------------- ----------------
(Unaudited) (Unaudited)
Operating activities
Net loss $ (2,256,296) $ (2,809,211)
Adjustment to reconcile net loss to net
cash provided by operating activities:
Amortization 22,227 19,843
Depreciation 465,973 461,755
Net change in operating assets and liabilities
Accounts receivable - related party - 16,000
Accounts receivable - insurance 19,860 189,402
Accounts receivable - other 13,804 (15,613)
Interest receivable 3,465 (4,625)
Inventories 8,405 (1,996)
Prepaid expenses 157,671 56,263
Accounts payable - related party (9,462) (81,620)
Accounts payable (150,231) (230,506)
Accrued interest - related party 873,452 817,230
Accrued interest 47,605 (99,478)
Accrued property taxes 113,278 (92,024)
Accrued expenses - related party 1,369 753
Accrued expenses 1,153 47,681
Security deposits (5,195) (991)
Deferred income (5,764) (8,985)
----------------- ----------------
Net cash used in operating activities (698,686) (1,736,122)
----------------- ----------------
Investing activities
Purchases of available-for-sale securities (901,945) (169,066)
Proceeds from sale of available-for-sale securities - 183,854
Purchases of held-to-maturity securities - (2,280,000)
Proceeds from sale of held-to-maturity securities 875,000 2,231,000
Purchases of property held for investment (5,841) (140,075)
----------------- ----------------
Net cash used in investing activities (32,786) (174,287)
----------------- ----------------
Financing activities
Proceeds from notes payable - related party 1,323,718 2,167,000
Payments on notes payable - related party (364,231) -
Notes repayment (320,213) (250,590)
Debt issue costs (26,218) -
----------------- ----------------
Net cash provided by financing activities 613,056 1,916,410
----------------- ----------------
(Decrease) increase in cash and cash equivalents (118,416) 6,001
Cash and cash equivalents at beginning of period 396,692 332,802
----------------- ----------------
Cash and cash equivalents at end of period $ 278,276 $ 338,803
================= ================
Supplemental disclosures:
Cash paid during the year for:
Interest $ 1,037,587 $ 1,001,782
================= ================
Income taxes $ - $ -
================= ================
The accompanying notes are an integral part of these financial statements.
A-4
Triad Senior Living II, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
BUSINESS ACTIVITY
Triad Senior Living II, L.P., (the "Partnership") is a limited partnership
organized under the laws of the State of Texas on September 24, 1998. The
Partnership was formed to acquire, develop, own and operate residential
rental properties for retirement age occupants. The Partnership will
continue until December 31, 2050, unless terminated earlier under certain
provisions of the partnership agreement.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements is as follows:
Basis of Accounting
The accompanying financial statements of the Partnership have been prepared
on the accrual basis of accounting.
Allocation of Profits and Losses
Profits and losses have been allocated as provided in the Partnership
agreement.
Any adjusted net income realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order of
priority:
(i) Adjusted net income shall be allocated to the General
Partner until the aggregate adjusted net income
allocated for the current and prior years equals the
aggregate amount of adjusted net loss allocated to the
General Partner for the current and prior years; and
then
(ii) Adjusted net income shall be allocated to the General
and Limited Partners in the same proportion that
cumulative adjusted net loss has been allocated to the
General and Limited Partners for the current year and
prior years until each General and Limited Partner has
been allocated cumulative adjusted net income for the
current and prior years equal to the cumulative adjusted
net loss allocated to the General and Limited Partners
for the current and prior years; and then
(iii) All remaining adjusted net income shall be allocated
among the General and Limited Partners in proportion to
their respective percentage interests.
Any adjusted net loss realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order or
priority:
(i) Adjusted net loss shall be allocated to the General and
Limited Partners in proportion to their respective
percentage interests until each General and Limited
Partner's positive capital account balance is reduced to
zero.
(ii) All remaining adjusted net loss shall be allocated to
the General Partner.
Notwithstanding any other provision of the Partnership agreement, from the
date that construction commences with respect to a Property (the "Subject
Property") to the date 18 months following the date that the Partnership
receives a Certificate of Occupancy for the Subject Property, all adjusted
net loss from the Subject Property shall be allocated to Triad Partners II,
Inc. The provisions shall be applied to each Property of the Partnership on
a property by property basis.
A-5
Triad Senior Living II, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Partner Liability
A Limited Partner is not personally liable or bound for the expenses,
liabilities, or obligations of the Partnership beyond the amount of such
Partner's capital contributions as defined in the Partnership agreement.
No Limited Partner shall be obligated to provide additional capital
contributions outside the "original capital contributions" made upon
admission to the Partnership or to make a loan to the Partnership.
Investment in Debt and Marketable Equity Securities
The Partnership has investments in debt and marketable equity securities.
Management determines the appropriate classification of the securities at
the time they are acquired and evaluates the appropriateness of such
classification at each balance sheet date.
The classification of these securities and the related accounting policies
are as follows:
Held-to-maturity securities consist solely of debt securities which
the Partnership has the positive intent and ability to hold to
maturity and are stated at amortized cost which approximates fair
value. There were no unrecognized holding gains or losses as of June
30, 2003 and 2002.
Available-for-sale securities consist of marketable equity securities
and debt securities not classified as held-to-maturity.
Available-for-sale securities are stated at fair value, and unrealized
holding gains or losses, if any, are reported as a separate component
of partners' equity. There were no unrealized holding gains or losses
as of June 30, 2003 and 2002.
Interest on debt securities is recognized in income as earned, and
dividends on marketable equity securities are recognized in income when
declared. Realized gains and losses are included in operations. Realized
gains and losses are determined on the basis of specific identification of
the securities sold. The marketable debt securities all mature within one
year.
2. TRANSACTIONS WITH AFFILIATED PARTIES
On September 24, 1998, the Partnership and a subsidiary of Capital Senior
Living Corporation ("CSLC"), entered into a Development and Turnkey
Services Agreement in connection with the development and management of the
planned new Waterford Communities where the Partnership would own and
finance the construction of the new communities. A subsidiary of CSLC will
have an option to purchase the partnership interest of Triad II for an
amount equal to the amount Triad II paid for its interest, plus
non-compounded interest of 12% per annum. The property management
agreements also provide CSLC's subsidiary with an option to purchase the
communities developed by the Partnership upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but
not less than hard and soft costs and lease-up costs).
CSLC has loaned the Partnership $21,977,727 and $21,018,240 as of June 30,
2003 and December 31, 2002, respectively.
Asset management fees of $18,000, payable to affiliates were incurred and
expensed as of the first six months ended June 30, 2003 and 2002. Accounts
payable to affiliates at June 30, 2003 and December 31, 2002 totaled
$10,673 and $20,135, respectively. For the first six months ended June 30,
2003 and 2002, related party interest incurred was $873,452 and $722,790,
respectively. Accrued interest payable to a related party was $4,244,528
and $3,371,076 at June 30, 2003 and December 31, 2002, respectively.
A-6
3. COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Partnership's financial position.
4. CSLC PURCHASE OF PARTNERSHIP INTEREST
A subsidiary of CSLC (the "purchaser"), (see note 2) has recently made the
election to exercise its option to purchase the partnership interests of
Triad Partners II, Inc. (Triad II). Triad II and the purchaser entered into
a Partnership Interest Purchase Agreement ("Purchase Agreement") on March
25, 2003 whereby Triad II will sell its general and limited partnership
interests for an aggregate of approximately $567,000. On July 29, 2003,
CSLC purchased the remaining general and limited partnership interests of
the Partnership and wholly owns the Partnership.
A-7
Report of Independent Certified Public Accountants
The Partners
Triad Senior Living II, L.P.
We have audited the accompanying balance sheets of Triad Senior Living II, L.P.
(A Texas Limited Partnership) as of December 31, 2002 and 2001, and the related
statements of operations, partners' deficit, and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Triad Senior Living II, L.P. as
of December 31, 2002 and 2001, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Lane Gorman Trubitt, L.L.P.
-------------------------------------
Lane Gorman Trubitt, L.L.P.
Dallas, Texas
February 14, 2003
B-1
Triad Senior Living II, L.P.
(A Texas Limited Partnership)
BALANCE SHEETS
December 31,
2002 2001
----- ----
ASSETS
PROPERTY HELD FOR INVESTMENT - AT COST
Land $ 2,591,286 $ 2,591,286
Buildings and improvements 32,144,792 32,014,094
Furniture and fixtures 1,199,283 1,143,741
Vehicles 25,385 25,385
-------------- --------------
35,960,746 35,774,506
Accumulated depreciation (1,952,095) (1,025,567)
-------------- --------------
Net property held for investment 34,008,651 34,748,939
-------------- --------------
OTHER ASSETS
Cash 396,692 332,802
Accounts receivable - related party - 16,000
Accounts receivable - insurance 19,860 210,376
Accounts receivable - other 26,814 22,878
Interest receivable 4,596 1,357
Inventories 25,814 16,092
Prepaid expenses 157,671 44,500
Investment in available-for-sale securities 400,784 197,913
Investment in held-to-maturity securities 3,487,000 3,618,000
Deposits 3,386 3,386
Debt issue costs - net accumulated amortization of $316,253 and $301,134
at December 31, 2002 and 2001, respectively 123,629 163,316
-------------- --------------
Total other assets 4,646,246 4,626,620
-------------- --------------
$ 38,654,897 $ 39,375,559
============== ==============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Accounts payable - related party $ 20,135 $ 91,620
Accounts payable 280,871 299,780
Accrued interest - related party 3,371,076 1,836,090
Accrued interest 36,361 99,478
Accrued interest - swap agreements 7,484,727 -
Accrued property taxes 127,986 328,134
Accrued expenses - related party 20,180 16,157
Accrued expenses 86,574 10,082
Security deposits 202,944 174,938
Deferred income 5,764 8,985
Notes payable - related party 21,018,240 16,872,740
Notes payable 26,322,698 26,873,996
-------------- --------------
Total liabilities 58,977,556 46,612,000
-------------- --------------
The accompanying notes are an integral part of these financial statements.
B-2
PARTNERS' DEFICIT
Partners' deficit (12,837,932) (7,236,441)
Accumulated other comprehensive loss (7,484,727) -
-------------- --------------
(20,322,659) (7,236,441)
-------------- --------------
$ 38,654,897 $ 39,375,559
============== ==============
The accompanying notes are an integral part of these financial statements.
B-3
Triad Senior Living II, L.P.
(A Texas Limited Partnership)
STATEMENTS OF OPERATIONS
Years Ended December 31,
2002 2001
----- ----
REVENUES
Rental income $ 3,540,817 $ 1,880,548
Resident and healthcare income 43,773 17,442
-------------- --------------
Total revenues 3,584,590 1,897,990
COST AND EXPENSES 5,779,642 5,155,072
-------------- --------------
OPERATING LOSS (2,195,052) (3,257,082)
OTHER INCOME AND (EXPENSE)
Interest and other income 89,649 189,564
Interest expense (3,496,088) (3,313,413)
-------------- --------------
Total other income and (expense) (3,406,439) (3,123,849)
-------------- --------------
NET LOSS $ (5,601,491) $ (6,380,931)
============== ==============
The accompanying notes are an integral part of these financial statements.
B-4
Triad Senior Living II, L.P.
(A Texas Limited Partnership)
STATEMENTS OF PARTNERS' DEFICIT AND COMPREHENSIVE LOSS
Years Ended December 31, 2002 and 2001
Accumulated Current
Other Year
General Limited Comprehensive Comprehensive
Partner Partners Total Loss Loss
------- -------- ----- ---- ----
Partners' deficit at January 1,
2001 $ (855,510) $ - $ (855,510) $ -
Net loss (6,380,931) - (6,380,931) $ (6,380,931)
------------ ----------- ------------ ---------- ==============
Partners' deficit at December 31,
2001 (7,236,441) - (7,236,441) -
Net loss (5,601,491) - (5,601,491) - $ (5,601,491)
Other comprehensive loss:
Fair market value adjustments on
swap agreements - - - (7,484,727) (7,484,727)
------------ ----------- ------------ ---------- --------------
Total comprehensive loss $ (13,086,218)
==============
Partners' deficit at December 31,
2002 $(12,837,932) $ - $(12,837,932) $ (7,484,727)
============= =========== ============= =============
The accompanying notes are an integral part of these financial statements.
B-5
Triad Senior Living II, L.P.
(A Texas Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2002 2001
---- ----
Cash flows from operating activities
Net loss $ (5,601,491) $ (6,380,931)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization 39,687 131,051
Depreciation 926,527 908,131
Net change in operating assets and liabilities
Accounts receivable - related party 16,000 41,945
Accounts receivable - insurance 190,516 (210,376)
Accounts receivable - other (3,936) (21,809)
Interest receivable (3,239) 56,631
Inventories (9,722) (10,056)
Prepaid expenses (113,171) (44,500)
Accounts payable - related party (71,485) (513,228)
Accounts payable (18,909) (502,428)
Accrued interest - related party 1,534,986 1,169,672
Accrued interest (63,117) 99,478
Accrued property taxes (200,148) 262,149
Accrued expenses - related party 4,023 1,157
Accrued expenses 76,492 (41,884)
Security deposits 28,006 97,113
Deferred income (3,221) 8,985
-------------- --------------
Net cash used in operating activities (3,272,202) (4,948,900)
-------------- --------------
Cash flows from investing activities
Purchases of property held for investment (186,239) (936,946)
Purchases of available-for-sale securities (386,725) (169,624)
Proceeds from sale of available-for-sale securities 183,854 -
Purchases of held-to-maturity securities (2,280,000) (12,389,359)
Proceeds from sale of held-to-maturity securities 2,411,000 12,350,776
Deposits - (3,386)
-------------- --------------
Net cash used in investing activities (258,110) (1,148,539)
-------------- --------------
Cash flows from financing activities
Proceeds from notes payable - related party 4,291,763 4,167,961
Payments on notes payable - related party (146,263) -
Proceeds from note payable - 1,880,948
Payments on notes payable (551,298) -
Debt issue costs - (158,748)
-------------- --------------
Net cash provided by financing activities 3,594,202 5,890,161
-------------- --------------
The accompanying notes are an integral part of these financial statements.
B-6
Net increase (decrease) in cash and cash equivalents 63,890 (207,278)
Cash at beginning of year 332,802 540,080
-------------- --------------
Cash at end of year $ 396,692 $ 332,802
============== ==============
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes $ - $ -
Interest $ 2,024,219 $ 2,044,263
The accompanying notes are an integral part of these financial statements.
B-7
Triad Senior Living II, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
BUSINESS ACTIVITY
Triad Senior Living II, L.P., (the "Partnership") is a limited partnership
organized under the laws of the State of Texas on September 24, 1998. The
Partnership was formed to acquire, develop, own and operate residential
rental properties for retirement age occupants. The Partnership will
continue until December 31, 2050, unless terminated earlier under certain
provisions of the partnership agreement.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements is as follows:
Basis of Accounting
The accompanying financial statements of the Partnership have been prepared
on the accrual basis of accounting.
Allocation of Profits and Losses
Profits and losses have been allocated as provided in the Partnership
agreement.
Any adjusted net income realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order of
priority:
(i) Adjusted net income shall be allocated to the General
Partner until the aggregate adjusted net income
allocated for the current and prior years equals the
aggregate amount of adjusted net loss allocated to the
General Partner for the current and prior years; and
then
(ii) Adjusted net income shall be allocated to the General
and Limited Partners in the same proportion that
cumulative adjusted net loss has been allocated to the
General and Limited Partners for the current year and
prior years until each General and Limited Partner has
been allocated cumulative adjusted net income for the
current and prior years equal to the cumulative adjusted
net loss allocated to the General and Limited Partners
for the current and prior years; and then
(iii) All remaining adjusted net income shall be allocated
among the General and Limited Partners in proportion to
their respective percentage interests.
Any adjusted net loss realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order or
priority:
(i) Adjusted net loss shall be allocated to the General and
Limited Partners in proportion to their respective
percentage interests until each General and Limited
Partner's positive capital account balance is reduced to
zero.
(ii) All remaining adjusted net loss shall be allocated to
the General Partner.
Notwithstanding any other provision of the Partnership agreement, from the
date that construction commences with respect to a Property (the "Subject
Property") to the date 18 months following the date that the Partnership
receives a Certificate of Occupancy for the Subject Property, all adjusted
net loss from the Subject Property shall be allocated to Triad Partners II,
Inc. The provisions shall be applied to each Property of the Partnership on
a property by property basis.
B-8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Partner Liability
A Limited Partner is not personally liable or bound for the expenses,
liabilities, or obligations of the Partnership beyond the amount of such
Partner's capital contributions as defined in the Partnership agreement.
No Limited Partner shall be obligated to provide additional capital
contributions outside the "original capital contributions" made upon
admission to the Partnership or to make a loan to the Partnership.
Cash and Cash Equivalents
The Partnership considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
The Partnership maintains its cash balances in financial institutions
located in Oklahoma City, Oklahoma; Dallas, Texas; and Cleveland and
Fairfield, Ohio, which at times may exceed insured limits. The Partnership
has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash equivalents.
Inventories
Inventories of food are used in operations and are stated at the lower of
cost or market, with cost determined on a first-in, first-out (FIFO) basis.
Property Held For Investment
Property held for investment is stated at cost. Major renewals and
improvements are capitalized, while costs of replacements, maintenance and
repairs which do not improve or extend the life of the respective assets
are charged to expense as incurred.
Buildings and improvements 20-40 years
Furniture and fixtures 5-10 years
Vehicles 5 years
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives. The straight-line method of depreciation is followed for
substantially all assets for financial reporting purposes, but accelerated
methods are used for tax purposes.
During project development, the costs of materials, services and
payroll-related expenditures, including capitalized interest were
capitalized. Capitalized costs of the projects are depreciated over their
estimated service lives. Depreciation expense charged to operations was
$926,527 and $908,131 for the years ended December 31, 2002 and 2001,
respectively. When management determines a project will not result in
probable future economic benefits, the related capitalized development
costs are removed from the accounts and a loss is recognized. Interest is
capitalized in connection with the construction of its projects. The
capitalized interest is recorded as part of the project and is amortized
over the project's estimated life.
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, following by a 12-month
lease-up period. The Partnership anticipates that newly opened or expanded
communities will operate at a loss during a substantial portion of the
lease-up period.
At each balance sheet date, management reviews the carrying value of
property held for investment to determine if facts and circumstances
suggest that they may be impaired or that the amortization or depreciation
period may need to be changed. Management does not believe there are any
indicators that would require an adjustment to the carrying value of the
property held for investment or the remaining useful lives as of December
31, 2002 and 2001.
B-9
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
Revenue is reported at the estimated net realizable amount from residents
and third-party payors when services are provided.
Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor
settlements are provided in the period the related services are rendered.
Any differences between estimated and actual reimbursements are included in
operations in the year of settlement.
Laws and regulations governing Medicare and Medicaid programs are complex
and subject to interpretation. Management 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.
Investment in Debt and Marketable Equity Securities
The Partnership has investments in debt and marketable equity securities.
Management determines the appropriate classification of the securities at
the time they are acquired and evaluates the appropriateness of such
classification at each balance sheet date.
The classification of these securities and the related accounting policies
are as follows:
Held-to-maturity securities consist solely of debt securities which
the Partnership has the positive intent and ability to hold to
maturity and are stated at amortized cost which approximates fair
value. There were no unrecognized holding gains or losses as of
December 31, 2002 and 2001.
Available-for-sale securities consist of marketable equity securities
and debt securities not classified as held-to-maturity.
Available-for-sale securities are stated at fair value, and unrealized
holding gains or losses, if any, are reported as a separate component
of partners' equity. There were no unrealized holding gains or losses
as of December 31, 2002 and 2001.
Interest on debt securities is recognized in income as earned, and
dividends on marketable equity securities are recognized in income when
declared. Realized gains and losses are included in operations. Realized
gains and losses are determined on the basis of specific identification of
the securities sold. The marketable debt securities all mature within one
year.
Amortization
Debt issue costs are amortized over the term of the note payable on a
straight-line basis.
Advertising Costs
Advertising costs, included in costs and expenses, are charged to
operations as incurred and were $32,271 and $93,274 for the years ended
December 31, 2002 and 2001, respectively.
Use of Estimates
In preparing the Partnership's financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
B-10
2. TRANSACTIONS WITH AFFILIATED PARTIES
On September 24, 1998, the Partnership and a subsidiary of Capital Senior
Living Corporation ("CSLC"), entered into a Development and Turnkey
Services Agreement in connection with the development and management of the
planned new Waterford Communities where the Partnership would own and
finance the construction of the new communities. A subsidiary of CSLC will
have an option to purchase the partnership interest of Triad II for an
amount equal to the amount Triad II paid for its interest, plus
non-compounded interest of 12% per annum. The property management
agreements also provide CSLC's subsidiary with an option to purchase the
communities developed by the Partnership upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but
not less than hard and soft costs and lease-up costs).
During 1998, a related party agreed to loan the Partnership up to
$7,000,000 and the loan amount was later amended to $15,000,000. See
Footnote 4.
Asset management fees of $36,000, payable to affiliates were incurred and
expensed for each of the years ended December 31, 2002 and 2001. Accounts
payable to affiliates at December 31, 2002 and 2001 totaled $20,135 and
$91,620, respectively. For 2002 and 2001, related party interest incurred
was $1,534,986 and $1,169,672, respectively. Accrued interest payable to a
related party was $3,371,076 and $1,836,090 at December 31, 2002 and 2001,
respectively.
3. INVESTMENT IN SECURITIES
The following is a summary of the Partnership's investments:
Held-to-Maturity
------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains (Losses) Value
----------------- ---------------- ---------------
December 31, 2002
Taxable bonds $ 3,487,000 $ - $ 3,487,000
================= ================ ===============
December 31, 2001
Taxable bonds $ 3,618,000 $ - $ 3,618,000
================= ================ ===============
Available-For-Sale
------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains (Losses) Value
----------------- ---------------- ---------------
December 31, 2002
Mutual funds $ 400,784 $ - $ 400,784
================= ================ ===============
December 31, 2001
Mutual funds $ 197,913 $ - $ 197,913
================= ================ ===============
4. NOTES PAYABLE
Under the terms of a subordinated promissory note with a related party, as
amended January 1, 2001, the Partnership may borrow up to $15,000,000 at
8.00% for project construction and additional borrowings, at the same rate,
to fund operating deficits. These loans may be prepaid without penalty.
Interest is payable quarterly after the first borrowing.
Borrowings at December 31, were as follows:
Outstanding Balance
-----------------------------------
Project Location Maturity 2002 2001
---------------- -------- ---------------- -----------------
Fairfield, OH September 24, 2008 $ 6,897,581 $ 5,589,581
Oklahoma City, OK September 24, 2008 6,744,551 5,451,552
Plano, TX September 24, 2008 6,776,278 5,485,277
Corporate September 24, 2008 599,830 346,330
---------------- ---------------
$ 21,018,240 $ 16,872,740
================ ===============
B-11
4. NOTES PAYABLE (CONTINUED)
Under the terms of a construction loan facility including a mini-perm
feature, with a financial institution, dated December 30, 1998, the
Partnership may borrow up to $26,000,000 to fund the costs of construction
of senior living facilities. On June 30, 1999, the loan amount was amended
up to $26,873,996. Each of the three non-revolving project loans may not
exceed $10,000,000 and are limited to the lessor of (1) 85% of construction
budget or (2) 75% of stabilized appraised value of that project. Amounts
borrowed and repaid may not be reborrowed. The line of credit expires six
months from the date of closing. No loans will be made after that date, but
loans that have closed prior to that date will continue to be funded on the
financial institution's base rate. The facility has commitment,
construction monitoring, and exit fee requirements. The Partnership has the
option to enter into an interest rate swap or interest rate cap agreement,
with the lender. The construction period for each loan ends on the earlier
of (1) 15 months from the date of closing of such loan or (2) issuance of a
certificate of occupancy for the project. The mini-perm period is a period
of 36 months from the end of the construction period. Interest is payable
monthly during the construction period and months 1 through 12 of the
mini-perm period. During months 13 through 36, each loan is payable in
monthly installments of principal and interest in amounts necessary to
amortize the loan over a term of twenty years. There is a 1% prepayment
penalty for prepayment prior to 30 months after the beginning of the
mini-perm period. An equity reserve, equal to 10% of the approved
construction budget, is required to be deposited into a restricted cash
account. The first 50% of each equity reserve will be released upon the
maintenance of greater than a 1.35x proforma debt service coverage ratio
(DSCR) for the applicable project for a three month period. The remaining
50% of each equity reserve will be released upon the maintenance of greater
than a 1.35x DSCR for the applicable project for a six month period. As
security for the debt, the financial institution has (1) first lien deeds
of trust on the properties, fixtures and personal property and (2)
assignment of leases, rents and licenses. The facility contains various
provisions and restrictive covenants.
Borrowings at December 31, were as follows:
Outstanding Balance
Project Location Maturity 2002 2001
---------------- --------------------- ------------------ -----------------
Fairfield, OH December 31, 2005 $ 8,346,199 $ 8,521,000
Oklahoma City, OK December 31, 2005 8,289,387 8,463,000
Plano, TX December 31, 2005 9,687,112 9,889,996
------------------ -----------------
$ 26,322,698 $ 26,873,996
================== =================
Maturities of notes payable are as follows for the years ending December
31:
Affiliate Other Total
------------------ ----------------- -----------------
2003 $ - $ 644,327 $ 644,327
2004 - 694,483 694,483
2005 - 24,983,888 24,983,888
2006 - - -
2007 - - -
Thereafter 21,018,240 - 21,018,240
------------------ ----------------- -----------------
$ 21,018,240 $ 26,322,698 $ 47,340,938
================== ================= =================
Interest Rate Swap Agreements
The Partnership uses interest rate and treasury lock swap agreements for
purposes other than trading. Interest rate swap agreements are used by the
Partnership to modify variable rate obligations to fixed rate obligations,
thereby reducing the exposure to market rate fluctuations. The interest
rate swap agreements are designated as hedges, and effectiveness is
determined by matching the principal balance and terms with that specific
obligation. Such an agreement involves the exchange of amounts based on
fixed interest rates for amounts based on variable interest rates over the
life of the agreement without an exchange of the notional amount upon which
payments are made. Accordingly, the interest rate swap contracts are
reflected at fair value in the balance sheet and the related gains or
losses on these agreements are deferred in partners' deficit (as a
component of comprehensive income). These deferred gains and losses are
then amortized as an adjustment to interest expense over the same period in
which the related interest payments being hedged are recognized in income.
B-12
4. NOTES PAYABLE (CONTINUED)
Interest Rate Swap Agreements (Continued)
The net effect of this accounting on operating results is that interest
expense on the portion of variable-rate debt being hedged is generally
recorded based on fixed interest rates. No other cash payments are made
unless the contract is terminated prior to maturity, in which case the
amount paid or received in settlement is established by agreement at the
termination date, and usually represents the net present value, at current
rates of interest, of the remaining obligations to exchange payments under
the terms of the contract. Interest rate swaps contracts are entered into
with a major financial institution in order to minimize counterparty credit
risk. The differential to be paid or received as interest rates change is
accounted for on the accrual method of accounting. The related amount
payable to or receivable from counterparties is included as an adjustment
to accrued interest. This arrangement had the effect of increasing the
interest rate from 6.875% to 7.39%. The Partnership had interest rate swap
contracts on $26,322,698 and $26,873,996 notional amounts of indebtedness
at December 31, 2002 and 2001, respectively. The outstanding contracts will
mature December 31, 2005.
Treasury Lock Swap Agreements
During 1998 the Partnership acquired and developed real estate using
proceeds from the line of credit, which proceeds are expected to be
refinanced on or about December 31, 2005 (See note 4). In connection with
such acquisition, development and anticipated refinancing, the Partnership
entered into Treasury Lock Swap Agreements on August 9, 2002, in the
notional amount of $25,875,576. The treasury lock swap agreements are used
to hedge the risk that the cost of future issuances of debt may be
adversely affected by changes in interest rates. Under the treasury lock
swap agreements, the Partnership agrees to pay or receive an amount equal
to the difference between the net present value of the cash flows for a
notional principal amount of indebtedness based on the locked rate at the
date when the agreement was established and the yield of a United States
Government 10-Year Treasury Note on the settlement date of January 3, 2006.
The notional amounts of the agreements are not exchanged. Treasury lock
swap agreements are entered into with a major financial institution in
order to minimize counterparty credit risk. The locked rates range from
7.46% to 9.07%. Treasury lock swap agreements are reflected at fair value
in the Partnership's balance sheet and the related gains or losses on these
agreements are deferred in partners' deficit (as a component of
comprehensive income). These deferred gains and losses are then amortized
as an adjustment to interest expense over the same period in which the
related interest expense over the same period in which the related interest
costs on the new debt issuances are recognized in income.
5. INCOME TAXES
No provision has been made in the financial statements for Federal income
taxes because, under current law, no Federal income taxes are paid directly
by the Partnership. The partners are responsible for their respective
shares of the Partnership's items of income, deductions, losses and
credits.
6. COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Partnership's financial position.
7. SUBSEQUENT EVENT (UNAUDITED)
A subsidiary of CSLC (the "purchaser"), (see note 2) has recently made the
election to exercise its option to purchase the partnership interests of
Triad Partners II, Inc. (Triad II). Triad II and the purchaser entered into
a Partnership Interest Purchase Agreement ("Purchase Agreement") on March
25, 2003 whereby Triad II will sell its general and limited partnership
interests for an aggregate of approximately $567,000. Upon completion of
this transaction, which the Partnership expects to take place by the end of
the Partnership's second fiscal quarter of 2003, the purchaser will wholly
own the Partnership. The purchase agreement is subject to customary terms
and conditions.
B-13
(ii) Financial Statements of Triad Senior Living III, LP
TRIAD SENIOR LIVING III, LP
BALANCE SHEETS
June 30, December 31,
2003 2002
-------------- --------------
(Unaudited) (Audited)
ASSETS
PROPERTY HELD FOR INVESTMENT - AT COST
Land $ 3,963,138 $ 3,963,138
Buildings and improvements 57,344,547 57,322,457
Furniture and fixtures 2,442,532 2,427,576
-------------- --------------
63,750,217 63,713,171
Accumulated depreciation (4,433,358) (3,592,443)
-------------- --------------
Net property held for investment 59,316,859 60,120,728
-------------- ---------------
OTHER ASSETS
Cash 464,506 544,158
Accounts receivable - insurance 2,830 11,740
Accounts receivable - other - 117,185
Interest receivable 98,001 75,747
Inventories 50,585 42,534
Prepaid expenses - 307,041
Investment in held-to-maturity securities 3,000,000 3,000,000
Deposits 905,640 949,169
Debt issue costs - net of accumulated amortization of
$416,236 and $409,202 at June 30, 2003 and
December 31, 2002, respectively 4,616 11,650
-------------- --------------
Total other assets 4,526,178 5,059,224
-------------- --------------
$63,843,037 $65,179,952
============== ==============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Accounts payable - related party $ 35,956 $ 57,393
Accounts payable 119,836 232,068
Accrued interest - related party 4,559,011 3,549,180
Accrued interest 163,756 190,585
Accrued property taxes The 572,726 904,272
Accrued expenses - related party 39,616 35,684
Accrued expenses 187,990 166,009
Security deposits 275,512 247,508
Deferred income - 40,075
Notes payable - related party 25,513,566 24,387,366
Notes payable 56,270,245 56,270,245
-------------- --------------
Total liabilities 87,738,214 86,080,385
-------------- --------------
PARTNERS' DEFICIT (23,895,177) (20,900,433)
-------------- --------------
$63,843,037 $65,179,952
============== ==============
The accompanying notes are an integral part of these financial statements.
C-1
TRIAD SENIOR LIVING III, LP
STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------------- ------------ ------------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Rental income $ 2,277,102 $ 1,534,892 $ 4,429,990 $ 2,840,839
Resident and healthcare income 48,138 42,058 91,165 75,259
------------- ------------ ------------ ------------
Total revenues 2,325,240 1,576,950 4,521,155 2,916,098
COSTS AND EXPENSES 2,809,869 2,548,466 5,483,811 5,024,607
------------- ------------ ------------ ------------
OPERATING LOSS (484,629) (971,516) (962,656) (2,108,509)
OTHER INCOME AND (EXPENSE)
Interest and other income 21,419 12,728 34,577 23,220
Interest expense (1,016,134) (1,036,725) (2,066,664) (2,096,467)
------------- ------------ ------------ ------------
Total other income and (expense) (994,715) (1,023,997) (2,032,087) (2,073,247)
NET LOSS $(1,479,344) $(1,995,513) $(2,994,743) $(4,181,756)
============= ============ ============ ============
The accompanying notes are an integral part of these financial statements.
C-2
TRIAD SENIOR LIVING III, LP
STATEMENTS OF PARTNERS' DEFICIT
Year Ended December 31, 2002 and Six Months Ended June 30, 2003
(Unaudited)
General Limited
Partner Partners Total
------- -------- -----
Partners' deficit at January 1, 2002 $ (12,769,658) $ - $ (12,769,658)
Net loss (8,130,775) - (8,130,775)
------------- ------------ ------------
Partners' deficit at December 31, 2002 (20,900,433) - (20,900,433)
Net loss (2,994,744) - (2,994,744)
------------- ------------ ------------
Partners' deficit at June 30, 2003 $ (23,895,177) $ - $ (23,895,177)
============= ============ ============
The accompanying notes are an integral part of these financial statements.
C-3
TRIAD SENIOR LIVING III, LP
STATEMENTS OF CASH FLOWS
Six Months Ended Six Months Ended
June 30, June 30,
2003 2002
---------------- -------------------
(Unaudited) (Unaudited)
Operating activities
Net loss $ (2,994,744) $ (4,181,759)
Adjustment to reconcile net loss to net
cash provided by operating activities:
Amortization 7,034 99,633
Depreciation 840,915 836,645
Net change in operating assets and liabilities
Accounts receivable - insurance 8,910 576,846
Accounts receivable - other 117,185 6,056
Interest receivable (22,254) (3,598)
Inventories (8,051) (2,292)
Prepaid expense 307,041 109,556
Accounts payable - related party (21,437) (134,921)
Accounts payable (112,232) (887,964)
Accrued interest - related party 1,009,831 824,493
Accrued interest (26,829) (29,439)
Accrued property taxes (331,546) (247,775)
Accrued expenses - related party 3,932 5,258
Accrued expenses 21,981 67,964
Security deposits 28,004 37,503
Deferred income (40,075) (2,666)
---------------- -------------------
Net cash used in operating activities (1,212,335) (2,926,460)
---------------- -------------------
Investing activities
Purchases of held--to-maturity securities - (750,000)
Property held for investment (37,046) (32,330)
Deposits 43,529 4,107
---------------- -------------------
Net cash provided by (used in) investing activities 6,483 (778,223)
---------------- -------------------
Financing activities
Proceeds from notes payable - related party 1,126,200 3,337,999
Proceeds from notes payable - 267,222
---------------- -------------------
Net cash provided by financing activities 1,126,200 3,605,221
---------------- -------------------
Decrease in cash and cash equivalents (79,652) (99,462)
Cash and cash equivalents at beginning of period 544,158 707,989
---------------- -------------------
Cash and cash equivalents at end of period 464,506 608,527
================ ===================
Supplemental disclosures:
Cash paid during the year for:
Interest $ 893,077 $ 1,075,477
================ ===================
Income taxes $ - $ -
================ ===================
The accompanying notes are an integral part of these financial statements.
C-4
Triad Senior Living III, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
BUSINESS ACTIVITY
Triad Senior Living III, L.P., (the "Partnership") is a limited partnership
organized under the laws of the State of Texas on November 10, 1998. The
Partnership was formed to acquire, develop, own and operate residential
rental properties for retirement age occupants. The Partnership will
continue until December 31, 2050, unless terminated earlier under certain
provisions of the partnership agreement.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently used in the
preparation of the accompanying financial statements are as follows:
Basis of Accounting
The accompanying financial statements of the Partnership have been prepared
on the accrual basis of accounting.
Allocation of Profits and Losses
Profits and losses have been allocated as provided in the Partnership
agreement.
Any adjusted net income realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order of
priority:
(i) Adjusted net income shall be allocated to the General
Partner until the aggregate adjusted net income
allocated for the current and prior years equals the
aggregate amount of adjusted net loss allocated to the
General Partner for the current and prior years; and
then
(ii) Adjusted net income shall be allocated to the General
and Limited Partners in the same proportion that
cumulative adjusted net loss has been allocated to the
General and Limited Partners for the current year and
prior years until each General and Limited Partner has
been allocated cumulative adjusted net income for the
current and prior years equal to the cumulative adjusted
net loss allocated to the General and Limited Partners
for the current and prior years; and then
(iii) All remaining adjusted net income shall be allocated
among the General and Limited Partners in proportion to
their respective percentage interests.
Any adjusted net loss realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order or
priority:
(i) Adjusted net loss shall be allocated to the General and
Limited Partners in proportion to their respective
percentage interests until each General and Limited
Partner's positive capital account balance is reduced to
zero.
(ii) All remaining adjusted net loss shall be allocated to
the General Partner.
Notwithstanding any other provision of the Partnership agreement, from the
date that construction commences with respect to a Property (the "Subject
Property") to the date 18 months following the date that the Partnership
receives a Certificate of Occupancy for the Subject Property, all adjusted
net loss from the Subject Property shall be allocated to Triad Partners
III, Inc. The provisions shall be applied to each Property of the
Partnership on a property by property basis.
C-5
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Partner Liability
A limited Partner is not personally liable or bound for the expenses,
liabilities or obligations of the Partnership beyond the amount of such
Partner's capital contributions as defined in the Partnership agreement.
No Limited Partner shall be obligated to provide additional capital
contributions outside the "original capital contributions" made upon
admission to the Partnership or to make a loan to the Partnership.
Investment in Debt Securities
The Partnership has investments in debt securities. Management determines
the appropriate classification of securities at the time they are acquired
and evaluates the appropriateness of such classification at each balance
sheet date.
Held-to-maturity securities consist solely of certificate of deposits which
the Company has the positive intent and ability to hold to maturity, and
are stated at amortized cost which approximates fair value. There were no
unrecognized holding gains or losses as of June 30, 2003 and 2002. Interest
on debt securities is recognized in income as earned. Realized gains and
losses are included in operations. Realized gains and losses are determined
on the basis of specific identification of the securities sold.
2. TRANSACTIONS WITH AFFILIATED PARTIES
On November 1, 1998, the Partnership and a subsidiary of Capital Senior
Living Corporation ("CSLC"), entered into a Development and Turnkey
Services Agreement in connection with the development and management of the
planned new Waterford Communities where the Partnership would own and
finance the construction of the new communities. A subsidiary of CSLC will
have an option to purchase the partnership interest of Triad III for an
amount equal to the amount Triad III paid for its interest, plus
non-compounded interest of 12% per annum. The property management
agreements also provide CSLC's subsidiary with an option to purchase the
communities developed by the Partnership upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but
not less than hard and soft costs and lease-up costs).
CSLC has loaned the Partnership $25,513,566 and $24,387,366 as of June 30,
2003 and December 31, 2002, respectively.
Asset management fees of $25,998, payable to affiliates, were incurred and
expensed for the six months ended June 30, 2003 and 2002, respectively.
Accounts payable to affiliates at June 30, 2003 and December 31, 2002
totaled $35,956 and $57,393, respectively. For the first six months ended
June 30, 2003 and 2002, related party interest incurred was $1,009,831 and
$821,862, respectively. Accrued interest payable to a related party was
$4,559,011 and $3,549,180 at June 30, 2003 and December 31, 2002,
respectively.
3. COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Partnership's financial position.
4. CSLC PURCHASE OF PARTNERSHIP INTEREST
A subsidiary of CSLC (the "purchaser"), (see note 2) has recently made the
election to exercise its option to purchase the partnership interests of
Triad Partners III, Inc. (Triad III). Triad III and the purchaser entered
into a Partnership Interest Purchase Agreement ("Purchase Agreement") on
March 25, 2003 whereby Triad III will sell its general and limited
partnership interests for an aggregate of approximately $932,000. On July
29, 2003, CSLC purchased the remaining general and limited partnership
interests of the Partnership and wholly owns the Partnership.
C-6
Report of Independent Certified Public Accountants
The Partners
Triad Senior Living III, L.P.
We have audited the accompanying balance sheets of Triad Senior Living III, L.P.
(A Texas Limited Partnership) as of December 31, 2002 and 2001, and the related
statements of operations, partners' deficit, and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Triad Senior Living III, L.P.
as of December 31, 2002 and 2001, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Lane Gorman Trubitt, L.L.P.
-------------------------------------
Lane Gorman Trubitt, L.L.P.
Dallas, Texas
February 14, 2003
D-1
Triad Senior Living III, L.P.
(A Texas Limited Partnership)
BALANCE SHEETS
December 31,
2002 2001
---------------------------------------
ASSETS
PROPERTY HELD FOR INVESTMENT - AT COST
Land $ 3,963,138 $ 3,963,138
Buildings and improvements 57,322,457 57,231,034
Furniture and fixtures 2,427,576 2,404,656
-----------------------------------
63,713,171 63,598,828
Accumulated depreciation (3,592,443) (1,917,285)
-----------------------------------
Net property held for investment 60,120,728 61,681,543
-----------------------------------
OTHER ASSETS
Cash 544,158 707,988
Accounts receivable - insurance 11,740 588,586
Accounts receivable - other 117,185 4,596
Interest receivable 75,747 21,502
Inventories 42,534 29,229
Prepaid expenses 307,041 83,003
Investment in held-to-maturity securities 3,000,000 1,500,000
Escrow deposits 949,169 1,105,306
Debt issue costs - net of accumulated amortization
of $409,202 and $744,238 at December 31, 2002
and 2001, respectively 11,650 120,668
-----------------------------------
Total other assets 5,059,224 4,160,878
-----------------------------------
$ 65,179,952 $ 65,842,421
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Accounts payable - related party $ 57,393 $ 164,074
Accounts payable 232,068 1,114,746
Accrued interest - related party 3,549,180 1,616,589
Accrued interest 190,585 228,570
Accrued property taxes 904,272 894,312
Accrued expenses - related party 35,684 30,000
Accrued expenses 166,009 59,232
Security deposits 247,508 175,500
Deferred income 40,075 2,666
Notes payable - related party 24,387,366 18,323,367
Notes payable 56,270,245 56,003,023
-----------------------------------
Total liabilities 86,080,385 78,612,079
-----------------------------------
The accompanying notes are an integral part of these financial statements.
D-2
PARTNERS' DEFICIT (20,900,433) (12,769,658)
-----------------------------------
$ 65,179,952 $ 65,842,421
===================================
The accompanying notes are an integral part of these financial statements.
D-3
Triad Senior Living III, L.P.
(A Texas Limited Partnership)
STATEMENTS OF OPERATIONS
Years Ended December 31,
2002 2001
-----------------------------------
REVENUES
Rental income $ 6,674,986 $ 3,335,131
Resident and healthcare income 139,319 100,476
-----------------------------------
Total revenues 6,814,305 3,435,607
COST AND EXPENSES 10,685,442 9,642,742
-----------------------------------
OPERATING LOSS (3,871,137) (6,207,135)
OTHER INCOME AND (EXPENSE)
Interest and other income 100,952 49,572
Interest expense (4,360,590) (4,726,098)
-----------------------------------
Total other income and (expense) (4,259,638) (4,676,526)
-----------------------------------
NET LOSS $ (8,130,775) $ (10,883,661)
===================================
The accompanying notes are an integral part of these financial statements.
D-4
Triad Senior Living III, L.P.
(A Texas Limited Partnership)
STATEMENTS OF PARTNERS' DEFICIT
Years Ended December 31, 2002 and 2001
General Limited
Partner Partners Total
-------------------------------------------------------
Partners' deficit at January 1, 2001 $ (1,885,997) $ - $ (1,885,997)
Net loss (10,883,661) - (10,883,661)
-------------------------------------------------------
Partners' deficit at December 31, 2001 (12,769,658) - (12,769,658)
Net loss (8,130,775) - (8,130,775)
-------------------------------------------------------
Partners' deficit at December 31, 2002 $(20,900,433) - (20,900,433)
=======================================================
The accompanying notes are an integral part of these financial statements.
D-5
Triad Senior Living III, L.P.
(A Texas Limited Partnership)
STATEMENTS OF CASH FLOWS
Years Ended December 31,
2002 2001
-----------------------------------
Cash flows from operating activities
Net loss $ (8,130,775) $ (10,883,661)
Adjustments to reconcile net loss to net cash used in
operating activities
Amortization 109,018 295,344
Depreciation 1,675,158 1,671,141
Net change in operating assets and liabilities
Accounts receivable - related party - 563
Accounts receivable - insurance 576,846 (588,586)
Accounts receivable - other (112,589) 404
Interest receivable (54,245) (21,502)
Inventories (13,305) (6,890)
Prepaid expenses (224,038) (83,003)
Accounts payable - related party (106,681) (974,810)
Accounts payable (882,678) (1,382,321)
Accrued interest - related party 1,932,591 1,201,103
Accrued interest (37,985) 228,570
Accrued property taxes 9,960 834,095
Accrued expenses - related party 5,684 -
Accrued expenses 106,777 (18,157)
Security deposits 72,008 118,000
Deferred income 37,409 2,666
----------------------------------
Net cash used in operating activities (5,036,845) (9,607,044)
----------------------------------
Cash flows from investing activities
Property held for investment (114,343) 106,824
Purchases of held-to-maturity securities (1,500,000) (1,500,000)
Escrow deposits 156,137 (1,105,306)
----------------------------------
Net cash used in investing activities (1,458,206) (2,498,482)
----------------------------------
Cash flows from financing activities
Proceeds from notes payable - related party 6,063,999 7,019,807
Proceeds from notes payable 267,222 5,461,533
Debt issue costs - (140,676)
----------------------------------
Net cash provided by financing activities 6,331,221 12,340,664
----------------------------------
Net increase (decrease) in cash (163,830) 235,138
Cash at beginning of year 707,988 472,850
----------------------------------
Cash at end of year $ 544,158 $ 707,988
==================================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Income taxes $ - $ -
Interest $ 2,465,984 $ 1,029,032
The accompanying notes are an integral part of these financial statements.
D-6
Triad Senior Living III, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
BUSINESS ACTIVITY
Triad Senior Living III, L.P., (the "Partnership") is a limited partnership
organized under the laws of the State of Texas on November 10, 1998. The
Partnership was formed to acquire, develop, own and operate residential
rental properties for retirement age occupants. The Partnership will
continue until December 31, 2050, unless terminated earlier under certain
provisions of the partnership agreement.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently used in the
preparation of the accompanying financial statements are as follows:
Basis of Accounting
The accompanying financial statements of the Partnership have been prepared
on the accrual basis of accounting.
Allocation of Profits and Losses
Profits and losses have been allocated as provided in the Partnership
agreement.
Any adjusted net income realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order of
priority:
(i) Adjusted net income shall be allocated to the General
Partner until the aggregate adjusted net income
allocated for the current and prior years equals the
aggregate amount of adjusted net loss allocated to the
General Partner for the current and prior years; and
then
(ii) Adjusted net income shall be allocated to the General
and Limited Partners in the same proportion that
cumulative adjusted net loss has been allocated to the
General and Limited Partners for the current year and
prior years until each General and Limited Partner has
been allocated cumulative adjusted net income for the
current and prior years equal to the cumulative adjusted
net loss allocated to the General and Limited Partners
for the current and prior years; and then
(iii) All remaining adjusted net income shall be allocated
among the General and Limited Partners in proportion to
their respective percentage interests.
Any adjusted net loss realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order or
priority:
(i) Adjusted net loss shall be allocated to the General and
Limited Partners in proportion to their respective
percentage interests until each General and Limited
Partner's positive capital account balance is reduced to
zero.
(ii) All remaining adjusted net loss shall be allocated to
the General Partner.
Notwithstanding any other provision of the Partnership agreement, from the
date that construction commences with respect to a Property (the "Subject
Property") to the date 18 months following the date that the Partnership
receives a Certificate of Occupancy for the Subject Property, all adjusted
net loss from the Subject Property shall be allocated to Triad Partners
III, Inc. The provisions shall be applied to each Property of the
Partnership on a property by property basis.
D-7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Partner Liability
A limited Partner is not personally liable or bound for the expenses,
liabilities or obligations of the Partnership beyond the amount of such
Partner's capital contributions as defined in the Partnership agreement.
No Limited Partner shall be obligated to provide additional capital
contributions outside the "original capital contributions" made upon
admission to the Partnership or to make a loan to the Partnership.
Cash and Cash Equivalents
The Partnership considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
The Partnership maintains its cash balances in financial institutions
located in South Bend, Indiana; Columbia, South Carolina; Ridgeland,
Mississippi; Mansfield, Ohio; and Pantego and Deer Park, Texas, which at
times may exceed insured limits. The Partnership has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Inventories
Inventories of food are used in operations and are stated at the lower of
cost or market, with cost determined on a first-in, first-out (FIFO) basis.
Property Held for Investment
Property held for investment is stated at cost. Major renewals and
improvements are capitalized, while costs of replacements, maintenance and
repairs which do not improve or extend the life of the respective assets
are charged to expense as incurred.
Buildings and improvements 20 - 40 years
Furniture and fixtures 5 - 10 years
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives. The straight-line method of depreciation is followed for
substantially all assets for financial reporting purposes, but accelerated
methods are used for tax purposes.
During project development, the costs of materials, services and
payroll-related expenditures, including capitalized interest were
capitalized. Capitalized costs of the projects are depreciated over their
estimated service lives. Depreciation expense charged to operations was
$1,675,158 and $1,671,141 for the years ended December 31, 2002 and 2001,
respectively. When management determines a project will not result in
probable future economic benefits, the related capitalized development
costs are removed from the accounts and a loss is recognized. Interest is
capitalized in connection with the construction of its projects. The
capitalized interest is recorded as part of the project and is amortized
over the project's estimated life.
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 Partnership anticipates that newly opened or expanded
communities will operate at a loss during a substantial portion of the
lease-up period.
At each balance sheet date, management reviews the carrying value of
property held for investment to determine if facts and circumstances
suggest that they may be impaired or that the amortization or depreciation
period may need to be changed. Management does not believe there are any
indicators that would require an adjustment to the carrying value of the
property held for investment or the remaining useful lives as of December
31, 2002 and 2001.
D-8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
Revenue is reported at the estimated net realizable amount from residents
and third-party payors when services are provided.
Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor
settlements are provided in the period the related services are rendered.
Any differences between estimated and actual reimbursements are included in
operations in the year of settlement.
Laws and regulations governing Medicare and Medicaid programs are complex
and subject to interpretation. Management 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.
Investment in Debt Securities
The Partnership has investments in debt securities. Management determines
the appropriate classification of securities at the time they are acquired
and evaluates the appropriateness of such classification at each balance
sheet date.
Held-to-maturity securities consist solely of certificate of deposits,
maturing at various dates between June 2003 and February 2004, which the
Company has the positive intent and ability to hold to maturity, and are
stated at amortized cost which approximates fair value. There were no
unrecognized holding gains or losses as of December 31, 2002 and 2001.
Interest on debt securities is recognized in income as earned. Realized
gains and losses are included in operations. Realized gains and losses are
determined on the basis of specific identification of the securities sold.
Amortization
Debt issue costs are amortized over the term of the note payable on a
straight-line basis.
Advertising Costs
Advertising costs, included in costs and expenses are charged to operations
as incurred and were $90,499 and $113,580 for the years ended December 31,
2002 and 2001, respectively.
Use of Estimates
In preparing the Partnership's financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
2. TRANSACTIONS WITH AFFILIATED PARTIES
On November 1, 1998, the Partnership and a subsidiary of Capital Senior
Living Corporation ("CSLC"), entered into a Development and Turnkey
Services Agreement in connection with the development and management of the
planned new Waterford Communities where the Partnership would own and
finance the construction of the new communities. A subsidiary of CSLC will
have an option to purchase the partnership interest of Triad III for an
amount equal to the amount Triad III paid for its interest, plus
non-compounded interest of 12% per annum. The property management
agreements also provide CSLC's subsidiary with an option to purchase the
communities developed by the Partnership upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but
not less than hard and soft costs and lease-up costs).
D-9
2. TRANSACTIONS WITH AFFILIATED PARTIES (Continued)
During 1998, a related party agreed to loan the Partnership up to
$10,000,000 and the loan amount was later amended to $26,000,000. See
Footnote 3.
Asset management fees of $51,996 and $42,000, payable to affiliates, were
incurred and expensed for the years ended December 31, 2002 and 2001,
respectively. Accounts payable to affiliates at December 31, 2002 and 2001
totaled $57,393 and $164,074, respectively. For 2002 and 2001, related
party interest incurred was $1,932,591 and $1,201,103, respectively.
Accrued interest payable to a related party was $3,549,180 and $1,616,589
at December 31, 2002 and 2001, respectively.
3. NOTES PAYABLE
Under the terms of a subordinated promissory note with a related party, as
amended August 1, 2001, the Partnership may borrow up to $26,000,000 at
8.00% for project construction and additional borrowings, at the same rate,
to fund operating deficits. This loan may be prepaid without penalty.
Interest is payable quarterly after the first borrowing.
Borrowings at December 31, were as follows:
Outstanding Balance
Project Location Maturity 2002 2001
---------------- ----------------- ------------------ ---------------
Columbia, SC November 1, 2008 $ 3,745,962 $ 2,954,962
Deer Park, TX November 1, 2008 3,349,600 2,494,600
Jackson, MS November 1, 2008 3,568,286 2,903,286
Mansfield, OH November 1, 2008 3,345,623 2,800,123
Edison Lake, IN November 1, 2008 3,047,544 2,566,045
Pantego, TX November 1, 2008 3,522,092 2,873,092
Corporate November 1, 2008 3,808,259 1,731,259
------------------ ---------------
$ 24,387,366 $ 18,323,367
================== ===============
Under the terms of a construction loan facility with a financial
institution, as amended August 7, 2001, the Partnership may borrow up to
$56,270,246 to fund the costs of construction of senior living facilities.
Project loans may not exceed the lessor of (1) 80% of the appraised value
of the project or (2) 85% of the project costs. Amounts borrowed and repaid
may not be reborrowed. The original commitment period is twelve months from
the closing of the first project loan, but the loan closing date can be no
later than January 30, 1999. The commitment period may be extended for
twelve months. Project loans have an original term of thirty-six months,
but can be extended subject to the terms of the agreement. The facility has
commitment, application, reaffirmation, and extension fee requirements.
Interest applicable to the borrowings is based on the LIBOR rate, plus
2.25, or at the Partnership's option, the financial institution's base
rate, and is payable monthly. As security for the debt, the financial
institution has (1) first lien deeds of trust on the properties (2)
assignment of leases, rents and licenses and (3) all equipment and
furnishings. As of December 31, 2002 and 2001, investment securities of
$3,000,000 and $1,500,000, respectively, were restricted as to use in
accordance with the terms of the construction loan facility. The facility
contains various provisions and restrictive covenants.
Borrowings at December 31, were as follows:
Outstanding Balance
Project Location Maturity 2002 2001
---------------- ----------------- ------------------ ---------------
Columbia, SC January 1, 2004 $ 9,233,995 $ 9,127,354
Deer Park, TX January 1, 2004 9,310,286 9,236,164
Jackson, MS January 1, 2004 9,413,988 9,413,988
Mansfield, OH January 1, 2004 9,151,550 9,151,550
Edison Lake, IN January 1, 2004 9,630,135 9,543,676
Pantego, TX January 1, 2004 9,530,291 9,530,291
------------------ ---------------
$ 56,270,245 $ 56,003,023
================== ===============
D-10
3. NOTES PAYABLE (CONTINUED)
Maturities of notes payable are as follows for the years ending December
31:
Affiliate Other Total
----------------- -------------------- ---------------------
2003 $ - $ $ -
2004 - 56,270,245 56,270,245
Thereafter 24,387,366 - 24,387,366
----------------- -------------------- ---------------------
$24,387,366 $56,270,245 $80,657,611
================= ==================== =====================
4. INCOME TAXES
No provision has been made in the financial statements for Federal income
taxes because, under current law, no Federal income taxes are paid directly
by the Partnership. The partners are responsible for their respective
shares of the Partnership's items of income, deductions, losses and
credits.
5. COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Partnership's financial position.
6. SUBSEQUENT EVENT (UNAUDITED)
A subsidiary of CSLC (the "purchaser"), (see note 2) has recently made the
election to exercise its option to purchase the partnership interests of
Triad Partners III, Inc. (Triad III). Triad III and the purchaser entered
into a Partnership Interest Purchase Agreement ("Purchase Agreement") on
March 25, 2003 whereby Triad III will sell its general and limited
partnership interests for an aggregate of approximately $932,000. Upon
completion of this transaction, which the Partnership expects to take place
by the end of the Partnership's second fiscal quarter of 2003, the
purchaser will wholly own the Partnership. The purchase agreement is
subject to customary terms and conditions.
D-11
(iii) Financial Statements of Triad Senior Living IV, LP
TRIAD SENIOR LIVING IV, LP
BALANCE SHEETS
June 30, December 31,
2003 2002
------------- ---------------
(Unaudited) (Audited)
ASSETS
PROPERTY HELD FOR INVESTMENT - AT COST
Land $ 1,323,000 $ 1,323,000
Buildings and improvements 23,126,958 23,100,280
Furniture and fixtures 851,853 850,332
------------- ---------------
25,301,811 25,273,612
Accumulated depreciation (879,633) (546,852)
------------- ---------------
Net property held for investment 24,422,178 24,726,760
------------- ---------------
OTHER ASSETS
Cash 804,483 270,645
Accounts receivable - related party 549,000 549,000
Accounts receivable - 6,389
Inventories 16,281 15,724
Prepaid expenses - 140,275
Deposits 183,939 735,432
Debt issue costs - net of accumulated amortization of $132,818
and $97,415 at June 30, 2003 and December 31, 2002, respectively 132,593 167,996
------------- ---------------
Total other assets 1,686,296 1,885,461
------------- ---------------
$26,108,474 $26,612,221
============= ===============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Accounts payable - related party $ 25,113 $ 17,053
Accounts payable 176,439 339,167
Accrued interest - related party 1,954,490 1,557,674
Accrued interest - 67,940
Accrued property taxes 286,772 259,787
Accrued expenses - related party 16,308 11,586
Accrued expenses 65,521 62,998
Security deposits 103,001 82,501
Deferred income - 13,045
Notes payable - related party 9,799,317 9,436,155
Notes payable 18,627,307 18,466,462
------------- ---------------
Total liabilities 31,054,268 30,314,368
------------- ---------------
PARTNERS' DEFICIT (4,945,794) (3,702,147)
------------- ---------------
$26,108,474 $26,612,221
============= ===============
The accompanying notes are an integral part of these financial statements.
E-1
TRIAD SENIOR LIVING IV, LP
STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
--------------- --------------- -------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Rental income $ 955,928 $ 148,071 $ 1,827,486 $ 172,944
Resident and healthcare income 6,078 471 11,267 1,081
--------------- --------------- -------------- ---------------
Total revenues 962,006 148,542 1,838,753 174,025
COSTS AND EXPENSES 1,210,561 800,037 2,360,822 1,248,848
--------------- --------------- -------------- ---------------
OPERATING LOSS (248,555) (651,495) (522,069) (1,074,823)
OTHER INCOME AND (EXPENSE)
Interest and other income 4,664 3,502 7,535 4,502
Interest expense (367,225) (320,721) (729,113) (481,001)
--------------- --------------- -------------- ---------------
Total other income and (expense) (362,561) (317,219) (721,578) (476,499)
--------------- --------------- -------------- ---------------
NET LOSS $ (611,116) $ (968,714) $ (1,243,647) $ (1,551,322)
=============== =============== ============== ===============
The accompanying notes are an integral part of these financial statements.
E-2
TRIAD SENIOR LIVING IV, LP
STATEMENTS OF PARTNERS' DEFICIT
Year Ended December 31, 2002 and Six Months Ended June 30, 2002
(Unaudited)
General Limited
Partner Partners Total
------------ ----------- ------------
Partners' deficit at January 1, 2002 $ (215,384) $ - $ (215,384)
Net loss (3,486,763) - (3,486,763)
------------ ----------- ------------
Partners' deficit at December 31, 2002 (3,702,147) - (3,702,147)
Net loss (1,243,647) - (1,243,647)
------------ ----------- ------------
Partners' deficit at June 30, 2003 $(4,945,794) $ - $(4,945,794)
============ =========== ============
The accompanying notes are an integral part of these financial statements.
E-3
TRIAD SENIOR LIVING IV, LP
STATEMENTS OF CASH FLOWS
Six Months Ended Six Months Ended
June 30, June 30,
2003 2002
---------------- ---------------
(Unaudited) (Unaudited)
Operating activities
Net loss $ (1,243,647) $ (1,551,323)
Adjustment to reconcile net loss to net
cash provided by operating activities:
Amortization 35,402 58,811
Depreciation 332,781 210,419
Net change in operating assets and liabilities
Accounts receivable - related party - (39,418)
Accounts receivable 6,389 11,411
Inventories (557) (11,338)
Prepaid expenses 140,275 -
Accounts payable - related party 8,060 (7,276)
Accounts payable (162,728) (3,459,569)
Accrued interest - related party 396,816 383,186
Accrued interest (67,940) -
Accrued property taxes 26,985 88,637
Accrued expenses - related party 4,722 10,000
Accrued expenses 2,523 44,594
Security deposits 20,500 28,501
Deferred income (13,045) -
---------------- ---------------
Net cash provided by/(used in) operating
activities (513,464) (4,233,365)
---------------- ---------------
Increase activities
Construction in process - 22,195,657
Property held for investment (28,199) (24,402,368)
Deposits 551,494 (631,207)
---------------- ---------------
Net cash provided by/(used in) investing
activities 523,295 (2,837,918)
---------------- ---------------
Financing activities
Proceeds from notes payable - related party 470,452 1,661,706
Payments on notes payable - related party (107,290) -
Proceeds from notes payable 160,845 5,500,700
---------------- ---------------
Net cash provided by financing activities 524,007 7,162,405
---------------- ---------------
Increase in cash and cash equivalents 533,838 91,122
Cash and cash equivalents at beginning of period 270,645 417,980
---------------- ---------------
Cash and cash equivalents at end of period $ 804,483 $ 509,102
---------------- ---------------
Supplemental disclosures:
Cash paid during the year for:
Interest $ - $ -
================ ===============
Income taxes $ - $ -
================ ===============
The accompanying notes are an integral part of these financial statements.
E-4
Triad Senior Living IV, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
BUSINESS ACTIVITY
Triad Senior Living IV, L.P., (the "Partnership") is a limited partnership
organized under the laws of the State of Texas on December 22, 1998. The
Partnership was formed to acquire, develop, own and operate residential
rental properties for retirement age occupants. The Partnership will
continue until December 31, 2050, unless terminated earlier under certain
provisions of the partnership agreement.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements is as follows:
Basis of Accounting
The accompanying financial statements of the Partnership have been prepared
on the accrual basis of accounting.
Allocation of Profits and Losses
Profits and losses have been allocated as provided in the Partnership
agreement.
Any adjusted net income realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order of
priority:
(i) Adjusted net income shall be allocated to the General
Partner until the aggregate adjusted net income allocated
for the current and prior years equals the aggregate
amount of adjusted net loss allocated to the General
Partner for the current and prior years; and then
(ii) Adjusted net income shall be allocated to the General and
Limited Partners in the same proportion that cumulative
adjusted net loss has been allocated to the General and
Limited Partners for the current year and prior years
until each General and Limited Partner has been allocated
cumulative adjusted net income for the current and prior
years equal to the cumulative adjusted net loss allocated
to the General and Limited Partners for the current and
prior years; and then
(iii) All remaining adjusted net income shall be allocated among
the General and Limited Partners in proportion to their
respective percentage interests.
Any adjusted net loss realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order or
priority:
(i) Adjusted net loss shall be allocated to the General and
Limited Partners in proportion to their respective
percentage interests until each General and Limited
Partner's positive capital account balance is reduced to
zero.
(ii) All remaining adjusted net loss shall be allocated to the
General Partner.
Notwithstanding any other provision of the Partnership agreement, from the
date that construction commences with respect to a Property (the "Subject
Property") to the date 18 months following the date that the Partnership
receives a Certificate of Occupancy for the Subject Property, all adjusted
net loss from the Subject Property shall be allocated to Triad Partners IV,
Inc. The provisions shall be applied to each Property of the Partnership on
a property by property basis
E-5
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Partner Liability
A Limited Partner is not personally liable or bound for the expenses,
liabilities, or obligations of the Partnership beyond the amount of such
Partner's capital contributions as defined in the Partnership agreement.
No Limited Partner shall be obligated to provide additional capital
contributions outside the "original capital contributions" made upon
admission to the Partnership or to make a loan to the Partnership.
2. TRANSACTIONS WITH AFFILIATED PARTIES
On December 22, 1998, the Partnership and a subsidiary of Capital Senior
Living Corporation ("CSLC"), entered into a Development and Turnkey
Services Agreement in connection with the development and management of the
planned new Waterford Communities where the Partnership would own and
finance the construction of the new communities. A subsidiary of CSLC will
have an option to purchase the partnership interest of Triad IV for an
amount equal to the amount Triad IV paid for its interest, plus
non-compounded interest of 12% per annum. The property management
agreements also provide CSLC's subsidiary with an option to purchase the
communities developed by the Partnership upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but
not less than hard and soft costs and lease-up costs).
CSLC has loaned the Partnership $9,799,317 and $9,436,155 as of June 30,
2003 and December 31, 2002, respectively.
Asset management fees of $12,000, payable to affiliates, were incurred and
expensed in each of the six months ended June 30, 2003 and 2002. Accounts
payable to affiliates at June 30, 2003 and December 31, 2002 totaled
$25,113 and $17,053, respectively. For the six months ended June 30, 2003
and 2002, related party interest incurred was $396,816 and $383,185,
respectively. Accrued interest payable to a related party was $1,954,490
and $1,557,674, at June 30, 2003 and December 31, 2002, respectively.
3. COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Partnership's financial position.
4. CSLC PURCHASE OF PARTNERSHIP INTEREST
A subsidiary of CSLC (the "purchaser"), (see note 2) has recently made the
election to exercise its option to purchase the partnership interests of
Triad Partners IV, Inc. (Triad IV). Triad IV and the purchaser entered into
a Partnership Interest Purchase Agreement ("Purchase Agreement") on March
25, 2003 whereby Triad IV will sell its general and limited partnership
interests for an aggregate of approximately $108,000. On July, 29, 2003,
CSLC purchased the remaining general and limited partnership interests of
the Partnership and wholly owns the Partnership.
E-6
Report of Independent Certified Public Accountants
The Partners
Triad Senior Living IV, L.P.
We have audited the accompanying balance sheets of Triad Senior Living IV, L.P.
(A Texas Limited Partnership) as of December 31, 2002 and 2001, and the related
statements of operations, partners' deficit, and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Triad Senior Living IV, L.P. as
of December 31, 2002 and 2001, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepting in the United States of America.
/s/ Lane Gorman Trubitt, L.L.P.
-------------------------------------------
Lane Gorman Trubitt, L.L.P.
Dallas, Texas
February 14, 2003
F-1
Triad Senior Living IV, L.P.
(A Texas Limited Partnership)
BALANCE SHEETS
December 31,
2002 2001
-----------------------------------
ASSETS
PROPERTY HELD FOR INVESTMENT - AT COST
Land $ 1,323,000 $ -
Buildings and improvements 23,100,280 -
Furniture and fixtures 850,332 -
Construction in process - 24,014,866
-----------------------------------
25,273,612 24,014,866
Accumulated depreciation (546,852) -
-----------------------------------
Net property held for investment 24,726,760 24,014,866
-----------------------------------
OTHER ASSETS
Cash 270,645 417,981
Accounts receivable - related party 549,000 549,000
Accounts receivable 6,389 4,934
Inventories 15,724 -
Prepaid expenses 140,275 -
Deposits 735,432 356,500
Debt issue costs - net of accumulated amortization of $97,415
and $195,685 at December 31, 2002 and 2001, respectively 167,996 132,186
-----------------------------------
Total other assets 1,885,461 1,460,601
-----------------------------------
$ 26,612,221 $ 25,475,467
===================================
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Accounts payable - related party 17,053 33,311
Accounts payable 339,167 3,980,931
Accrued interest - related party 1,557,674 993,691
Accrued interest 67,940 -
Accrued property taxes 259,787 80,001
Accrued expenses - related party 11,586 -
Accrued expenses 62,998 -
Security deposits 82,501 24,500
Deferred income 13,045 -
Notes payable - related party 9,436,155 8,662,404
Notes payable 18,466,462 11,916,013
-----------------------------------
Total liabilities 30,314,368 25,690,851
-----------------------------------
The accompanying notes are an integral part of these financial statements.
F-2
PARTNERS' DEFICIT (3,702,147) (215,384)
-----------------------------------
$ 26,612,221 $ 25,475,467
===================================
The accompanying notes are an integral part of these financial statements.
F-3
Triad Senior Living IV, L.P.
(A Texas Limited Partnership)
STATEMENTS OF OPERATIONS
Years Ended December 31,
2002 2001
------------------------------------
REVENUES
Rental income 1,365,041 -
Resident and health care income 22,160 -
Other income - 999
------------------------------------
Total revenues 1,387,201 999
COSTS AND EXPENSES 3,608,410 194,908
------------------------------------
OPERATING LOSS (2,221,209) (193,909)
OTHER INCOME AND (EXPENSE)
Gain (loss) on sale of property (25,726) 58,856
Interest and other income 13,466 -
Interest expense (1,253,294) (66,711)
------------------------------------
Total other income and (expense) (1,265,554) (7,855)
------------------------------------
NET LOSS (3,486,763) (201,764)
====================================
The accompanying notes are an integral part of these financial statements.
F-4
Triad Senior Living IV, L.P.
(A Texas Limited Partnership)
STATEMENTS OF PARTNERS' DEFICIT
Years Ended December 31, 2002 and 2001
General Limited
Partner Partners Total
-------------------------------------------------------
Partners' deficit at January 1, 2001 $ (13,620) $ - $ (13,620)
Net loss (201,764) - (201,764)
-------------------------------------------------------
Partners' deficit at December 31, 2001 (215,384) - (215,384)
Net loss (3,486,763) - (3,486,763)
-------------------------------------------------------
Partners' deficit at December 31, 2002 $ (3,702,147) $ - $ (3,702,147)
=======================================================
The accompanying notes are an integral part of these financial statements.
F-5
Triad Senior Living IV, L.P.
(A Texas Limited Partnership)
STATEMENTS OF CASH FLOWS
Years Ended December 31,
2002 2001
-------------------------------------
Cash flows from operating activities
$
Net loss $ (3,486,763) (201,764)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Amortization 103,895 110,641
Depreciation 546,852 -
(Gain) loss on sale of property 25,726 (58,856)
Net change in operating assets and liabilities
Accounts receivable - related party - 7,434
Accounts receivable (1,455) (4,934)
Inventories (15,724) -
Prepaid expenses (140,275) -
Accounts payable - related party (16,258) (1,122,947)
Accounts payable (3,641,764) 2,552,685
Accrued interest - related party 778,398 657,255
Accrued interest 67,940 -
Accrued property taxes 179,786 80,001
Accrued expenses - related party 11,586 -
Accrued expenses 62,998 -
Security deposits 58,001 24,500
Deferred income 13,045 -
-------------------------------------
Net cash provided by (used in) operating activities (5,454,012) 2,044,015
-------------------------------------
Cash flows from investing activities
Property held for investment (2,641,148) (13,560,972)
Deposits (378,932) (356,500)
-------------------------------------
Net cash used in investing activities (3,020,080) (13,917,472)
-------------------------------------
Cash flows from financing activities
Proceeds from notes payable - related party 2,316,012 1,518,955
Payments on notes payable - related party (400,000) -
Proceeds from notes payable 6,550,449 10,755,736
Debt issue costs (139,705) -
-------------------------------------
Net cash provided by financing activities 8,326,756 12,274,691
-------------------------------------
Net increase (decrease) in cash (147,336) 401,234
Cash at beginning of year 417,981 16,747
-------------------------------------
Cash at end of year 270,645 417,981
=====================================
Supplemental disclosures of cash flow information
Cash paid during the year for: `
Income taxes $ - $ -
The accompanying notes are an integral part of these financial statements.
F-6
Interest (net of amount capitalized) 749,875 324,637
Supplemental schedule of noncash investing and financing activities:
Sale of property held for investment via reduction in a related
party note payable $ 1,382,402 $ 2,691,674
Purchase of property held for investment via increase in a related
party note payable $ - $ 2,632,818
The accompanying notes are an integral part of these financial statements.
F-7
Triad Senior Living IV, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
BUSINESS ACTIVITY
Triad Senior Living IV, L.P., (the "Partnership") is a limited partnership
organized under the laws of the State of Texas on December 22, 1998. The
Partnership was formed to acquire, develop, own and operate residential
rental properties for retirement age occupants. The Partnership will
continue until December 31, 2050, unless terminated earlier under certain
provisions of the partnership agreement.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements is as follows:
Basis of Accounting
The accompanying financial statements of the Partnership have been prepared
on the accrual basis of accounting.
Allocation of Profits and Losses
Profits and losses have been allocated as provided in the Partnership
agreement.
Any adjusted net income realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order of
priority:
(i) Adjusted net income shall be allocated to the General
Partner until the aggregate adjusted net income allocated
for the current and prior years equals the aggregate
amount of adjusted net loss allocated to the General
Partner for the current and prior years; and then
(ii) Adjusted net income shall be allocated to the General and
Limited Partners in the same proportion that cumulative
adjusted net loss has been allocated to the General and
Limited Partners for the current year and prior years
until each General and Limited Partner has been allocated
cumulative adjusted net income for the current and prior
years equal to the cumulative adjusted net loss allocated
to the General and Limited Partners for the current and
prior years; and then
(iii) All remaining adjusted net income shall be allocated among
the General and Limited Partners in proportion to their
respective percentage interests.
Any adjusted net loss realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order or
priority:
(i) Adjusted net loss shall be allocated to the General and
Limited Partners in proportion to their respective
percentage interests until each General and Limited
Partner's positive capital account balance is reduced to
zero.
(ii) All remaining adjusted net loss shall be allocated to the
General Partner.
Notwithstanding any other provision of the Partnership agreement, from the
date that construction commences with respect to a Property (the "Subject
Property") to the date 18 months following the date that the Partnership
receives a Certificate of Occupancy for the Subject Property, all adjusted
net loss from the Subject Property shall be allocated to Triad Partners IV,
Inc. The provisions shall be applied to each Property of the Partnership on
a property by property basis.
F-8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Partner Liability
A Limited Partner is not personally liable or bound for the expenses,
liabilities, or obligations of the Partnership beyond the amount of such
Partner's capital contributions as defined in the Partnership agreement.
No Limited Partner shall be obligated to provide additional capital
contributions outside the "original capital contributions" made upon
admission to the Partnership or to make a loan to the Partnership.
Cash and Cash Equivalents
The Partnership considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
The Partnership maintains its cash balances in several financial
institutions located in Texas, which at times may exceed insured limits.
The Partnership has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
Inventories
Inventories of food are used in operations and are stated at the lower of
cost or market, with cost determined on a first-in, first-out (FIFO) basis.
Property Held for Investment
Property held for investment is stated at cost. Major renewals and
improvements are capitalized, while costs of replacements, maintenance and
repairs which do not improve or extend the life of the respective assets
are charged to expense as incurred.
Buildings and improvements 20 - 40 years
Furniture and fixtures 5 - 10 years
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives. The straight-line method of depreciation is followed for
substantially all assets for financial reporting purposes, but accelerated
methods are used for tax purposes.
During project development, the costs of materials, services and
payroll-related expenditures, including interest were capitalized.
Capitalized costs of the projects are depreciated over their estimated
service lives when the projects are placed in service. As of May 31, 2002,
all property was in service and carried at cost less accumulated
depreciation. Depreciation expense charged to operations was $546,852 and
$-0- for the years ended December 31, 2002 and 2001, respectively. When
management determines a project will not result in probable future economic
benefits, the related capitalized development costs are removed from the
accounts and a loss is recognized.
Interest is capitalized in connection with the construction of its
projects. The capitalized interest is recorded as part of the project and
will be amortized over the project's estimated life. For the years ended
December 31, 2002 and 2001, total interest incurred was $1,350,225 and
$657,255, of which $96,931 and $657,255 was capitalized, respectively.
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, following by a 12-month
lease-up period. The Partnership anticipates that newly opened or expanded
communities will operate at a loss during a substantial portion of the
lease-up period.
F-9
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property Held for Investment (Continued)
At each balance sheet date, management reviews the carrying value of
property held for investment to determine if facts and circumstances
suggest that they may be impaired or that the amortization or depreciation
period may need to be changed. Management does not believe there are any
indicators that would require an adjustment to the carrying value of the
property held for investment or the remaining useful lives as of December
31, 2002 and 2001.
Revenue Recognition
Revenue is reported at the estimated net realizable amount from residents
and third-party payors when services are provided.
Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor
settlements are provided in the period the related services are rendered.
Any differences between estimated and actual reimbursements are included in
operations in the year of settlement.
Laws and regulations governing Medicare and Medicaid programs are complex
and subject to interpretation. Management 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.
Amortization
Debt issue costs are amortized over the term of the note payable on a
straight-line basis.
Advertising Costs
Advertising costs, included in costs and expenses, are charged to
operations as incurred and was $5,273 and $-0- for the years ended December
31, 2002 and 2001, respectively.
Use of Estimates
In preparing the Partnership's financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
2. TRANSACTIONS WITH AFFILIATED PARTIES
On December 22, 1998, the Partnership and a subsidiary of Capital Senior
Living Corporation ("CSLC"), entered into a Development and Turnkey
Services Agreement in connection with the development and management of the
planned new Waterford Communities where the Partnership would own and
finance the construction of the new communities. A subsidiary of CSLC will
have an option to purchase the partnership interest of Triad IV for an
amount equal to the amount Triad IV paid for its interest, plus
non-compounded interest of 12% per annum. The property management
agreements also provide CSLC's subsidiary with an option to purchase the
communities developed by the Partnership upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but
not less than hard and soft costs and lease-up costs).
During 1998, a related party agreed to loan the Partnership up to
$10,000,000. See Footnote 3.
F-10
During 2002, undeveloped land was transferred to CSLC and the proceeds of
$1,382,402 were offset against the note payable to CSLC. The transaction
generated a loss on sale of $25,726.
2. TRANSACTIONS WITH AFFILIATED PARTIES (CONTINUED)
During 2001, two properties and the associated notes payable were
transferred from an affiliated entity, Triad Senior Living V, L.P. at cost
of $2,632,818. These properties were then sold to CSLC and the proceeds of
$2,691,674 were used to pay down the note payable to CSLC. These
transactions generated a gain on sale of $58,856.
Development fees of $-0- and $56,664, payable to affiliates were incurred
and capitalized for the years ended December 31, 2002 and 2001,
respectively. Asset management fees of $24,000, payable to affiliates were
incurred and expensed in each of the years ended December 31, 2002 and
2001. Accounts payable to affiliates at December 31, 2002 and 2001 totaled
$17,053 and $33,311, respectively. For 2002 and 2001, related party
interest incurred was $681,467 and $657,255, respectively. Accrued interest
payable to a related party was $1,557,674 and $993,691, at December 31,
2002 and 2001, respectively.
3. NOTES PAYABLE
Under the terms of a subordinated promissory note with a related party, as
amended January 1, 2001, the Partnership may borrow up to $10,000,000 at
8.00%. This loan may be prepaid without penalty. Interest is payable
quarterly after the first borrowing.
Borrowings at December 31, were as follows:
Outstanding Balance
--------------------------------------
Project Location Maturity 2002 2003
--------------- --------------------------------------------------------------
N. Richland Hills, Texas December 30, 2008 $ 4,562,746 $ 3,126,511
Richardson, Texas December 30, 2008 3,885,479 3,559,627
Gilbert, Arizona December 30, 2003 1,142,261
Corporate December 30, 2008 987,930 834,005
------------------ ------------------
$ 9,436,155 $ 8,662,404
================== ==================
Under the terms of a construction loan facility with a financial
institution, as amended March 22, 2002, the Partnership may borrow up to
$18,627,307 to fund the costs of construction of senior living facilities.
Project loans may not exceed the lessor of (1) 80% of the appraised value
of the project or (2) 85% of the project costs. Amounts borrowed and repaid
may not be reborrowed. The amended construction loan maturity date is
December 31, 2004, but can be extended subject to the terms of the
agreement to December 31, 2006. The facility has commitment, application,
reaffirmation, and extension fee requirements. Interest applicable to the
borrowings is based on the LIBOR rate, plus 2.25, or at the Partnership's
option, the financial institution's base rate, and is payable monthly. As
security for the debt, the financial institution has (1) first lien deeds
of trust on the properties (2) assignment of leases, rents and licenses and
(3) all equipment and furnishings. The facility contains various provisions
and restrictive covenants.
Borrowings at December 31, were as follows:
Outstanding Balance
Project Location Maturity 2002 2003
--------------- --------------------------------------------------------------
N. Richland Hills, Texas December 31, 2004 $ 8,627,307 $ -
Richardson, Texas December 31, 2004 9,839,155 -
Corporate December 31, 2004 - 11,916,013
------------------ ------------------
$ 18,466,462 $ 11,916,013
================== ==================
F-11
3. NOTES PAYABLE (CONTINUED)
Maturities of notes payable are as follows for the years ending December
31,:
Affiliate Other Total
----------- -------------- --------------
2003 $ - $ - $ -
2004 18,466,462 -
2005 - - -
2006 - - -
2007 - - -
Thereafter 9,436,155 - 9,436,155
----------- ------------- --------------
$9,436,155 $ 18,466,462 $ 27,902,617
=========== ============= ==============
4. INCOME TAXES
No provision has been made in the financial statements for Federal income
taxes because, under current law, no Federal income taxes are paid directly
by the Partnership. The partners are responsible for their respective
shares of the Partnership's items of income, deductions, losses and
credits.
5. COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Partnership's financial position.
6. SUBSEQUENT EVENT (UNAUDITED)
A subsidiary of CSLC (the "purchaser"), (see note 2) has recently made the
election to exercise its option to purchase the partnership interests of
Triad Partners IV, Inc. (Triad IV). Triad IV and the purchaser entered into
a Partnership Interest Purchase Agreement ("Purchase Agreement") on March
25, 2003 whereby Triad IV will sell its general and limited partnership
interests for an aggregate of approximately $108,000. Upon completion of
this transaction, which the Partnership expects to take place by the end of
the Partnership's second fiscal quarter of 2003, the purchaser will wholly
own the Partnership. The purchase agreement is subject to customary terms
and conditions.
F-12
(iv) Financial Statements of Triad Senior Living V, LP
TRIAD SENIOR LIVING V, LP
BALANCE SHEETS
June 30, December 31,
2003 2002
-------------- -------------
(Unaudited) (Audited)
ASSETS
PROPERTY HELD FOR INVESTMENT - AT COST
Land $ 1,024,404 $ 1,024,404
Buildings and improvements 9,661,501 9,660,221
Furniture and fixtures 315,601 311,499
Vehicles 49,613 49,613
-------------- -------------
11,051,119 11,045,737
Accumulated depreciation (587,619) (445,925)
-------------- -------------
Net property held for investment 10,463,500 10,599,812
-------------- -------------
OTHER ASSETS
Cash 65,360 116,047
Accounts receivable 3,643 1,044
Inventories 11,139 9,211
Prepaid expenses - 41,665
Deposits 757,106 757,106
Debt issue costs - net of accumulated amortization
of $153,310 and $148,310 at June 30, 2003 and
December 31, 2002, respectively 25,000 30,000
-------------- -------------
Total other assets 862,248 955,073
-------------- -------------
$ 11,325,748 $ 11,554,885
============== =============
LIABILITIES AND PARTNERS' DEFICITY
LIABILITIES
Accounts payable - related party - 5,890
Accounts payable 8,121 13,828
Accrued interest - related party 913,441 725,257
Accrued interest 38,053 39,757
Accrued expenses - related party 7,041 6,420
Accrued expenses 62,556 32,768
Security deposits 12,328 13,678
Deferred income - 27,416
Notes payable - related party 4,711,950 4,610,950
Notes payable 8,697,888 8,794,141
-------------- -------------
Total liabilities 14,451,378 14,270,105
-------------- -------------
PARTNERS' DEFICIT (3,125,630) (2,715,220)
-------------- -------------
$ 11,325,748 $ 11,554,885
============== =============
The accompanying notes are an integral part of these financial statements.
G-1
TRIAD SENIOR LIVING V, LP
STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
--------------- ------------- --------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Rental income $ 422,714 $ 273,640 $ 844,239 $ 497,778
Resident and healthcare income 3,313 1,921 4,310 3,332
--------------- ------------- --------------- -------------
Total revenues 426,027 275,561 848,549 501,110
COSTS AND EXPENSES 432,207 416,466 842,671 790,492
--------------- ------------- --------------- -------------
OPERATING PROFIT/(LOSS) (6,180) (140,905) 5,878 (289,382)
OTHER INCOME AND (EXPENSE)
Interest and other income - 500 2,500 1,000
Interest expense (210,621) (211,617) (418,788) (398,392)
--------------- ------------- --------------- -------------
Total other income and (expense) (210,621) (211,117) (416,288) (397,392)
--------------- ------------- --------------- -------------
NET LOSS $ (216,801) $ (352,022) $ (410,410) $ (686,774)
=============== ============= =============== =============
The accompanying notes are an integral part of these financial statements.
G-2
TRIAD SENIOR LIVING V, LP
STATEMENTS OF PARTNERS' DEFICIT
Year Ended December 31, 2002 and Six Months Ended June 30, 2003
(Unaudited)
General Limited
Partner Partners Total
------------- ----------- ---------
Partners' deficit at January 1, 2002 $ (1,460,405) $ (1,000) $ (1,461,405)
Capital contribution - 50,000 50,000
Net loss (1,254,815) (49,000) (1,303,815)
------------- ----------- --------------
Partners' deficit at December 31, 2002 (2,715,220) - (2,715,220)
Net loss (410,410) - (410,410)
------------- ----------- ---------------
Partners' deficit at June 30, 2003 $ (3,125,630) $ - $ (3,125,630)
============= =========== ===============
The accompanying notes are an integral part of these financial statements.
G-3
TRIAD SENIOR LIVING V, LP
STATEMENTS OF CASH FLOWS
Six Months Ended Six Months Ended
June 30, June 30,
2003 2002
-------------- --------------
(Unaudited) (Unaudited)
Operating activities
Net loss $ (410,410) $ (686,774)
Adjustment to reconcile net loss to net
cash provided by operating activities:
Amortization 5,000 27,719
Depreciation 141,694 140,898
Net change in operating assets and liabilities
Accounts receivable (2,599) 28,097
Inventories (1,928) (1,563)
Prepaid expenses 41,665 10,757
Accounts payable - related party (5,890) (29,001)
Accounts payable (5,707) (13,440)
Accrued interest - related party 188,184 150,180
Accrued interest (1,704) -
Accrued expenses - related party 621 93
Accrued expenses 29,788 73,353
Security deposits (1,350) (443)
Deferred income (27,416) (2,033)
-------------- --------------
Net cash used in operating activities (50,052) (302,157)
-------------- --------------
Investing activities
Property held for investment (5,382) -
Deposits - (750,000)
-------------- --------------
Net cash used in investing activities (5,382) (750,000)
-------------- --------------
Financing activities
Proceeds from notes payable - related party 101,000 828,001
Proceeds from notes payable - 274,353
Notes repayment (96,253) (26,140)
Debt issue costs - (40,000)
-------------- --------------
Net cash provided by financing activities 4,747 1,036,214
-------------- --------------
Decrease in cash and cash equivalents (50,687) (15,943)
Cash and cash equivalents at beginning of period 116,047 69,397
-------------- --------------
Cash and cash equivalents at end of period 65,360 53,454
============== ==============
Supplemental disclosures:
Cash paid during the year for:
Interest $ 232,309 $ -
============== ==============
Income taxes $ - $ -
============== ==============
The accompanying notes are an integral part of these financial statements.
G-4
Triad Senior Living V, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
BUSINESS ACTIVITY
Triad Senior Living V, L.P., (the "Partnership") is a limited partnership
organized under the laws of the State of Texas on December 1, 1999. The
Partnership was formed to acquire, develop, own and operate residential
rental properties for retirement age occupants. The Partnership will
continue until December 31, 2050, unless terminated earlier under certain
provisions of the partnership agreement.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements is as follows:
Basis of Accounting
The accompanying financial statements of the Partnership have been prepared
on the accrual basis of accounting.
Allocation of Profits and Losses
Profits and losses have been allocated as provided in the Partnership
agreement.
Any adjusted net income realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order of
priority:
(i) Adjusted net income shall be allocated to the General
Partner until the aggregate adjusted net income
allocated for the current and prior years equals the
aggregate amount of adjusted net loss allocated to the
General Partner for the current and prior years; and
then
(ii) Adjusted net income shall be allocated to the General
and Limited Partners in the same proportion that
cumulative adjusted net loss has been allocated to the
General and Limited Partners for the current year and
prior years until each General and Limited Partner has
been allocated cumulative adjusted net income for the
current and prior years equal to the cumulative adjusted
net loss allocated to the General and Limited Partners
for the current and prior years; and then
(iii) All remaining adjusted net income shall be allocated
among the General and Limited Partners in proportion to
their respective percentage interests.
Any adjusted net loss realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order or
priority:
(i) Adjusted net loss shall be allocated to the General and
Limited Partners in proportion to their respective
percentage interests until each General and Limited
Partner's positive capital account balance is reduced to
zero.
(ii) All remaining adjusted net loss shall be allocated to
the General Partner.
Notwithstanding any other provision of the Partnership agreement, from the
date that construction commences with respect to a Property (the "Subject
Property") to the date 18 months following the date that the Partnership
receives a Certificate of Occupancy for the Subject Property, all adjusted
net loss from the Subject Property shall be allocated to Triad Partners V,
Inc. The provisions shall be applied to each Property of the Partnership on
a property by property basis.
G-5
Triad Senior Living V, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Partner Liability
A Limited Partner is not personally liable or bound for the expenses,
liabilities, or obligations of the Partnership beyond the amount of such
Partner's capital contributions as defined in the Partnership agreement.
No Limited Partner shall be obligated to provide additional capital
contributions outside the "original capital contributions" made upon
admission to the Partnership or to make a loan to the Partnership.
2. TRANSACTIONS WITH AFFILIATED PARTIES
On December 1, 1999, the Partnership and a subsidiary of Capital Senior
Living Corporation ("CSLC"), entered into a Development and Turnkey
Services Agreement in connection with the development and management of the
planned new Waterford Communities where the Partnership would own and
finance the construction of the new communities. A subsidiary of CSLC will
have an option to purchase the partnership interest of Triad V for an
amount equal to the amount Triad V paid for its interest, plus
non-compounded interest of 12% per annum. The property management
agreements also provide CSLC's subsidiary with an option to purchase the
communities developed by the Partnership upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but
not less than hard and soft costs and lease-up costs).
CSLC has loaned the Partnership $4,711,950 and $4,610,950 as of June 30,
2003 and December 31, 2002, respectively.
Asset management fees of $12,000, payable to affiliates, were incurred and
expensed for each of the six months ended June 30, 2003 and 2002. Accounts
payable to affiliates at June 30, 2003 and December 31, 2002 totaled $0 and
$5,890, respectively. For the six months ended June 30, 2003 and 2002,
related party interest incurred was $188,184 and $150,179, respectively.
Accrued interest payable to a related party was $913,441 and $725,257 at
June 30, 2003 and December 31, 2002, respectively.
3. COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Partnership's financial position.
4. CSLC PURCHASE OF PARTNERSHIP INTEREST
A subsidiary of CSLC (the "purchaser"), (see note 2) has recently made the
election to exercise its option to purchase the partnership interests of
Triad Partners V, L.L.C. (Triad V). Triad V and the purchaser entered into
a Partnership Interest Purchase Agreement ("Purchase Agreement") on March
25, 2003 whereby Triad V will sell its general and limited partnership
interests for an aggregate of approximately $84,000. On July 29, 2003, CSLC
purchased the remaining general and limited partnership interests of the
Partnership and wholly owns the Partnership.
G-6
Report of Independent Certified Public Accountants
The Partners
Triad Senior Living V, L.P.
We have audited the accompanying balance sheets of Triad Senior Living V, L.P.
(A Texas Limited Partnership) as of December 31, 2002 and 2001, and the related
statements of operations, partners' deficit, and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Triad Senior Living V, L.P. as
of December 31, 2002 and 2001, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Lane Gorman Trubitt, L.L.P.
-------------------------------------
Lane Gorman Trubitt, L.L.P.
Dallas, Texas
February 14, 2003
H-1
Triad Senior Living V, L.P.
(A Texas Limited Partnership)
BALANCE SHEETS
December 31,
2002 2001
---- ----
ASSETS
PROPERTY HELD FOR INVESTMENT - AT COST
Land $ 1,024,404 $ 1,024,404
Buildings and improvements 9,660,221 9,635,440
Furniture and fixtures 311,499 309,840
Vehicles 49,613 49,613
-------------- --------------
11,045,737 11,019,297
Accumulated depreciation (445,925) (164,093)
-------------- --------------
Net property held for investment 10,599,812 10,855,204
-------------- --------------
OTHER ASSETS
Cash 116,047 69,397
Accounts receivable 1,044 1,278
Inventories 9,211 5,501
Prepaid expenses 41,665 8,070
Deposits 757,106 3,000
Debt issue costs - net of accumulated amortization of $148,310
and $201,418 at December 31, 2002 and 2001, respectively 30,000 46,437
-------------- --------------
Total other assets 955,073 133,683
-------------- --------------
$ 11,554,885 $ 10,988,887
============== ==============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Accounts payable - related party $ 5,890 $ 30,918
Accounts payable 13,828 6,596
Accrued interest - related party 725,257 395,655
Accrued interest 39,757 -
Accrued expenses - related party 6,420 5,000
Accrued expenses 32,768 3,251
Security deposits 13,678 13,750
Deferred income 27,416 2,033
Notes payable - related party 4,610,950 3,450,425
Notes payable 8,794,141 8,542,664
-------------- --------------
Total liabilities 14,270,105 12,450,292
-------------- --------------
PARTNERS' DEFICIT (2,715,220) (1,461,405)
-------------- --------------
$ 11,554,885 $ 10,988,887
============== ==============
The accompanying notes are an integral part of these financial statements.
H-2
Triad Senior Living V, L.P.
(A Texas Limited Partnership)
STATEMENTS OF OPERATIONS
Years Ended December 31,
2002 2001
---- ----
REVENUES
Rental income $ 1,203,446 $ 298,726
Resident and healthcare income 6,357 2,332
------------- -----------
Total revenues 1,209,803 301,058
COSTS AND EXPENSES 1,689,673 968,864
------------- -----------
OPERATING LOSS (479,870) (667,806)
OTHER INCOME AND (EXPENSE)
Interest and other income 8,606 1,000
Interest expense (832,551) (434,288)
------------- -----------
Total other income and (expense) (823,945) (433,288)
------------- -----------
NET LOSS $ (1,303,815) $(1,101,094)
============= ===========
The accompanying notes are an integral part of these financial statements.
H-3
Triad Senior Living V, L.P.
(A Texas Limited Partnership)
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 2002 and 2001
General Limited
Partner Partners Total
----------- ------------ ------------
Partners' deficit at January 1, 2001 $ (359,311) $ (1,000) $ (360,311)
Net loss (1,101,094) - (1,101,094)
----------- ------------ -------------
Partners' deficit at December 31, 2001 (1,460,405) (1,000) (1,461,405)
Capital contribution - 50,000 50,000
Net loss (1,254,815) (49,000) (1,303,815)
----------- ------------ -------------
Partners' deficit at December 31, 2002 $(2,715,220) $ - $ (2,715,220)
=========== ============ =============
The accompanying notes are an integral part of these financial statements.
H-4
Triad Senior Living V, L.P.
(A Texas Limited Partnership)
STATEMENTS OF CASH FLOWS
Years Ended December 31,
2002 2001
---- ----
Cash flows from operating activities
Net loss $ (1,303,815) $ (1,101,094)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization 56,437 45,769
Depreciation 281,832 164,093
Net change in operating assets and liabilities
Accounts receivable 234 (1,268)
Inventories (3,710) (5,501)
Prepaid expenses (33,595) (8,070)
Accounts payable - related party (25,028) (420,521)
Accounts payable 7,232 (1,446,918)
Accrued interest - related party 329,602 89,928
Accrued interest 39,757 -
Accrued expenses - related party 1,420 5,000
Accrued expenses 29,517 3,251
Security deposits (72) 13,750
Deferred income 25,383 2,033
------------ --------------
Net cash used in operating activities (594,806) (2,659,548)
------------ --------------
Cash flows from investing activities
Property held for investment (26,440) (2,388,316)
Deposits (754,106) -
------------ --------------
Net cash used in investing activities (780,546) (2,388,316)
------------ --------------
Cash flows from financing activities
Proceeds from notes payable - related party 1,210,525 993,941
Payments on notes payable - related party (50,000) -
Proceeds from notes payable 361,410 3,935,590
Notes repayment (109,933) -
Debt issue costs (40,000) -
Capital contribution 50,000 -
------------ --------------
Net cash provided by financing activities 1,422,002 4,929,531
------------ --------------
Net increase (decrease) in cash 46,650 (118,333)
Cash at beginning of year 69,397 187,730
------------ -------------
Cash at end of year 116,047 69,397
============ =============
The accompanying notes are an integral part of these financial statements.
H-5
Supplemental disclosure of cash flow information
Cash paid during the period
for:
Income taxes $ - $ -
Interest $ 463,192 $ 282,015
Non-cash investing and financing activities:
Sale of property held for investment via reduction in a related party
note payable $ - $ 2,632,818
The accompanying notes are an integral part of these financial statements.
H-6
Triad Senior Living V, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
BUSINESS ACTIVITY
Triad Senior Living V, L.P., (the "Partnership") is a limited partnership
organized under the laws of the State of Texas on December 1, 1999. The
Partnership was formed to acquire, develop, own and operate residential
rental properties for retirement age occupants. The Partnership will
continue until December 31, 2050, unless terminated earlier under certain
provisions of the partnership agreement.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements is as follows:
Basis of Accounting
The accompanying financial statements of the Partnership have been prepared
on the accrual basis of accounting.
Allocation of Profits and Losses
Profits and losses have been allocated as provided in the Partnership
agreement.
Any adjusted net income realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order of
priority:
(i) Adjusted net income shall be allocated to the General
Partner until the aggregate adjusted net income
allocated for the current and prior years equals the
aggregate amount of adjusted net loss allocated to the
General Partner for the current and prior years; and
then
(ii) Adjusted net income shall be allocated to the General
and Limited Partners in the same proportion that
cumulative adjusted net loss has been allocated to the
General and Limited Partners for the current year and
prior years until each General and Limited Partner has
been allocated cumulative adjusted net income for the
current and prior years equal to the cumulative adjusted
net loss allocated to the General and Limited Partners
for the current and prior years; and then
(iii) All remaining adjusted net income shall be allocated
among the General and Limited Partners in proportion to
their respective percentage interests.
Any adjusted net loss realized by the Partnership for such year shall be
allocated among the Partners as follows and in the following order or
priority:
(i) Adjusted net loss shall be allocated to the General and
Limited Partners in proportion to their respective
percentage interests until each General and Limited
Partner's positive capital account balance is reduced to
zero.
(ii) All remaining adjusted net loss shall be allocated to
the General Partner.
Notwithstanding any other provision of the Partnership agreement, from the
date that construction commences with respect to a Property (the "Subject
Property") to the date 18 months following the date that the Partnership
receives a Certificate of Occupancy for the Subject Property, all adjusted
net loss from the Subject Property shall be allocated to Triad Partners V,
Inc. The provisions shall be applied to each Property of the Partnership on
a property by property basis.
H-7
Triad Senior Living V, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Partner Liability
A Limited Partner is not personally liable or bound for the expenses,
liabilities, or obligations of the Partnership beyond the amount of such
Partner's capital contributions as defined in the Partnership agreement.
No Limited Partner shall be obligated to provide additional capital
contributions outside the "original capital contributions" made upon
admission to the Partnership or to make a loan to the Partnership.
Cash and Cash Equivalents
The Partnership considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
The Partnership maintains its cash balances in financial institutions
located in Dallas, Texas and Springfield, Missouri, which at times may
exceed insured limits. The Partnership has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk
on cash and cash equivalents.
Inventories
Inventories of food are used in operations and are stated at the lower of
cost or market, with cost determined on a first-in, first-out (FIFO) basis.
Property Held for Investment
Property held for investment is stated at cost. Major renewals and
improvements are capitalized, while costs of replacements, maintenance and
repairs which do not improve or extend the life of the respective assets
are charged to expense as incurred.
Buildings and improvements 40 years
Furniture and fixtures 10 years
Vehicles 5 years
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives. The straight-line method of depreciation is followed for
substantially all assets for financial reporting purposes, but accelerated
methods are used for tax purposes.
During project development, the costs of materials, services and
payroll-related expenditures, including interest were capitalized.
Capitalized costs of the projects are depreciated over their estimated
service lives. Depreciation expense charged to operations was $281,832 and
$164,093, for the years ended December 31, 2002 and 2001, respectively.
When management determines a project will not result in probable future
economic benefits, the related capitalized development costs are removed
from the accounts and a loss is recognized. Interest is capitalized in
connection with the construction of its projects. The capitalized interest
is recorded as part of the project and is amortized over the project's
estimated life.
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, following by a 12-month
lease-up period. The Partnership anticipates that newly opened or expanded
communities will operate at a loss during a substantial portion of the
lease-up period.
At each balance sheet date, management reviews the carrying value of
property held for investment to determine if facts and circumstances
suggest that they may be impaired or that the amortization or depreciation
period may need to be changed. Management does not believe there are any
indicators that would require an adjustment to the carrying value of the
property held for investment or the remaining useful lives as of December
31, 2002 and 2001.
H-8
Triad Senior Living V, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
Revenue is reported at the estimated net realizable amount from residents
and third-party payors when services are provided.
Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor
settlements are provided in the period the related services are rendered.
Any differences between estimated and actual reimbursements are included in
operations in the year of settlement.
Laws and regulations governing Medicare and Medicaid programs are complex
and subject to interpretation. Management 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.
Amortization
Debt issue costs are amortized over the term of the note payable on a
straight-line basis.
Advertising Costs
Advertising costs, included in costs and expenses, are charged to
operations as incurred and were $16,154 and $20,383 for the years ended
December 31, 2002 and 2001, respectively.
Use of Estimates
In preparing the Partnership's financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
2. TRANSACTIONS WITH AFFILIATED PARTIES
On December 1, 1999, the Partnership and a subsidiary of Capital Senior
Living Corporation ("CSLC"), entered into a Development and Turnkey
Services Agreement in connection with the development and management of the
planned new Waterford Communities where the Partnership would own and
finance the construction of the new communities. A subsidiary of CSLC will
have an option to purchase the partnership interest of Triad V for an
amount equal to the amount Triad V paid for its interest, plus
non-compounded interest of 12% per annum. The property management
agreements also provide CSLC's subsidiary with an option to purchase the
communities developed by the Partnership upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but
not less than hard and soft costs and lease-up costs).
During 1998, a related party agreed to loan the Partnership up to
$10,000,000. See Footnote 3.
During 2001, two properties and the associated notes payable were
transferred to an affiliated entity, Triad Senior Living IV, L.P. at a cost
of $2,632,818. No profit or loss on sale was recognized on these
transactions.
H-9
Triad Senior Living V, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
2. TRANSACTIONS WITH AFFILIATED PARTIES (CONTINUED)
Development fees of $-0- and $171,636, payable to affiliates were incurred
and capitalized for the years ended December 31, 2002 and 2001,
respectively. Asset management fees of $24,000, payable to affiliates were
incurred and expensed in each of the years ended December 31, 2002 and
2001. Accounts payable to affiliates at December 31, 2002 and 2001 totaled
$5,890 and $30,918, respectively. For 2002 and 2001, related party interest
incurred was $329,602 and $395,734, respectively. Accrued interest payable
to a related party was $725,257 and $395,655 at December 31, 2002 and 2001,
respectively.
3. NOTES PAYABLE
Under the terms of a subordinated promissory note with a related party, as
amended January 1, 2001, the Partnership may borrow up to $10,000,000 at
8.00%. This loan may be prepaid without penalty. Interest is payable
quarterly after the first borrowing.
Borrowings at December 31, were as follows:
Outstanding Balance
-------------------
Project Location Maturity 2002 2001
---------------- ------------------- ------------------ ---------------
Springfield, Missouri December 30, 2008 $ 4,107,162 $ 3,065,139
Corporate December 30, 2008 503,788 385,286
------------------ ---------------
$ 4,610,950 $ 3,450,425
================== ===============
Under the terms of a master construction loan facility with a financial
institution, dated July 28, 1999, the Partnership may borrow up to
$27,000,000 to fund the costs of construction of senior living facilities.
Project loans may not exceed the lessor of (1) 75% of the initial appraised
value of the project, (2) 80% of the project costs, or (3) $10,000,000.
Amounts borrowed and repaid may not be reborrowed. The commitment period is
eighteen months from the closing of the project loan. Project loans have a
term of forty-eight months. The facility has commitment, project
submission, and construction administration fee requirements. Interest
applicable to the borrowings is based on the LIBOR rate, plus 2.50, or at
the Partnership's option, the financial institution's base rate plus .75%,
and is payable monthly. During months 29 through 48, each loan is payable
in monthly installments of principal and interest in amounts necessary to
amortize the loan over a term of twenty-five years. As security for the
debt, the financial institution has (1) first lien deeds of trust on the
properties (2) assignment of leases, rents and licenses and (3) all
equipment and furnishings. The facility contains various provisions and
restrictive covenants. The Partnership has one project loan dated January
10, 2000, in the original amount of $9,332,736, due on January 10, 2004
with borrowings of $8,794,141 and $8,542,664 at December 31, 2002 and 2001,
respectively.
Maturities of notes payable are as follows for the years ending December
31,:
Affiliate Other Total
------------------ ------------------ -----------------
2003 $ - $ 184,841 $ 184,841
2004 - 8,609,300 8,609,300
2005 - - -
2006 - - -
2007 - - -
Thereafter 4,610,950 - 4,610,950
------------------ ------------------ -----------------
$ 4,610,950 $ 8,794,141 $ 13,405,091
================== ================== =================
4. INCOME TAXES
No provision has been made in the financial statements for Federal income
taxes because, under current law, no Federal income taxes are paid directly
by the Partnership. The partners are responsible for their respective
shares of the Partnership's items of income, deductions, losses and
credits.
H-10
Triad Senior Living V, L.P.
(A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
5. COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Partnership's financial position.
6. SUBSEQUENT EVENT (UNAUDITED)
A subsidiary of CSLC (the "purchaser"), (see note 2) has recently made the
election to exercise its option to purchase the partnership interests of
Triad Partners V, L.L.C. (Triad V). Triad V and the purchaser entered into
a Partnership Interest Purchase Agreement ("Purchase Agreement") on March
25, 2003 whereby Triad V will sell its general and limited partnership
interests for an aggregate of approximately $84,000. Upon completion of
this transaction, which the Partnership expects to take place by the end of
the Partnership's second fiscal quarter of 2003, the purchaser will wholly
own the Partnership. The purchase agreement is subject to customary terms
and conditions.
H-11
(b) Pro Forma Financial Information
INTRODUCTION TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The Pro Forma Consolidated Balance Sheet as of June 30, 2003 and the Pro Forma
Consolidated Statements of Income for the six months ended June 30, 2003 and for
the year ended December 31, 2002, represent the financial position and results
of operations of Capital Senior Living Corporation ("Capital") for such periods
after giving effect to the transactions described in the accompanying notes,
relating to the purchase of the remaining partnership interest in the Triad
Entities effective July 1, 2003 and the consolidation of Triad Senior Living I,
LP ("Triad I") under the provisions of FASB Interpretation No. 46 as if they had
occurred as of June 30, 2003 for the Pro Forma Consolidated Balance Sheet, and
as of January 1, 2002 for the Pro Forma Consolidated Statements of Income.
The financial data for the Triad Entities and Triad I reflects the use of their
unaudited balance sheets as of June 30, 2003, audited statements of income for
the year ended December 31, 2002, and unaudited statements of income for the six
months ended June 30, 2003.
The pro forma financial statements reflect the purchase of the remaining
interest in the Triad Entities for cash consideration of $1.3 million, a note of
$0.4 million and assumption of liabilities.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities" an
interpretation of ARB No. 51, effective immediately for variable interest
entities created after January 31, 2003 and effective for the first fiscal year
or interim period beginning after June 15, 2003 for variable interest entities
that existed prior to February 1, 2003. The Company will adopt the provisions of
this interpretation in the third quarter of 2003 as a cumulative effect
adjustment, and its adoption will result in the Company consolidating the
financial statements of the Triad I, currently accounted for separately under
the equity method of accounting.
The Pro Forma Consolidated Balance Sheet and Pro Forma Consolidated Statements
of Income are presented for informational purposes only and do not necessarily
reflect the financial position or results of operations of Capital which would
have actually resulted with the Triad Entities and Triad I if the acquisition
had occurred as of the dates indicated, or the future results of operations of
Capital. The Pro Forma Consolidated Balance Sheet and Pro Forma Consolidated
Statement of Income and the accompanying notes should be read in conjunction
with the historical consolidated financial statements and notes thereto of
Capital and the Triad Entities contained elsewhere in this document.
PF-1
Capital Senior Living Corporation
Unaudited Pro Forma Consolidated Balance Sheets
As of June 30, 2003
Capital
Triad
Capital Entities Triad I Pro Forma
June 30, June 30, June 30, June 30,
2003 2003 2003 Adjustments 2003
---------- ----------- ----------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,268,000 $ 1,613,000 $ 1,433,000 $ (1,490,000)1C,1E $ 7,824,000
Restricted cash & marketable securities 4,490,000 7,954,000 - - 12,444,000
Accounts receivable, net 1,156,000 10,000 34,000 - 1,200,000
Accounts receivable from affiliates 424,000 - 212,000 (212,000)4D 424,000
Deferred taxes 462,000 - - - 462,000
Assets held for sale 1,739,000 - - - 1,739,000
Prepaid expenses and other 4,728,000 26,000 - - 4,754,000
---------- ----------- ----------- ------------- -------------
Total current assets 19,267,000 9,603,000 1,679,000 (1,702,000) 28,847,000
Property and equipment, net 144,150,000 127,751,000 54,770,000 62,609,000 1A,2B 389,280,000
3B,6A
Deferred taxes 6,842,000 - - 6,842,000
Due from affiliates 456,000 - - (456,000)4C -
Notes receivable from affiliates 92,886,000 - - (88,134,000)3A,5C 4,752,000
Investments in limited partnerships 1,712,000 - - - 1,712,000
Assets held for sale 2,392,000 - - - 2,392,000
Other assets 4,568,000 1,199,000 1,750,000 - 7,517,000
---------- ----------- ----------- ------------- -------------
Total assets 272,273,000 138,553,000 58,199,000 (27,683,000) 441,342,000
========== =========== =========== ============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,533,000 410,000 575,000 (471,000)4A 2,047,000
Accrued expenses 4,132,000 13,563,000 3,333,000 (14,039,000)4B,5A 6,989,000
Current portion of notes payable 10,408,000 861,000 907,000 402,000 1D 12,578,000
Federal and State Income Taxes Payable 680,000 680,000
Customer deposits 939,000 589,000 438,000 - 1,966,000
---------- ----------- ----------- ------------- -------------
Total current liabilities 17,692,000 15,423,000 5,253,000 (14,108,000) 24,260,000
Deferred income from affiliates 916,000 - - (838,000)2A 78,000
Deferred income - - - - -
Notes payable, net of current portion 130,649,000 170,740,000 59,947,000 (74,833,000)5B 286,503,000
Line of credit - - - - -
Minority interest in consolidated partnerships 443,000 - - - 443,000
Other long-term liabilities 7,485,000 7,485,000
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value: - - - - -
Authorized share 15,000,000; no shares
issued or outstanding
Common stock, $.01 par value:
Authorized share 65,000,000; shares
outstanding 19,746,901 197,000 - - - 197,000
Partners' deficit - (55,095,000) (7,001,000) 62,096,000 1B,6B -
Additional paid-in capital 92,014,000 - - - 92,014,000
Retained earnings 30,362,000 - - - 30,362,000
---------- ----------- ----------- ------------- -------------
Total shareholders' equity 122,573,000 (55,095,000) (7,001,000) 62,096,000 122,573,000
---------- ----------- ----------- ------------- -------------
Total liabilities and shareholders' equity 272,273,000 138,553,000 58,199,000 (27,683,000) 441,342,000
========== =========== =========== ============= =============
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
PF-2
Capital
Triad
Capital Entities Triad I Pro Forma
June 30, June 30, June 30, June 30,
2003 2003 2003 Adjustments 2003
---------------------------------------------------- --------------
Revenues:
Resident and healthcare revenue $26,517,000 $ 9,702,000 $7,359,000 $ - $ 43,578,000
Unaffiliated management services revenue 295,000 - - - 295,000
Affiliated management services revenue 1,802,000 - - (1,802,000)1 -
Affiliated development fees 137,000 - - (137,000)3 -
---------------------------------------------------- --------------
Total revenues 28,751,000 9,702,000 7,359,000 (1,939,000) 43,873,000
Expenses:
Operating expenses 15,843,000 7,920,000 5,010,000 (1,816,000)2,4 26,957,000
General and administrative expenses 5,267,000 2,003,000 1,106,000 - 8,376,000
Depreciation and amortization 2,686,000 1,781,000 839,000 - 5,306,000
---------------------------------------------------- --------------
Total expenses 23,796,000 11,704,000 6,955,000 (1,816,000) 40,639,000
Income (loss) from operations 4,955,000 (2,002,000) 404,000 (123,000) 3,234,000
Other income (expense)
Interest expense (5,170,000) (5,195,000) (2,022,000) 2,978,000 5 (9,409,000)
Interest income 3,421,000 54,000 5,000 (2,978,000)6 502,000
Equity in the earnings of affiliates 73,000 - - - 73,000
Gain on sale of properties 3,491,000 238,000 - - 3,729,000
---------------------------------------------------- --------------
Income (loss) before income taxes and minority
interest in Consolidated partnerships 6,770,000 (6,905,000) (1,613,000) (123,000) (1,871,000)
(Provision) benefit for income taxes (2,612,000) - - 2,741,000 7 129,000
---------------------------------------------------- --------------
Income (loss) before minority interest
in consolidated partnerships 4,158,000 (6,905,000) (1,613,000) 2,618,000 (1,742,000)
Minority interest in consolidated
partnerships 110,000 - - - 110,000
---------------------------------------------------- --------------
Net income (loss) $ 4,268,000 $ (6,905,000) $(1,613,000) $ 2,618,000 $ (1,632,000)
==================================================== ==============
Net income (loss) per share:
Basic $ 0.22 $ (0.08)
Diluted $ 0.21 $ (0.08)
Weighted average share - basic 19,747,000 19,747,000
Weighted average share - diluted 19,897,000 19,897,000
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
PF-3
Capital Senior Living Corporation
Unaudited Pro Forma Consolidated Statements of Income
For the Year Ended December 31, 2003
Triad Capital
Capital Entities Triad I Pro Forma
December 31, December 31, December 31, December 31,
2002 2002 2002 Adjustments 2002
----------------------------------------------------- --------------
Revenues:
Resident and healthcare revenue $57,574,000 $13,032,000 $14,045,000 $ - $ 84,651,000
Rental and lease income 37,000 - - - 37,000
Unaffiliated management services revenue 1,069,000 - - - 1,069,000
Affiliated management services revenue 2,062,000 - - (2,062,000)1 -
Affiliated development fees 740,000 - - (740,000)3 -
----------------------------------------------------- --------------
Total revenues 61,482,000 13,032,000 14,045,000 (2,802,000) 85,757,000
Expenses:
Operating expenses 32,851,000 14,285,000 10,097,000 (2,090,000)2,4 55,143,000
General and administrative expenses 11,824,000 3,732,000 2,127,000 - 17,683,000
Depreciation and amortization 5,846,000 3,430,000 1,666,000 - 10,942,000
----------------------------------------------------- --------------
Total expenses 50,521,000 21,447,000 13,890,000 (2,090,000) 83,768,000
Income (loss) from operations 10,961,000 (8,415,000) 155,000 (712,000) 1,989,000
Other income (expense)
Interest expense (10,749,000) (10,252,000) (2,995,000) 5,076,000 5 (18,920,000)
Interest income 5,968,000 170,000 15,000 (5,076,000)6 1,077,000
Equity in the earnings of affiliates 69,000 - - - 69,000
Gain on sale of properties 1,876,000 (26,000) - - 1,850,000
----------------------------------------------------- --------------
Income (loss) before income taxes and minority
interest in consolidated partnerships 8,125,000 (18,523,000) (2,825,000) (712,000) (13,935,000)
(Provision) benefit for income taxes (3,015,000) - - 7,502,000 7 4,487,000
----------------------------------------------------- --------------
Income (loss) before minority interest in
consolidated partnerships 5,110,000 (18,523,000) (2,825,000) 6,790,000 (9,448,000)
Minority interest in consolidated
partnerships (428,000) - - - (428,000)
----------------------------------------------------- --------------
Net income (loss) $ 4,682,000 $(18,523,000) $(2,825,000) $ 6,790,000 $ (9,876,000)
===================================================== ==============
Net income (loss) per share:
Basic $ 0.24 $ (0.50)
Diluted $ 0.24 $ (0.50)
Weighted average share - basic 19,726,000 19,726,000
Weighted average share - diluted 19,917,000 19,917,000
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
PF-4
CAPITAL, TRIAD ENTITIES AND TRIAD I
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation.
The purchase of the remaining partnership interest in the Triad Entities by
Capital and the consolidation and Triad I under the provisions of FAS 46 are
being accounted for as a purchase business combination as follows:
Triad
Entities Triad I
----------------- --------------
Purchase price:
Cash paid for partnership interest 1,293,000 --
Note payable 402,000 --
Cash paid for acquisition costs 197,000 --
Bank debt assumed 109,598,000 48,024,000
Capital debt and accrued interest 73,674,000 15,001,000
Other liabilities assumed 10,377,000 2,174,000
Deferred income eliminated (627,000) (211,000)
Triad note reserves eliminated (471,000) (70,000)
------------- -------------
Purchase price 194,443,000 64,918,000
Assets acquired:
Cash 1,613,000 1,433,000
Other assets 9,189,000 1,996,000
Property and equipment 183,641,000 61,489,000
------------- -------------
194,443,000 64,918,000
Note 2. Pro Forma Adjustments.
The pro forma adjustments to the consolidated balance sheet and consolidated
statements of income are detailed below:
Pro Forma Balance Sheet
As of June 30, 2003
1. To record the step up in basis on the assets of the Triad Entities.
A. Property and equipment 56,987,000
B. Partners' deficit 55,095,000
C. Cash paid 1,293,000
D. Notes payable 402,000
E. Cash paid for acquisition costs 197,000
------------- -------------
56,987,000 56,987,000
2. To eliminate Capital deferred management fees, deferred interest and deferred
development fees relating to the Triad Entities and Triad I.
A. Deferred income 838,000
B. Property and equipment 838,000
3. To eliminate capital's note receivable reserve related to the Triad Entities
and Triad I.
A. Notes receivable 541,000
B. Property and equipment 541,000
PF-5
CAPITAL, TRIAD ENTITIES AND TRIAD I
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
4. To eliminate related party payables and receivables between Capital, the
Triad Entities and Triad I.
A. Accounts payable 471,000
B. Accrued expenses 197,000
C. Due to/from affiliates 456,000
D. Accounts receivable 212,000
5. To eliminate related notes and accrued interest between Capital, the Triad
Entities and Triad I.
A. Accrued interest 13,842,000
B. Notes payable 74,833,000
C. Notes receivable 88,675,000
6. To record the step up in basis on the assets of the Triad I.
A. Property and equipment 7,001,000
B. Partners' deficit 7,001,000
Pro Forma Statement of Income
For the Six Months Ended June 30, 2003
1. Adjustment to reflect the elimination of affiliated management services
revenue between Capital, the Triad Entities and Triad I.
Affiliated management services revenue 1,802,000
2. Adjustment to reflect the elimination of affiliated management services
expense between Capital, the Triad Entities and Triad I.
Operating expenses 1,802,000
3. Adjustment to reflect the elimination of affiliated development fees between
Capital, the Triad Entities and Triad I.
Affiliated development fees 137,000
4. Adjustment to reflect the elimination of affiliated deferred management
services expenses between Capital, the Triad Entities and Triad I.
Operating expenses 14,000
5. Adjustment to reflect the elimination of interest income between Capital, the
Triad Entities and Triad I.
Interest income 2,978,000
6. Adjustment to reflect the elimination of interest expense between Capital,
the Triad Entities and Triad I.
Interest expense 2,978,000
7. Adjustment to record the income tax benefit derived from the net losses of
the Triad Entities using an effective tax rate of 39%.
Provision for income taxes 2,741,000
PF-6
CAPITAL, TRIAD ENTITIES AND TRIAD I
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Pro Forma Statement of Income
For the Year Ended December 31, 2003
1. Adjustment to reflect the elimination of affiliated management services
revenue between Capital, the Triad Entities and Triad I.
Affiliated management services revenue 2,062,000
2. Adjustment to reflect the elimination of affiliated management services
expense between Capital, the Triad Entities and Triad I.
Operating expenses 2,062,000
3. Adjustment to reflect the elimination of affiliated development fees between
Capital, the Triad Entities and Triad I.
Affiliated development fees 740,000
4. Adjustment to reflect the elimination of affiliated deferred management
services expenses between Capital, the Triad Entities and Triad I.
Operating expenses 28,000
5. Adjustment to reflect the elimination of interest income between Capital, the
Triad Entities and Triad I.
Interest income 5,076,000
6. Adjustment to reflect the elimination of interest expense between Capital,
the Triad Entities and Triad I.
Interest expense 5,076,000
7. Adjustment to record the income tax benefit derived from the net losses of
the Triad Entities using an effective tax rate of 39%.
Provision for income taxes 7,502,000
PF-7
SIGNATURE
Pursuant to the requirements 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.
Date: October 10, 2003 Capital Senior Living Corporation
By: /s/ Ralph A. Beattie
---------------------------------
Name: Ralph A. Beattie
Title: Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
10.1 Form of Partnership Interest Purchase Agreements, dated as of
March 25, 2003, between Capital Senior Living Properties, Inc.
and the Triad Entities, regarding the exercise of the
registrant's options to purchase the partnership interests in
the Triad Entities owned by non-registrant parties
(incorporated by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K, filed by the registrant with the
Securities and Exchange Commission on July 29, 2003)
99.1 Press Release dated July 29, 2003 (incorporated by reference
to Exhibit 99.1 to the registrant's Current Report on Form
8-K, filed by the registrant with the Securities and Exchange
Commission on July 29, 2003)