CAPITAL SENIOR LIVING CORP, 424B1, 1997-10-31

CAPITAL SENIOR LIVING CORP
424B1, 1997-10-31
NURSING & PERSONAL CARE FACILITIES

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<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-33379

PROSPECTUS

<TABLE>
<S> <C> <C>
9,000,000 Shares
[CAPITAL SENIOR Capital Senior Living Corporation
LIVING LOGO] Common Stock
</TABLE>

---------------------------
Capital Senior Living Corporation (the "Company") is one of the largest
providers of senior living services in the United States. The Company currently
owns interests in and/or operates 33 communities in 17 states with a capacity of
approximately 5,000 residents, including 17 communities in which it owns
interests, 15 communities that it manages for third parties pursuant to
multi-year management contracts and one community that it leases from a third
party.

All of the shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being offered by the Company. A
significant portion of the net proceeds of the Offering will be received by the
existing stockholders of the Company and their affiliates. See "The
Company -- Formation Transactions" and "Use of Proceeds." Prior to the Offering,
there has been no public market for the Common Stock. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. At the request of the Company, up to 450,000 shares of
Common Stock have been reserved for sale in the Offering to certain individuals,
including directors and employees of the Company, members of their families, and
other persons having business relationships with the Company. See
"Underwriting." The Common Stock has been approved for listing on the New York
Stock Exchange, subject to official notice of issuance, under the symbol "CSU."
---------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
==================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $13.50 $.84 $12.66
- ------------------------------------------------------------------------------------------------------------------
Total(3)................................. $121,500,000 $7,560,000 $113,940,000
==================================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering, estimated at $1.2 million,
payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,350,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will total $139,725,000, $8,694,000, and
$131,031,000, respectively. See "Underwriting."
---------------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the shares
will be made at the offices of Lehman Brothers Inc., in New York, New York on or
about November 5, 1997.
---------------------------
LEHMAN BROTHERS
J.C. BRADFORD & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.

OCTOBER 30, 1997.
<PAGE> 2

Inside cover page to include:

- Company logo

- map of U.S. showing states where the Company has operations

- exterior photos of the Veranda Club and Independence Village

- interior photos of Veranda Club and Independence Village

- photos of residents engaging in activities

- photos of construction projects

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK TO COVER A
SYNDICATE SHORT POSITION IN THE COMMON STOCK FOR THE PURPOSE OF MAINTAINING THE
PRICE OF THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless indicated otherwise or the context suggests
otherwise, references in this Prospectus to the "Company" mean Capital Senior
Living Corporation and its subsidiaries and predecessor entities and the
Acquired Assets (as defined herein). Unless otherwise indicated, the information
in this Prospectus assumes: (i) the completion of the reorganization of the
Company and related transactions (the "Formation," as more specifically
described under "The Company -- Formation Transactions") simultaneously with the
completion of the Offering; and (ii) no exercise of the Underwriters'
over-allotment option. See "The Company -- Formation Transactions" and
"Underwriting."

THE COMPANY

The Company is one of the largest providers of senior living services in
the United States in terms of resident capacity, according to the Assisted
Living Federation of America's 1996 Annual Largest Provider Survey. The Company
currently owns interests in and/or operates 33 communities in 17 states with a
capacity of approximately 5,000 residents, including 17 communities in which it
owns interests, 15 communities that it manages for third parties pursuant to
multi-year management contracts and one community that it leases from a third
party. The Company is currently developing 17 new communities which will have a
capacity of approximately 3,130 residents and is expanding 12 existing
communities to accommodate 994 additional residents. The Company also operates
one home health care agency. Approximately 93% of the Company's revenues and
reimbursable expenses are derived from private pay sources. At June 30, 1997,
communities which the Company operates and in which it owns interests had an
occupancy rate of approximately 95%, its managed communities had an occupancy
rate of approximately 95%, and its leased community had an occupancy rate of
approximately 95%. The Company and its predecessors have provided senior living
services since 1990.

The senior living services industry encompasses a broad and diverse range
of living accommodations and health care services that are provided primarily to
persons 65 years of age or older. For the elderly who require limited services,
care in independent living ("IL") residences, supplemented at times by home
health care, offers a viable option. Most independent living residences and
retirement centers typically offer community living together with a basic
services package consisting of meals, housekeeping, laundry, security,
transportation, social and recreational activities and health care monitoring.
As a senior's need for assistance increases, care in an assisted living ("AL")
residence is often preferable and more cost-effective than home-based care or
nursing home care. Typically, assisted living represents a combination of
housing and 24-hour a day personal support services designed to aid elderly
residents with activities of daily life ("ADLs"), such as ambulation, bathing,
dressing, eating, grooming, personal hygiene and monitoring or assistance with
medications. Certain assisted living residences may also provide assistance to
residents with low acuity medical needs (generally consisting of assistance and
reminders to residents that suffer from short periods of memory loss and
dementia, including reminders regarding medications), or may offer higher levels
of personal assistance for incontinent residents or residents with Alzheimer's
disease or other cognitive or physical frailties. Generally, assisted living
residents require higher levels of care than residents of independent living
residences and retirement living centers, but require lower levels of care than
patients in skilled nursing ("SN") facilities. For seniors who need the constant
attention of a skilled nurse or medical practitioner, a skilled nursing facility
may be required.

The Company believes that the senior living services industry will require
large capital infusions over the next 30 years to meet the growing demand for
senior living facilities. The National Investment Conference has estimated that
gross capital expenditures for the senior living marketplace will grow from $86
billion in 1996 to $126 billion in 2005 and to $490 billion in 2030, in order to
accommodate increasing demand for senior living services.

The Company's operating philosophy emphasizes a "continuum of care" which
integrates independent living, assisted living, skilled nursing and home health
care and provides senior citizens with the opportunity to "age in place." The
Company is a fully integrated senior living services organization, with internal
capabilities to operate, expand, develop, and acquire "purpose-built" senior
living communities (i.e., communities designed for the efficient delivery of
senior living services). The Company believes that its size, national scope and
comprehensive information systems provide it with economies of scale in its
operations and a platform for future growth. The Company anticipates that these
factors will position it to capitalize on emerging trends in the senior living
services industry and provide it with a competitive advantage.

The Company has built a senior management team that it believes is one of
the most experienced in the acquisition, development, and operation of senior
living communities. The Company was founded by its co-chairmen Jeffrey L. Beck
and James A. Stroud, who together have 35 years of experience in the residential
and senior living services industries. The Company's eight executive officers
have an average of 17 years of industry experience. In addition, the Company's
14 executive, regional and district officers have an average of
3
<PAGE> 4

14 years of industry experience, and its 26 on-site executive directors have an
average of 12 years of industry experience. The Company's senior management will
own approximately 51% of the outstanding shares of Common Stock after giving
effect to the Offering.

The Company has distinguished itself from many of its competitors because
it has been profitable in each quarter since 1992. The Company's management team
has created substantial value through the intensive management of its
communities. From 1992 through 1996, the Company achieved a compounded annual
growth rate in net operating income before depreciation and amortization of
15.4% for the nine senior living communities in which the Company owned
interests and operated during that period. During the same period, revenues for
such communities increased by a compounded annual growth rate of 5.4%, while
expenses for such communities increased by a compounded annual growth rate of
2.9%.

Growth Strategies

The Company believes its current operations throughout the United States
provide an established foundation for continued growth and that it has
implemented the systems and attracted the personnel necessary to support its
future growth plans. The Company plans to continue its growth principally
through the following strategies:

- Expand Existing Communities. The Company plans to expand certain of its
existing communities to include additional independent living and
assisted living residences (including special programs and living units
for residents with Alzheimer's and other cognitive and physical
frailties), and skilled nursing beds. The Company believes that the
incremental returns on expansion projects are attractive because they
enable the Company to spread the fixed costs associated with a single
location over more units and to capitalize on a community's existing
market presence. Moreover, expansions provide the Company with more
flexible capacity to accommodate residents as they "age in place."

The Company currently has 12 expansion projects which it expects to
complete in 1998 and 1999, representing an aggregate increase in capacity
of 994 residents. The Company or its strategic partners have purchased
the land associated with six of the planned expansion projects, with an
additional six parcels under contract to be acquired.

- Develop New Communities. The Company's senior management has developed in
excess of $350 million of senior living communities. In selected markets,
the Company is developing new senior living communities that are designed
to provide a quality lifestyle that is attractive to a large segment of
the senior population. Markets are chosen based on a variety of factors,
including demographic and economic factors, the supply of existing or
potential senior living communities, as well as potential economies of
scale that the Company may achieve through the clustering of communities
in a given region. The Company plans to develop new communities,
including its proprietary "Waterford" communities, which will be designed
to provide middle-income seniors with amenities comparable to communities
with higher resident fee structures. The Company plans to develop these
communities for its own account, as well as in alliances with for-profit
and not-for-profit organizations.

The Company has commenced development of 17 senior living communities
which are expected to be completed by 1999. Of these 17 new communities,
11 will be Waterford communities (with an expected capacity of
approximately 1,496 residents). The Waterford communities will be
developed pursuant to an arrangement with Tri Point Communities, L.P.
("Tri Point"), an affiliate of the Company, under which Tri Point will
fund the construction and lease-up costs and will pay the Company a fee
for development and management services. The Company will have options to
purchase the Waterford communities upon their completion. See "Certain
Transactions -- Tri Point Development Agreement." In addition, six senior
living communities are expected to be developed in strategic alliances
with third parties (with an expected capacity of approximately 1,694
residents). The Company or its strategic partners have purchased the land
associated with four of the planned development projects, with an
additional two parcels under contract to be acquired. Of the 17 new
communities under development, four are to be owned by Buckner Retirement
Services, Inc., two are to be owned by LCOR Incorporated and 11 are to be
owned by Tri Point. Messrs. Beck and Stroud will contribute cash to Tri
Point in the form of capital contributions to Tri Point's equity as
development of properties are undertaken in an amount sufficient to pay
15% of the construction costs of each project. Funds will be contributed
concurrently with the funding of construction draws. While Messrs. Beck
and Stroud have represented to the Company that they have sufficient
personal resources to make these capital contributions, there can be no
assurance that each of them will in fact possess the required amount of
funds necessary to make such contributions. If Messrs. Beck and Stroud
should fail to make such contributions, Tri Point will be unable to
pursue and fund the construction of new communities, which would have a
material adverse affect on the Company's future results of operations.
Further, the Company may experience a conflict with the interests of
Messrs. Beck and Stroud should they default on their obligations to
provide such funds to Tri Point. There can be no assurance that such
conflict, if it should develop, will be resolved in a manner favorable to
the Company. The Company has
4
<PAGE> 5

implemented policies regarding transactions with related parties, as
described herein under "Certain Transactions -- Policy of the Board of
Directors."

The Company has executed a joint venture agreement pursuant to which it
will form an entity to develop and operate senior living communities in
major cities in the Peoples Republic of China. The Company currently
expects that, following its initial development of senior living
communities in China, the joint venture will sell individual units in the
communities to prospective residents, and the Company will retain the
operating responsibilities and management fees associated with such
communities.

- Pursue Strategic Acquisitions. The Company believes that the fragmented
nature of the senior living services industry, combined with the
Company's financial resources, national presence and extensive industry
relationships, should provide it with ample acquisition opportunities.
The Company intends to continue to: (i) increase its ownership interests
in certain communities in which it already possesses an interest; (ii)
pursue single or portfolio acquisitions of senior living communities; and
(iii) pursue strategic acquisitions of other senior living services
companies as the industry consolidates.

- Expand Home Health Care Services. The Company plans to establish or
acquire additional home health care agencies to permit it to expand the
range of services that it offers at its senior living communities. In
addition, home health care services are planned to be offered in many of
the Company's newly-developed communities and expanded communities. The
Company currently intends to establish approximately five new home health
care agencies at its owned communities by the fourth quarter of 1998.

The Company believes that it will have significant capacity to fund
additional growth by virtue of its capital structure. Upon completion of the
Offering, the Company's ratio of debt-to-total market capitalization (i.e.,
total indebtedness divided by the sum of total indebtedness plus the market
value of outstanding Common Stock) will be less than 3%, and at June 30, 1997,
on a pro forma basis after giving effect to the Offering, the Company would have
had cash and cash equivalents of approximately $28.5 million.

The success of the Company's growth strategy will depend, in large part, on
the Company's ability to effectively integrate the operations and assets
acquired in the Formation Transactions, as well as new senior living communities
that are acquired or developed. In addition, the Company will need to
effectively manage the varying sources of revenue resulting from the Company's
ownership, management and development of senior living communities and home
health care agencies. See "Risk Factors -- No Assurance as to Ability to Manage
Growth," "-- Risks in Acquisitions of Communities and Complementary Businesses;
Difficulties of Integration," and "-- Risks Associated with Third-Party
Management Business."

ACQUISITION OF ASSETS OF CAPITAL SENIOR LIVING COMMUNITIES, L.P.

As more specifically described herein under "The Company -- Formation
Transactions," simultaneously with the consummation of the Offering, the Company
will purchase substantially all of the assets (the "Acquired Assets"), other
than working capital items, of Capital Senior Living Communities, L.P. ("CSLC")
for the assumption of approximately $70.0 million of debt plus cash sufficient
so that the sum of the debt assumed plus cash equals $75.6 million (subject to
closing prorations), and new construction in progress at CSLC's Cottonwood
community will be transferred to the Company for assumption by the Company of
the related construction loan (which is anticipated to have an outstanding
balance of approximately $1.0 million at closing). The purchase price to be paid
for the Acquired Assets is determined as follows: (i) CSLC's communities, other
than construction in progress, are valued based on the appraised value of the
communities of $41.3 million; (ii) CSLC's investment in HealthCare Properties,
L.P. ("HCP") is valued based on the appraised value of HCP's communities of
$24.5 million, adjusted for working capital items and other assets and
liabilities that are to be settled in cash, multiplied by the percentage of HCP
owned by CSLC; (iii) CSLC's investment in promissory notes ("NHP Notes") of NHP
Retirement Housing Partners I, L.P. ("NHP") is valued based on discounting the
amount of principal and interest payments to be made following the maturity date
of the NHP Notes (assuming a six month lag between maturity and full repayment);
and (iv) CSLC's investment in NHP limited partnership interests are valued at
its historical cost which approximates fair value. The appraised values for the
communities have been determined by third-party appraisals.

The debt to be assumed by CSLC was incurred on July 1, 1997 pursuant to a
$77.0 mortgage loan agreement with an affiliate of Lehman Brothers, Inc.
("Lehman Brothers"). On October 30, 1997, approximately $70.0 million was
outstanding under this loan agreement (excluding borrowings for construction in
progress), of which $5.5 million was used to repay outstanding amounts under
CSLC's prior credit facility and approximately $64.5 million was used by CSLC to
purchase U.S. Treasury securities. The remaining $7.0 million is available to
fund construction in progress at CSLC's Cottonwood community. It is expected
that at the consummation of the Offering, and as part of the Formation
Transactions, the Acquired Assets will be acquired by the Company through the
Company's assumption of such debt, such debt will be reduced with approximately
$70.0 million of the net proceeds of the Offering and the U.S. Treasury
securities
5
<PAGE> 6

will revert to CSLC. The approximate $64.5 million of U.S. Treasury securities
will be retained by CSLC and the Company will have no interest in such
securities. Messrs. Beck and Stroud beneficially own approximately 66% of the
limited partnership interests in CSLC. Through their ownership of such
interests, Messrs. Beck and Stroud will derive financial benefits from CSLC's
sale of the Acquired Assets to the Company and the retention by CSLC of the U.S.
Treasury securities, and in connection with CSLC's sale of the Acquired Assets,
CSLC will pay a company controlled by Messrs. Beck and Stroud a brokerage fee of
approximately $2.9 million. See "Certain Transactions -- Formation Transactions"
and "Certain Transactions -- LBHI Loan."

THE OFFERING

Common Stock offered by the
Company.................. 9,000,000 shares

Common Stock to be
outstanding after the
Offering................. 18,367,347 shares (1)

Use of proceeds............ The net proceeds to the Company from the Offering
will be used as follows: (i) to repay approximately
$70.0 million of indebtedness incurred by the
Company to acquire assets in the Formation
Transactions, as described herein under "The
Company -- Formation Transactions"; (ii) $19.5
million to repay the Formation Note issued to
existing stockholders of the Company; (iii) to pay
the balance of the purchase price to an affiliate
related to the purchase of assets in the Formation
Transactions (estimated at $5.6 million); (iv) to
fund development activities; and (v) to repay $1.2
million of indebtedness to affiliates. Any
remaining balance will be used for general
corporate purposes, including working capital, and
may be used to purchase additional interests in the
Company's existing senior living communities. An
affiliate of Lehman Brothers, the lead managing
underwriter of the Offering, will receive
approximately $70.0 million of the net proceeds in
reduction of a secured loan made by the Lehman
Brothers affiliate prior to the Offering. See "Use
of Proceeds," "Certain Transactions -- LBHI Loan"
and "Underwriting."

New York Stock Exchange
symbol................... CSU
- ---------------

(1) Does not include 782,500 shares of Common Stock reserved for issuance
pursuant to outstanding stock options under the Company's 1997 Omnibus Stock
and Incentive Plan (the "1997 Stock Incentive Plan"), which options are
exercisable at the initial public offering price. See
"Management -- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan"
and "Description of Capital Stock."
6
<PAGE> 7

SUMMARY FINANCIAL DATA

The following sets forth summary combined financial and operating
information for the Company: (i) on a historical basis for each of the periods
and dates indicated; and (ii) on a pro forma basis for each of the periods and
dates indicated. The following information should be read in conjunction with
the financial statements and notes thereto of the Company included elsewhere in
this Prospectus. The historical financial information for the Company as of and
for the fiscal years ended December 31, 1996, 1995 and 1994 has been derived
from the Company's historical financial statements audited by Ernst & Young LLP,
independent auditors, whose report with respect thereto is included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------- ------------------------------------------
1997 1996
PRO FORMA(1) 1997 1996 PRO FORMA(1) 1996 1995 1994
------------ ------- ------ ------------ ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
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Statement of Income Data:
Revenues:
Resident and health care revenue........ $10,428 $10,428 $6,955 $16,662 $13,692 $13,238 $12,761
Rental and lease income................. 2,158 2,158 648 5,691 1,101 1,231 1,235
Unaffiliated management services
revenue............................... 949 949 53 801 801 -- --
Affiliated management services
revenue............................... 701 701 1,419 1,753 2,708 2,778 3,113
Development fees........................ 370 370 -- 674 673 -- --
Other................................... 461 461 438 924 924 871 800
------- ------- ------ ------- ------- ------- -------
Total revenues...................... 15,067 15,067 9,513 26,505 19,899 18,118 17,909
------- ------- ------ ------- ------- ------- -------
Expenses:
Operating expenses...................... 8,080 8,080 5,394 13,526 10,798 10,287 10,142
General and administrative
expenses(2)........................... 2,000 3,933 2,465 4,967 5,493 4,364 4,595
Depreciation and amortization........... 994 950 779 2,140 1,481 1,776 1,707
------- ------- ------ ------- ------- ------- -------
Total expenses...................... 11,074 12,963 8,638 20,633 17,772 16,427 16,444
------- ------- ------ ------- ------- ------- -------
Income from operations.................... 3,993 2,104 875 5,872 2,127 1,691 1,465
Other income (expense):
Interest income......................... 832 794 206 483 432 368 122
Interest expense........................ (344) (419) (75) (966) (221) (278) (261)
Gain on sale of properties(3)........... -- -- -- 825 438 -- --
Equity in earnings on investments....... -- -- 398 -- 459 -- --
Other................................... -- -- 26 (72) 42 -- (16)
------- ------- ------ ------- ------- ------- -------
Income before income taxes and minority
interest in combined partnerships....... 4,481 2,479 1,430 6,142 3,277 1,781 1,310
Provision for income taxes(4)............. -- -- -- -- -- (18) (130)
------- ------- ------ ------- ------- ------- -------
Income before minority interest in
combined partnerships................... 4,481 2,479 1,430 6,142 3,277 1,763 1,180
Minority interest in combined
partnerships............................ (395) (1,266) (650) (527) (1,224) (760) (634)
------- ------- ------ ------- ------- ------- -------
Net income................................ $ 4,086 $ 1,213 $ 780 $ 5,615 $ 2,053 $ 1,003 $ 546
======= ======= ====== ======= ======= ======= =======
Pro Forma Net Income (unaudited)(5):
Net income................................ $ 4,086 $ 1,213 $ 5,615 $ 2,053
Pro forma income taxes.................... (1,614) (479) (2,218) (811)
------- ------- ------- -------
Pro forma net income...................... $ 2,472 $ 734 $ 3,397 $ 1,242
======= ======= ======= =======
Pro forma net income per share data:
Pro forma net income per share.......... $ 0.13 $ 0.18
======= =======
Shares used in computing pro forma net
income per share(1)................... 18,367 18,367
======= =======
</TABLE>

<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31,
-------------------------- ---------------------------
PRO FORMA(1) HISTORICAL 1996 1995 1994
------------ ---------- ------- ------- -------
($ IN THOUSANDS)
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Balance Sheet Data:
Cash and cash equivalents................................. $28,453 $13,199 $10,819 $10,017 $ 8,799
Working capital........................................... 27,873 5,138 9,567 6,784 5,938
Total assets.............................................. 92,971 56,634 33,203 29,747 29,913
Long-term debt, including current portion................. 6,946 13,613 666 2,687 2,192
Equity.................................................... 73,521 18,789 17,201 14,447 12,495
</TABLE>

7
<PAGE> 8

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ------------------------------------
1997 1996
PRO FORMA(1) 1997 1996 PRO FORMA(1) 1996 1995 1994
------------ ----- ----- ------------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data (at end of period):
Facilities:
Owned(6)................................... 17 17 19 17 17 20 23
Managed for third parties.................. 15 15 1 15 15 -- --
Leased from third party(7)................. 1 1 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
33 33 20 32 32 20 23
===== ===== ===== ===== ===== ===== =====
Resident capacity:
Owned(6)................................... 2,572 2,572 2,840 2,572 2,572 2,949 3,250
Managed for third parties.................. 2,372 2,372 117 2,325 2,325 -- --
Leased from third party(7)................. 98 98 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
5,042 5,042 2,957 4,897 4,897 2,949 3,250
===== ===== ===== ===== ===== ===== =====
Occupancy rates(8):
Owned and operated(9)...................... 95% 95% 91% 92% 92% 91% 89%
Managed for third parties(10).............. 95% 95% -- 94% 94% -- --
Leased from third party(7)................. 95% 95% -- -- -- -- --
</TABLE>

- ---------------

(1) Gives effect to the consummation of the Offering and the completion of the
Formation Transactions (as more specifically described under "Prospectus
Summary -- The Offering," "The Company -- Formation Transactions," and "Use
of Proceeds") as if they had occurred on January 1, 1996 for the statement
of income data and on June 30, 1997 for the balance sheet data.

(2) General and administrative expenses include officers' salaries of
$2,600,000 and $1,658,000 for the six months ended June 30, 1997 and 1996,
respectively, and $3,372,000, $2,976,000 and $3,443,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. These amounts are primarily
comprised of salaries and bonuses paid to the founders and were based in
part on Federal income tax regulations regarding distributions of closely
held corporations and S corporations. After the Offering, these Federal
income tax regulations will no longer apply to the Company and the pro
forma amounts include approximately $378,000 and $189,000 for founders'
salaries and bonuses for the year ended December 31, 1996 and the six
months ended June 30, 1997, respectively, which are based on the founders'
employment agreements. See "Management -- Employment Agreements."

(3) The historical statement of income for the year ended December 31, 1996
includes a gain of $438,000 on the sale of two multi-family rental
properties on November 1, 1996. The pro forma statement of income for the
year ended December 31, 1996 also includes the sale of one community on May
1, 1996 which resulted in: (i) a gain of $387,000 representing the
difference between the carrying value of the community and the sales
proceeds; and (ii) an extraordinary gain of $953,000 (which is not
reflected in the pro forma statement of income).

(4) A provision for income taxes was recorded by the Company from inception
through February 1, 1995. No provision for income taxes has been recorded
after February 1, 1995 as the operating companies included in the
historical combined financial statements are S corporations or partnerships
and accordingly are not subject to income taxes.

(5) The provision for income taxes to arrive at pro forma net income assumes a
combined Federal and state effective income tax rate of 39.5%.

(6) Includes communities in which the Company owns interests and which it
operates, and communities in which the Company owns interests and which are
operated by third parties under leases which were in place when the Company
acquired its interests. See "Business -- Operating Communities."

(7) The Company has managed this community from September 1, 1996 through May
31, 1997 and acquired a leasehold interest in it effective June 1, 1997.

(8) Occupancy rates are based on the ratio of occupied units to total available
units for independent and assisted living residences, and occupied beds to
available beds on a per diem basis for skilled nursing beds as of the end
of each period.

(9) Does not include communities owned by the Company and leased to third
parties pursuant to leases under which the Company receives rent regardless
of whether the units are occupied. See "Business -- Operating Communities."

(10) Does not include occupancy information on Buckner Westminster Place and
Buckner Haven. See "Business -- Operating Communities."
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RISK FACTORS

An investment in the Common Stock involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus before making a decision
to purchase Common Stock in the Offering.

NO ASSURANCE AS TO ABILITY TO MANAGE GROWTH

The Company intends to expand its operations through the development,
expansion and acquisition of senior living communities, as well as through the
expansion of the Company's home health care services. The success of the
Company's growth strategy will depend, in large part, on its ability to
effectively operate such communities or home health care agencies, as to which
there can be no assurance. The Company's growth plans will also place
significant demands on the Company's management and operating personnel. The
Company's ability to manage its future growth effectively will require it to
continue to attract, retain, train, motivate, and manage key employees. If the
Company is unable to manage its growth effectively, its business, results of
operations, and financial condition may be adversely affected. See
"Business -- Growth Strategies" and "Management -- Executive Officers, Directors
and Key Employees."

NO ASSURANCE AS TO ABILITY TO DEVELOP AND EXPAND ADDITIONAL SENIOR LIVING
COMMUNITIES

An integral component of the Company's growth strategy is to develop,
expand and acquire senior living communities. As part of its growth strategy,
the Company is currently developing 17 new senior living communities, with an
estimated aggregate capacity for 3,130 residents, and is expanding 12 existing
senior living communities to add capacity to accommodate an additional 994
residents. The Company's ability to successfully develop and expand senior
living communities will depend on a number of factors, including, but not
limited to, the Company's ability to acquire suitable development sites at
reasonable prices; the Company's success in obtaining necessary zoning,
licensing, and other required governmental permits and authorizations; and the
Company's ability to control construction costs and accurately project
completion schedules. In addition, the Company's development and expansion plans
are subject to numerous factors over which it has little or no control,
including competition for developable properties; shortages of labor or
materials; changes in applicable laws or regulations or their enforcement; the
failure of general contractors or subcontractors to perform under their
contracts; strikes; and adverse weather conditions. As a result of these
factors, there can be no assurance that the Company will not experience
construction delays, that it will be successful in developing and constructing
currently planned or additional senior living communities, or that any developed
senior living communities will be economically successful. If the Company's
development and expansion schedule is delayed, the Company's growth plans could
be adversely affected. Additionally, the Company anticipates that the
development and expansion of senior living communities may involve a substantial
commitment of capital for a period of time of two years or more until the
communities are operating and producing revenue, the consequence of which could
be an adverse impact on the Company's liquidity. In addition, there can be no
assurance that once operating, such communities will be profitable. See
"Business -- Growth Strategies."

RISKS IN ACQUISITIONS OF COMMUNITIES AND COMPLEMENTARY BUSINESSES; DIFFICULTIES
OF INTEGRATION

The Company may make strategic acquisitions of senior living communities
(which may include a variety of independent living, assisted living, and skilled
nursing communities), home health care agencies, and other properties or
businesses that are complementary to the Company's operations and growth
strategy. The acquisition of existing communities or other businesses involves a
number of risks. Existing communities available for acquisition frequently serve
or target different markets than those presently served by the Company. The
Company may also determine that renovations of acquired communities and changes
in staff and operating management personnel are necessary to successfully
integrate such communities or businesses into the Company's existing operations.
The costs incurred to reposition or renovate newly acquired communities may not
be recovered by the Company. In undertaking acquisitions, the Company also may
be adversely impacted by unforeseen liabilities attributable to the prior
operators of such communities or businesses, against whom the Company may have
little or no recourse. The success of the Company's

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acquisition strategy will be determined by numerous factors, including the
Company's ability to identify suitable acquisition candidates; the competition
for such acquisitions; the purchase price; the requirement to make operational
or structural changes and improvements; the financial performance of the
communities or businesses after acquisition; the Company's ability to finance
the acquisitions; and the Company's ability to integrate effectively any
acquired communities or businesses into the Company's management, information,
and operating systems. There can be no assurance that the Company's acquisition
of senior living communities and complementary properties and businesses will be
completed at the rate currently expected, if at all, or, if completed, that any
acquired communities or businesses will be successfully integrated into the
Company's operations.

OFFERING TO BENEFIT EXISTING STOCKHOLDERS; CONFLICTS OF INTEREST

Simultaneously with the completion of the Offering, the Company will
complete the Formation Transactions, which will benefit the existing
stockholders of the Company. The Company will use a substantial portion of the
net proceeds of the Offering to complete the Formation Transactions and repay
the Formation Note (as defined herein). The principal amount of the Formation
Note is $19.5 million. Additionally, as part of the Formation Transactions and
as more specifically described herein under "The Company -- Formation
Transactions," simultaneously with consummation of the Offering, the Company
will purchase substantially all of the Acquired Assets of CSLC, an affiliate of
the founders of the Company (Messrs. Beck and Stroud), for the assumption of
approximately $70.0 million of debt (excluding borrowings for construction in
progress) plus cash sufficient so that the sum of the debt assumed plus cash
equals the contracted purchase price, which is estimated to be $75.6 million,
excluding construction in progress. As a part of the Formation Transactions, the
CSLC debt assumed by the Company will be reduced with approximately $70.0
million of the net proceeds of the Offering, and U.S. Treasury securities
aggregating approximately $64.5 million that serve as collateral for such debt
will revert unencumbered to CSLC. Such U.S. Treasury securities will be retained
by CSLC and the Company will have no interest in such securities. Messrs. Beck
and Stroud beneficially own approximately 66% of the limited partnership
interests in CSLC. Through their ownership of such interests, Messrs. Beck and
Stroud will derive financial benefits from the CSLC's sale of the Acquired
Assets to the Company and the retention by CSLC of the U.S. Treasury securities,
and in connection with CSLC's sale of the Acquired Assets, CSLC will pay a
company controlled by Messrs. Beck and Stroud a brokerage fee of approximately
$2.9 million. The Formation Transactions were not the result of arms' length
negotiations. Although the price to be paid by the Company for certain of the
assets to be acquired in the Formation Transactions from CSLC was based on a
third-party appraisal of the estimated value of those assets, the consideration
to be paid to the Company's existing stockholders in exchange for the
contribution of certain other assets to be acquired in the Formation
Transactions was not based upon a third-party appraisal of those assets. There
can be no assurance that the value of any of the assets acquired or contributed
in the Formation Transactions are equivalent to the consideration to be paid by
the Company. Further, a minority limited partner of CSLC could challenge the
Company's acquisition of such assets, which could adversely affect the Company's
ability to consummate such acquisition. The Company has not received any
challenge to these transactions. Consummation of the Offering is subject to
completion of the Formation Transactions. See "The Company -- Formation
Transactions," "Use of Proceeds," and "Certain Transactions."

The Company expects to continue to be a party to certain transactions with
affiliates, as described in "Certain Transactions." In particular, the Company
intends to develop Waterford communities pursuant to an arrangement with Tri
Point, an affiliate of the Company, under which Tri Point will fund the
construction and lease-up costs and will pay the Company a fee for development
and management services. See "Certain Transactions -- Tri Point Development
Agreement." Messrs. Beck and Stroud will contribute cash to Tri Point in the
form of capital contributions to Tri Point's equity as development of properties
are undertaken in an amount sufficient to pay 15% of the construction costs of
each project. Funds will be contributed concurrently with the funding of
construction draws. While Messrs. Beck and Stroud have represented to the
Company that they have sufficient personal resources to make these capital
contributions, there can be no assurance that each of them will in fact possess
the required amount of funds necessary to make such contributions. If Messrs.
Beck and Stroud should fail to make such contributions, Tri Point will be unable
to pursue and fund the construction of new communities, which would have a
material adverse effect on the

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Company's future results of operations. Further, the Company may experience a
conflict with the interests of Messrs. Beck and Stroud should they default on
their obligations to provide such funds to Tri Point. There can be no assurance
that such conflict, if it should develop, will be resolved in a manner favorable
to the Company. The Company has implemented a policy requiring any material
transaction (or series of related transactions) between the Company and related
parties to be approved by a majority of the directors who have no beneficial or
economic interest in such related party upon such directors' determination that
the terms of the transaction are no less favorable to the Company than those
that could have been obtained from third parties. See "Management -- Executive
Officers, Directors and Key Employees" and "Certain Transactions -- Policy of
the Board of Directors."

RISKS ASSOCIATED WITH THIRD-PARTY MANAGEMENT BUSINESS

The Company currently manages 15 senior living communities for third
parties pursuant to multi-year management contracts. The management contracts
have terms of between four and 15 years. While the management contracts are
generally terminable by the community owner only for cause, in certain cases the
community owner may terminate the contract upon 30 days' notice to the Company
in the event of a sale of the community. In those contracts which are terminable
in the event of a sale of the community, the Company has certain rights to offer
to purchase the community. In addition, certain of the management contracts are
based on a fixed fee. To the extent that the costs associated with providing
services under such contracts increase faster than the fees established under
such contracts, the Company's earnings could be reduced. The factors affecting
the financial performance of communities managed under contracts with third
parties do not vary substantially from the factors affecting performance of
owned communities, although the risk of termination related to managed
communities is qualitatively different from certain risks associated with owned
communities, such as liabilities of a property owner for compliance with
environmental laws. See "Business -- Third-Party Management Contracts."

CONTROL BY MANAGEMENT AND CERTAIN STOCKHOLDERS

Upon completion of the Offering, the Company's officers and directors and
entities controlled by them will, collectively, beneficially own approximately
51% of the outstanding shares of Common Stock (approximately 48% if the
Underwriters' over-allotment option is exercised in full). Accordingly, such
persons will have the ability, by voting their shares in concert, to control the
election of the Company's Board of Directors and the outcome of all other
matters submitted to the Company's stockholders. Furthermore, such influence
could deter any unsolicited acquisition of the Company and, consequently,
adversely affect the market price of the Common Stock. See "Principal
Stockholders."

INCREASING COMPETITION

The senior living services industry is highly competitive, and the Company
expects that all segments of the industry will become increasingly competitive
in the future. The Company competes with other companies providing independent
living, assisted living, skilled nursing, home health care, and other similar
services and care alternatives. Although the Company believes there is a need
for senior living communities in the markets where the Company is operating and
developing residences, the Company expects that competition will increase from
existing competitors and new market entrants, some of whom may have
substantially greater financial resources than the Company. In addition, some of
the Company's competitors operate on a not-for-profit basis or as charitable
organizations and have the ability to finance capital expenditures on a
tax-exempt basis or through the receipt of charitable contributions, neither of
which are available to the Company, except indirectly through its alliances with
not-for-profit organizations. Furthermore, if the development of new senior
living communities (particularly given the current rapid pace of development of
new senior living communities) outpaces the demand for such communities in the
markets in which the Company has or is developing senior living communities,
such markets may become saturated. An oversupply of such communities in the
Company's markets could cause the Company to experience decreased occupancy,
reduced operating margins, and lower profitability. See
"Business -- Competition."

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DEPENDENCE ON KEY PERSONNEL

The Company is dependent on the services of its executive officers
(particularly the Company's Co-Chairman and Chief Executive Officer, Jeffrey L.
Beck, and the Company's Co-Chairman and Chief Operating Officer, James A.
Stroud) for the management of the Company. The loss by the Company of certain of
its executive officers and the inability to attract and retain qualified
management personnel could adversely affect the Company's business, financial
condition, and results of operations. In particular, certain matters regarding
Mr. Stroud may impact his ability to continue to serve as an employee of the
Company. See "Management -- Executive Officers, Directors and Key Employees."

COMMUNITY MANAGEMENT, STAFFING, AND LABOR COSTS

The Company competes with other providers of senior living and health care
services with respect to attracting and retaining qualified management personnel
responsible for the day-to-day operations of each of the Company's communities
and skilled technical personnel responsible for providing resident care. A
shortage of nurses or trained personnel may require the Company to enhance its
wage and benefits package in order to compete in the hiring and retention of
such personnel or to hire more expensive temporary personnel. The Company will
also be dependent on the available labor pool of semi-skilled and unskilled
employees in each of the markets in which it operates. No assurance can be given
that the Company's labor costs will not increase, or that, if they do increase,
they can be matched by corresponding increases in rates charged to residents.
Any significant failure by the Company to attract and retain qualified
management and staff personnel, to control its labor costs, or to pass on any
increased labor costs to residents through rate increases could have a material
adverse effect on the Company's business, financial condition, and results of
operations.

DEPENDENCE ON PRIVATE PAY RESIDENTS

Approximately 94% of the Company's total revenues and reimbursable expenses
for the year ended December 31, 1996, and approximately 93% of the Company's
total revenues and reimbursable expenses for the six months ended June 30, 1997,
were attributable to private pay sources. For the same periods, approximately 6%
and 7%, respectively, of the Company's revenues and reimbursable expenses were
attributable to reimbursements from Medicare and Medicaid. The Company expects
to continue to rely primarily on the ability of residents to pay for the
Company's services from their own or familial financial resources. Inflation or
other circumstances that adversely affect the ability of the elderly to pay for
the Company's services could have a material adverse effect on the Company's
business, financial condition, and results of operations.

NEED FOR ADDITIONAL FINANCING; EXPOSURE TO RISING INTEREST RATES

The Company's ability to meet its growth objectives and to satisfy its
working capital needs will depend, in part, on its ability to obtain additional
financing on acceptable terms from available financing sources, including the
use of off balance sheet financing. There can be no assurance that such
financing will be available or that, if available, future debt instruments will
not also include covenants restricting the Company's ability to incur additional
debt. Moreover, raising additional funds through the issuance of equity
securities could cause existing stockholders to experience further dilution and
could adversely affect the market price of the Common Stock. There can be no
assurance that the Company will be successful in securing additional financing,
that adequate financing will be available and, if available, will be on terms
that are acceptable to the Company, or that off balance sheet financing will be
available. The Company's inability to obtain additional financing on acceptable
terms could delay or eliminate some or all of the Company's growth plans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Future indebtedness, including amounts available under the LBHI Loan (which
bears interest at the 30-day LIBOR rate plus 0.50%), and lease obligations may
be based on floating interest rates prevailing from time to time. Therefore,
increases in prevailing interest rates could increase the Company's interest or
lease

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payment obligations and could have a material adverse effect on the Company's
business, financial condition, and results of operations.

LIMITED COMBINED OPERATING HISTORY

While the Company and its predecessors have provided senior living services
since 1990, these operations have not been conducted under a single entity. The
Company is acquiring all of its assets in the Formation Transactions and there
can be no assurance that the Company will be able to effectively integrate the
ownership and operation of these assets acquired. The Company itself has a
limited operating history upon which investors may evaluate the performance of
the Company as an integrated entity. See "The Company -- Formation
Transactions."

GOVERNMENT REGULATION AND THE BURDENS OF COMPLIANCE

Federal and state governments regulate various aspects of the Company's
business. The development and operation of health care facilities and the
provision of health care services are subject to federal, state, and local
licensure, certification, and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of services, the
distribution of pharmaceuticals, billing practices and policies, equipment,
staffing (including professional licensing), operating policies and procedures,
fire prevention measures, environmental matters, and compliance with building
and safety codes. Failure to comply with these laws and regulations could result
in the denial of reimbursement, the imposition of fines, temporary suspension of
admission of new patients, suspension or decertification from the Medicare
program, restrictions on the ability to acquire new communities or expand
existing communities, and, in extreme cases, the revocation of a community's
license or closure of a community. There can be no assurance that federal,
state, or local governments will not impose additional restrictions on the
Company's activities that could materially adversely affect the Company.

Many states, including several of the states in which the Company currently
operates, control the supply of licensed skilled nursing beds and home health
care agencies through certificate of need ("CON") programs. In those states,
approval is required for the construction of new health care communities, the
addition of licensed beds, and certain capital expenditures at such communities,
as well as the opening of a home health care agency. To the extent that a CON or
other similar approval is required for the acquisition or construction of new
communities, the expansion of the number of licensed beds, services, or existing
communities, or the opening of a home health care agency, the Company could be
adversely affected by the failure or inability to obtain such approval, changes
in the standards applicable for such approval, and possible delays and expenses
associated with obtaining such approval. In addition, in most states, the
reduction of the number of licensed beds or the closure of a community requires
the approval of the appropriate state regulatory agency and, if the Company were
to seek to reduce the number of licensed beds at, or to close, a community, the
Company could be adversely affected by a failure to obtain or a delay in
obtaining such approval.

Federal and state anti-remuneration laws, such as "anti-kickback" laws,
govern certain financial arrangements among health care providers and others who
may be in a position to refer or recommend patients to such providers. These
laws prohibit, among other things, certain direct and indirect payments that are
intended to induce the referral of patients to, the arranging for services by,
or the recommending of, a particular provider of health care items or services.
Federal anti-kickback laws have been broadly interpreted to apply to certain
contractual relationships between health care providers and sources of patient
referral. Similar state laws vary, are sometimes vague, and seldom have been
interpreted by courts or regulatory agencies. Violation of these laws can result
in loss of licensure, civil and criminal penalties, and exclusion of health care
providers or suppliers from participation in Medicare and Medicaid programs.
There can be no assurance that such laws will be interpreted in a manner
consistent with the practices of the Company.

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create access to the properties by disabled persons. Although the Company
believes that its communities are substantially in compliance with present
requirements or are exempt therefrom, if required changes involve a greater
expenditure than anticipated or must be made on a more accelerated basis than
anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.
See "Business -- Government Regulation."

RISKS OF CHINESE OPERATIONS

In addition to normal investment risks, the Company's joint venture
activities in China are subject to certain risks that are unique to that
country. The Company intends to be one of the first providers of senior living
services in China. There can be no assurance that the Company's products and
services will be accepted in China. The value of the Company's interests in
China may also be affected adversely by significant political, social, and legal
uncertainties in China. A change in the policies of the Chinese government,
including, changes in laws or regulations, or the interpretation thereof,
taxation, restrictions on currency conversion, the imposition of exchange
controls or price controls, or the expropriation of private or foreign business
or property interests, could adversely affect the Company's interests in China.
In addition, the Chinese currency is not freely convertible into United States
dollars. Foreign investment enterprises are permitted to maintain up to a
maximum amount of foreign exchange in their own foreign exchange account in
China with respect to their regular foreign exchange revenue items. Foreign
investment enterprises are required to sell any foreign exchange revenue beyond
the prescribed maximum amount either to authorized foreign exchange banks or
though swap centers in exchange for Chinese currency. There is no assurance
that, even if converted to United States dollars, the Company will be able to
repatriate any earnings from Chinese operations. Additionally, there is no
assurance that the Chinese currency will not be subject to devaluation or
depreciation or that shortages in the availability of foreign currency will not
develop. The value of the Company's investments and profitability of its
operations in China may be materially adversely affected by devaluation of the
Chinese currency.

POTENTIAL FOR ENVIRONMENTAL LIABILITY

Under various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs incurred by such parties in connection with the contamination. Such
laws typically impose clean-up responsibility and liability without regard to
whether the owner knew of or caused the presence of the contaminants, and
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation, or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such property, may adversely affect the owner's
ability to sell or lease such property or to borrow using such property as
collateral. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or remediation of such substances at the disposal or treatment facility,
whether or not such facility is owned or operated by such person. Finally, the
owner of a site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from a
site. The Company believes that there is no asbestos in the properties owned or
operated by it. The Company has completed Phase I environmental audits of the
communities in which the Company owns interests, and such surveys have not
revealed any material environmental liabilities that exist with respect to these
communities.

LIABILITY AND INSURANCE

The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the senior living services
industry have become subject to an increasing number of lawsuits

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alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs. Moreover,
senior living communities offer residents a greater degree of independence in
their daily living. This increased level of independence may subject the
resident and the Company to certain risks that would be reduced in more
institutionalized settings. The Company currently maintains insurance in amounts
it believes are comparable to that maintained by other senior living companies
based on the nature of the risks, its historical experience, and industry
standards, and the Company believes that such insurance coverage is adequate.
There can be no assurance, however, that claims in excess of the Company's
insurance or claims not covered by the Company's insurance, such as claims for
punitive damages, will not arise. A claim against the Company not covered by, or
in excess of, the Company's insurance could have a material adverse effect upon
the Company. In addition, the Company's insurance policies must be renewed
annually. There can be no assurance that the Company will be able to obtain
liability insurance in the future or that, if such insurance is available, it
will be available on acceptable economic terms. See "Business -- Insurance and
Legal Proceedings."

EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS

The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") and the Company's Bylaws (the "Bylaws"), as well as Delaware
corporate law, contain certain provisions that could have the effect of making
it more difficult for a third party to acquire, or discouraging a third party
from attempting to acquire, control of the Company. These provisions could limit
the price that certain investors might be willing to pay in the future for
shares of Common Stock. Certain of these provisions allow the Company to issue,
without stockholder approval, preferred stock having rights senior to those of
the Common Stock. Other provisions impose various procedural and other
requirements, including advance notice and super-majority voting provisions,
that could make it more difficult for stockholders to effect certain corporate
actions. In addition, the Company's Board of Directors is divided into three
classes, each of which serves for a staggered three-year term, which may make it
more difficult for a third party to gain control of the Board of Directors. As a
Delaware corporation, the Company is subject to Section 203 of the Delaware
General Corporation Law which, in general, prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) for three
years following the date such person became an interested stockholder unless
certain conditions are satisfied.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market following
the Offering, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock. Upon completion of the
Offering, the Company will have 18,367,347 shares of Common Stock outstanding.
Of these shares, the 9,000,000 shares sold in the Offering will be freely
tradeable without restriction or limitation under the Securities Act of 1933, as
amended (the "Securities Act"), except for shares purchased by "affiliates" of
the Company, as such term is defined in Rule 144 promulgated under the
Securities Act. The remaining 9,367,347 shares, including the shares issued in
the Formation Transactions, will be "restricted securities" within the meaning
of Rule 144 and may not be resold in the public markets unless registered under
the Securities Act or pursuant to an exemption, such as the safe harbor provided
by Rule 144. The Company and all directors and executive officers of the Company
(who in the aggregate will beneficially own 9,367,347 shares of Common Stock)
and all of its stockholders will agree prior to the Offering, subject to certain
exceptions, not to offer, sell, or otherwise dispose of any Common Stock for a
period of 180 days after the date hereof, without the written consent of Lehman
Brothers. See "Principal Stockholders" and "Shares Eligible For Future Sale."

The Company intends to file a registration statement under the Securities
Act to register the issuance of an aggregate of 1,565,000 shares under the
Company's 1997 Stock Incentive Plan. See "Management -- Compensation Pursuant to
Plans -- 1997 Stock Incentive Plan" and "Shares Eligible For Future Sale."

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ABSENCE OF PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF MARKET PRICE

Prior to the Offering, there has been no public trading market for the
Common Stock. The public offering price for the Common Stock has been determined
by negotiations among the Company and the Underwriters based upon several
factors and does not necessarily bear any relationship to the Company's assets,
book value, results of operations, net worth, or any other generally accepted
criteria of value, and should not be considered as indicative of the actual
value of the Company. See "Underwriting." Although the Common Stock has been
approved for listing on the New York Stock Exchange ("NYSE"), subject to
official notice of issuance, there can be no assurance that an active trading
market will develop or be sustained after the Offering. To the extent that an
active trading market does develop, factors such as quarterly variations in the
Company's financial results, announcements by the Company or others, general
market conditions, or certain regulatory pronouncements may cause the market
price of the Common Stock to fluctuate substantially. There can be no assurance
that the Common Stock can be resold at or above the initial public offering
price.

DILUTION

Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the amount of $9.58 per share in the pro forma net
tangible book value of their shares of Common Stock, based upon the initial
public offering price of $13.50 per share. See "Dilution."

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THE COMPANY

GENERAL

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and senior living services industries. The Company's eight executive officers
have an average of 17 years of industry experience. In addition, the Company's
14 executive, regional and district officers have an average of 14 years of
industry experience, and its 26 on-site executive directors have an average of
12 years of industry experience. The Company's senior management will own
approximately 51% of the outstanding shares of Common Stock after giving effect
to the Offering.

The Company has distinguished itself from many of its competitors because
it has been profitable in each quarter since 1992. The Company's management team
has created substantial value through the intensive management of its
communities. From 1992 through 1996, the Company achieved a compounded annual
growth rate in net operating income before depreciation and amortization of
15.4% for the nine communities in which the Company owned interests and operated
during that period. During the same period, revenues for such communities
increased by a compounded annual growth rate of 5.4%, while expenses for such
communities increased by a compounded annual growth rate of 2.9%.

Growth Strategies

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new communities under development, four are to be owned by Buckner
Retirement Services, Inc., two are to be owned by LCOR Incorporated and
11 are to be owned by Tri Point.

- Pursue Strategic Acquisitions. The Company believes that the fragmented
nature of the senior living services industry, combined with the
Company's financial resources, national presence and extensive industry
relationships, should provide it with ample acquisition opportunities.
The Company intends to continue to: (i) increase its ownership interests
in certain communities in which it already possesses an ownership
interest; (ii) pursue single or portfolio acquisitions of senior living
communities; and (iii) pursue strategic acquisitions of other senior
living services companies as the industry consolidates.

The Company was incorporated under the laws of the State of Delaware in
October 1996. The Company's principal executive offices are located at 14160
Dallas Parkway, Suite 300, Dallas, Texas 75240, and its telephone number at that
address is (972) 770-5600.

FORMATION TRANSACTIONS

The Company was incorporated in October 1996 in anticipation of the
Offering. Simultaneously with the consummation of the Offering, the Company, the
Company's founders, Messrs. Beck and Stroud, Lawrence A. Cohen, Vice Chairman
and Chief Financial Officer of the Company, and affiliates of Messrs. Beck and
Stroud will complete a series of transactions (the "Formation Transactions")
that will result in the reorganization of the Company (the "Formation").
Following the Offering, all of the Company's operations will be conducted by the
Company or its wholly owned subsidiaries.

As part of the Formation Transactions, Messrs. Beck and Stroud (and their
affiliates) will contribute all of the capital stock of Capital Senior Living,
Inc., Capital Senior Management 1, Inc., Capital Senior Management 2, Inc.,
Capital Senior Development, Inc., and, with Lawrence A. Cohen, of Quality Home
Care, Inc. (the "Contributed Entities") to the Company in exchange for the
issuance of 7,687,347 shares of Common Stock and the issuance of separate notes
to Messrs. Beck, Stroud and Cohen in the aggregate principal amount of $19.5
million (collectively, the "Formation Note"). The number of shares of Common

19
<PAGE> 20

Stock to be issued and the principal amount of the Formation Note were
established by Messrs. Beck and Stroud and the Company in connection with the
Formation based on an assessment of the value of the Contributed Entities and
the value of the Acquired Assets. The Formation Note will be repaid from net
proceeds of the Offering. Such repayment received by Messrs. Beck and Stroud
will in turn be used by them to pay tax obligations which they will incur in
connection with the Formation. The primary assets of the Contributed Entities
consist of third-party management contracts, development contracts and a home
health care agency. See "Risk Factors -- Offering to Benefit Existing
Stockholders; Conflicts of Interest."

Also as part of the Formation Transactions, the Company will purchase
substantially all of the assets (the "Acquired Assets"), other than working
capital items, of Capital Senior Living Communities, L.P., a Delaware limited
partnership ("CSLC"), for the assumption of approximately $70.0 million of debt
plus cash sufficient so that the sum of the debt assumed plus cash equals $75.6
million (subject to closing prorations), and new construction in progress at
CSLC's Cottonwood community will be transferred to the Company for assumption by
the Company of the related construction loan which is anticipated to have an
outstanding balance of approximately $1.0 million as of closing (the "Asset
Acquisition"). The Acquired Assets of CSLC are: (i) four senior living
communities located in Cottonwood, Arizona, Indianapolis, Indiana, Merrillville,
Indiana and Canton, Ohio; (ii) approximately 56% of the limited partner
interests in HealthCare Properties, L.P., a Delaware limited partnership
("HCP"); and (iii) approximately 31% of the aggregate principal amount of
certain notes (the "NHP Notes") issued by NHP Retirement Housing Partners I,
L.P., a Delaware limited partnership ("NHP") and approximately 3% of the
outstanding limited partnership interests of NHP. The primary assets of HCP
consist of: (i) approximately $9.5 million in cash and cash equivalents at June
30, 1997; (ii) four physical rehabilitation facilities located in Orlando,
Florida, Nashville, Tennessee, Lancaster, South Carolina, and Martin, Tennessee;
and (iii) four skilled nursing communities located in Evansville, Indiana,
Cambridge, Massachusetts, Fort Worth, Texas, and Austin, Texas. The outstanding
principal amount of all of the NHP Notes at June 30, 1997 was $42.7 million. The
NHP Notes accrue interest at a rate of 13% per annum, pay cash interest at a
rate of 7% per annum, are secured by substantially all of the assets of NHP, and
mature on December 31, 2001. The primary assets of NHP consist of five senior
living communities located in Buffalo, New York, Sacramento, California (two
communities), Detroit, Michigan, and Boca Raton, Florida. Messrs. Beck and
Stroud control approximately 66% of the limited partnership interests in CSLC
and will initiate the steps to begin the liquidation of CSLC, pursuant to the
terms of CSLC's partnership agreement, following completion of the Formation
Transactions. The purchase price to be paid for the Acquired Assets is
determined as follows: (i) CSLC's communities, other than construction in
process, are valued based on the appraised value of the communities; (ii) CSLC's
investment in HCP is valued based on the appraised value of HCP's communities,
adjusted for working capital items and other assets and liabilities that would
be settled in cash, multiplied by the percentage of HCP owned by CSLC; (iii)
CSLC's investment in the NHP Notes is valued based on discounting the amount of
principal and interest payments to be made following the maturity date (December
31, 2001) of the NHP Notes (assuming a six month lag between maturity and full
repayment); and (iv) CSLC's investment in the NHP limited partnership interests
is valued at its historical cost basis which approximates fair value. The
appraised values for the communities have been determined by third-party
appraisals.

20
<PAGE> 21

The following chart depicts the organizational structure of the Company
following the Offering:

[Chart]
- ---------------

(1) The Contributed Entities consist of the following: Capital Senior Living,
Inc.; Capital Senior Management 1, Inc.; Capital Senior Management 2, Inc.;
Capital Senior Development, Inc.; and Quality Home Care, Inc.

(2) The Acquired Assets will be owned by a newly formed, wholly-owned subsidiary
of the Company.

(3) The remaining outstanding limited partnership interests in HCP and NHP that
are not owned by the Company, and the remaining outstanding NHP Notes not
owned by the Company, are publicly held.

CSLC, HCP and NHP are limited partnerships required to file periodic
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The general partner of CSLC is Retirement Living Communities, an Indiana
limited partnership, which is beneficially owned by Messrs. Beck and Stroud. The
general partner of HCP and NHP is Capital Realty Group Senior Housing, Inc.
("Senior Housing"), an entity beneficially owned by Mr. Beck and Mr. Stroud. The
general partners of CSLC, HCP and NHP will remain beneficially owned by Messrs.
Beck and Stroud after completion of the Formation Transactions. As part of the
Formation Transactions, the Company has received a ten-year option to purchase
all of the capital stock of Senior Housing at fair market value (as determined
by an independent appraisal), which it intends to exercise in 1998, but has no
obligation to do so. Pending such exercise, any fees received by Senior Housing
from HCP or NHP will be assigned to the Company.

The debt to be assumed by the Company in the Asset Acquisition consists of
a $77.0 million mortgage loan commitment made on June 30, 1997 to CSLC by Lehman
Brothers Holdings, Inc. ("LBHI"), an affiliate of Lehman Brothers (the "LBHI
Loan"), of which approximately $70.0 million was outstanding on October 30,
1997, excluding borrowings for construction in progress. Of the proceeds from
the LBHI Loan, $5.5 million was used to repay outstanding amounts under the
CSLC's prior credit facility, approximately $64.5 million was used by CSLC to
purchase U.S. Treasury securities and the remaining $7.0 million is available to
fund expenditures associated with the expansion of one of CSLC's communities.
The LBHI Loan was incurred by CSLC for the purpose of refinancing the
outstanding debt due under CSLC's prior credit facility and to provide
construction financing for the expansion of one of CSLC's communities. The U.S.
Treasury securities were acquired with proceeds of the LBHI Loan to provide
collateral for the borrowings thereunder. The U.S. Treasury securities were sold
under a repurchase agreement with Lehman

21
<PAGE> 22

Brothers, with a term equal to their maturity. It is expected that, upon
consummation of the Offering and as a part of the Formation Transactions, the
Acquired Assets will be acquired by the Company through assumption of the LBHI
Loan, the repurchase agreement will be cancelled and the LBHI Loan will be
reduced by the Company with net proceeds of the Offering. See "Use of Proceeds."
The U.S. Treasury securities will revert to CSLC for use or disposition as
determined by CSLC, and the Company will have no interest in such securities.

See "Use of Proceeds," "Risk Factors -- Offering to Benefit Existing
Stockholders; Conflicts of Interest," "Certain Transactions -- Organization of
the Company," "-- Formation Transactions," and "Underwriting."

USE OF PROCEEDS

The net proceeds from the sale of the Common Stock offered hereby are
estimated to be approximately $111.8 million (approximately $128.5 million if
the Underwriters' over-allotment option is exercised in full) after deduction of
the underwriting discounts and commissions and estimated offering expenses
payable by the Company.

The Company will use approximately $70.0 million of the net proceeds of the
Offering to reduce the outstanding balance of the LBHI Loan, $5.5 million of
which was used to repay outstanding amounts under CSLC's prior credit facility
and approximately $64.5 million of which was used by CSLC to purchase U.S.
Treasury securities. The $7.0 million of borrowings that will remain available
to the Company under the LBHI Loan will be refinanced following the Offering to
fund expenditures associated with the expansion of one of the Company's
communities. Borrowings under the LBHI Loan bear interest at the 30-day LIBOR
rate plus 0.50% and mature on December 31, 1997. See "Certain
Transactions -- LBHI Loan." The Company expects to use the balance of the net
proceeds remaining after reduction of the LBHI Loan as follows: (i)
approximately $5.6 million will be paid to CSLC in order to purchase the
Acquired Assets; (ii) $19.5 million to repay the Formation Note; (iii)
approximately $5.0 million to fund its anticipated contribution and costs
associated with its development alliances with not-for-profit and for-profit
organizations in the United States; (iv) approximately $2.0 million to fund its
anticipated contribution and costs associated with its venture in China; and (v)
repayment of $1.2 million of notes payable and accrued interest to the Company's
founders and an affiliate. The Company may use a portion of the remaining $8.5
million of net proceeds over the next 12 to 18 months to purchase additional
interests in the Company's existing senior living communities, although there
are no agreements or commitments to do so. If not used to purchase such
additional interests, such net proceeds will be used for general corporate
purposes, including working capital.

Pending the use of the net proceeds as described above, the net proceeds
will be invested in short-term, investment-grade securities.

22
<PAGE> 23

DIVIDEND POLICY

Following the Offering, it will be the policy of the Company's Board of
Directors to retain all future earnings to finance the operation and expansion
of the Company's business. Accordingly, the Company does not anticipate
declaring or paying cash dividends on the Common Stock in the foreseeable
future. The payment of cash dividends in the future will be at the sole
discretion of the Company's Board of Directors and will depend on, among other
things, the Company's earnings, operations, capital requirements, financial
condition, restrictions in then existing financing agreements, and other factors
deemed relevant by the Board of Directors.

Since the respective dates of their incorporation, the Contributed Entities
have elected to operate as S corporations under Subchapter S of the Internal
Revenue Code. As a result, the Contributed Entities' earnings for the period
commencing on the dates of their incorporation and ending on the day preceding
the date of termination of their S corporation status have been or will be, as
the case may be, taxed for Federal income tax purposes, with certain exceptions,
directly to the stockholders of the Contributed Entities. The termination of the
Contributed Entities' S corporation status will occur on the date of the
completion of the Offering. Commencing upon the completion of the Offering, the
Contributed Entities will no longer be treated as S corporations and,
accordingly, will be fully subject to Federal income taxes.

23
<PAGE> 24

CAPITALIZATION

The following table sets forth at June 30, 1997, the historical
capitalization of the Company and the pro forma capitalization as adjusted to
reflect: (i) the Offering; (ii) the funding and subsequent repayment of the LBHI
Loan; and (iii) the Formation Transactions. The table should be read in
conjunction with the Combined Financial Statements and the related notes
thereto, the "Pro Forma Combined Financial Statements," "The
Company -- Formation Transactions," and "Use of Proceeds" contained elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
AT JUNE 30, 1997
---------------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion).................. $13,613 $ 6,946
------- -------
Minority interest in combined partnerships.................. 20,749 11,090
------- -------
Equity:
Partners' capital......................................... 19,370 --
Preferred Stock, $.01 par value,
15,000,000 shares authorized; no shares issued and
outstanding............................................ -- --
Common Stock, $.01 par value,
65,000,000 shares authorized; 1,680,000 shares issued
and outstanding, historical; and 18,367,347 issued and
outstanding, as adjusted(1)............................ 17 183
Additional paid-in capital................................ 27 74,008
Retained earnings (deficit)............................... (625) (670)
------- -------
Total equity...................................... 18,789 73,521
------- -------
Total capitalization.............................. $53,151 $91,557
======= =======
</TABLE>

- ---------------

(1) Excludes 782,500 shares of Common Stock subject to options expected to be
granted pursuant to the Company's 1997 Stock Incentive Plan as of the
closing of the Offering, which options will be exercisable at the initial
public offering price. The Company has reserved for issuance up to 1,565,000
shares of Common Stock under its 1997 Stock Incentive Plan. See
"Management -- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan."

24
<PAGE> 25

DILUTION

The net tangible book value of the Company at June 30, 1997, was
approximately $18.4 million, or $1.97 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding, which, for purposes of these calculations, is presumed to be
9,367,347 shares (which reflects 1,680,000 shares outstanding as of June 30,
1997, and 7,687,347 shares to be issued in the Formation Transactions). Pro
forma net tangible book value was calculated after giving effect to: (i) the
sale of the 9,000,000 shares of Common Stock offered hereby at an initial public
offering price of $13.50 per share, after deducting the underwriting discounts
and commissions and estimated offering expenses payable by the Company; (ii) the
Formation Transactions; and (iii) the application of a portion of the estimated
net proceeds to retire the Formation Note, the LBHI Loan, and notes payable to
the Company's founders and an affiliate. Pro forma net tangible book value of
the Company, after giving effect to the Offering and the Formation Transactions,
as of June 30, 1997 would have been approximately $72.0 million, or $3.92 per
share of Common Stock. This represents an immediate increase in pro forma net
tangible book value per share of $1.95 to existing stockholders and an immediate
dilution of $9.58 per share to investors purchasing Common Stock in the
Offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price............................... $13.50
Net tangible book value after giving effect to the
Formation Transactions as of June 30, 1997............. $1.97
Increase in net tangible book value attributable to the
Offering............................................... 1.95
-----
Pro forma net tangible book value after giving effect to the
Offering and the Formation................................ 3.92
------
Dilution to new investors in the Offering................... $ 9.58
======
</TABLE>

The following table summarizes the number of shares of Common Stock issued
by the Company, the total cash consideration paid to the Company, and the
average price per share by the existing stockholders and to be paid by the new
investors purchasing Common Stock in the Offering.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 9,367,347 51.0% $ 16,800 -- --
New investors.............. 9,000,000 49.0 121,500,000 100.0% $13.50
---------- ----- ------------ -----
Total............ 18,367,347 100.0% $121,516,800 100.0%
========== ===== ============ =====
</TABLE>

The tables above exclude the effect of 782,500 shares of Common Stock
subject to issuance pursuant to outstanding stock options under the Company's
1997 Stock Incentive Plan. See "Management -- Compensation Pursuant to
Plans -- 1997 Stock Incentive Plan."

25
<PAGE> 26

SELECTED FINANCIAL DATA

The following table sets forth selected financial data, other data and pro
forma financial data of the Company. The selected financial data for the years
ended December 31, 1993 and 1992 are derived from the unaudited combined
financial statements of the Company. The selected financial data for the years
ended December 31, 1996, 1995 and 1994 are derived from the combined financial
statements of the Company, which financial statements have been audited by Ernst
& Young LLP, independent auditors. The combined financial statements as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, and the independent auditor's report thereon, are included
elsewhere in this Prospectus. The selected balance sheet data as of June 30,
1997, and the statements of income for the six months ended June 30, 1997 and
1996, are derived from the unaudited combined financial statements of the
Company. In the opinion of the Company's management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. The information below should be read in conjunction with, and
are qualified in their entirety by, the combined financial statements and
related notes thereto, the "Pro Forma Combined Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------- --------------------------------------------------------------
1997 1996
PRO FORMA(1) 1997 1996 PRO FORMA(1) 1996 1995 1994 1993 1992
------------ ------- ------ ------------ ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Income Data:
Revenues:
Resident and health care
revenue................... $10,428 $10,428 $6,955 $16,662 $13,692 $13,238 $12,761 $12,140 $11,361
Rental and lease income..... 2,158 2,158 648 5,691 1,101 1,231 1,235 1,175 1,055
Unaffiliated management
services revenue.......... 949 949 53 801 801 -- -- -- --
Affiliated management
services revenue.......... 701 701 1,419 1,753 2,708 2,778 3,113 3,458 1,533
Development fees............ 370 370 -- 674 673 -- -- -- --
Other....................... 461 461 438 924 924 871 800 1,022 1,141
------- ------- ------ ------- ------- ------- ------- ------- -------
Total revenues.......... 15,067 15,067 9,513 26,505 19,899 18,118 17,909 17,795 15,090
------- ------- ------ ------- ------- ------- ------- ------- -------
Expenses:
Operating expenses............ 8,080 8,080 5,394 13,526 10,798 10,287 10,142 9,653 9,226
General and administrative
expenses(2)................. 2,000 3,933 2,465 4,967 5,493 4,364 4,595 5,406 3,783
Depreciation and
amortization................ 994 950 779 2,140 1,481 1,776 1,707 1,609 1,566
------- ------- ------ ------- ------- ------- ------- ------- -------
Total expenses.......... 11,074 12,963 8,638 20,633 17,772 16,427 16,444 16,668 14,575
------- ------- ------ ------- ------- ------- ------- ------- -------
Income from operations......... 3,993 2,104 875 5,872 2,127 1,691 1,465 1,127 515
Other income (expense):
Interest income............... 832 794 206 483 432 368 122 89 73
Interest expense.............. (344) (419) (75) (966) (221) (278) (261) (307) (293)
Gain on sale of
properties(3)............... -- -- -- 825 438 -- -- -- --
Equity in earnings on
investments................. -- -- 398 -- 459 -- -- -- --
Other....................... -- -- 26 (72) 42 -- (16) (20) --
------- ------- ------ ------- ------- ------- ------- ------- -------
Income before income taxes and
minority interest in combined
partnerships.................. 4,481 2,479 1,430 6,142 3,277 1,781 1,310 889 295
(Provision) benefit for income
taxes(4)...................... -- -- -- -- -- (18) (130) 62 96
------- ------- ------ ------- ------- ------- ------- ------- -------
Income before minority interest
in combined
partnerships.................. 4,481 2,479 1,430 6,142 3,277 1,763 1,180 951 (292)
Minority interest in combined
partnerships.................. (395) (1,266) (650) (527) (1,224) (760) (634) (572) (391)
------- ------- ------ ------- ------- ------- ------- ------- -------
Net income..................... $ 4,086 $ 1,213 $ 780 $ 5,615 $ 2,053 $ 1,003 $ 546 $ 379 $ 94
======= ======= ====== ======= ======= ======= ======= ======= =======
Pro Forma Net Income Data
(unaudited)(5):
Net income.................... $ 4,086 $ 1,213 $ 5,615 $ 2,053
Pro forma income taxes........ (1,614) (479) (2,218) (811)
------- ------- ------- -------
Pro forma net income.......... $ 2,472 $ 734 $ 3,397 $ 1,242
======= ======= ======= =======
Pro forma net income per share
data:
Pro forma net income per
share....................... $ 0.13 $ 0.18
======= =======
Shares used in computing pro
forma net income per
share(1)...................... 18,367 18,367
======= =======
</TABLE>

26
<PAGE> 27

<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31,
------------------------- -----------------------------------------------
PRO FORMA(1) HISTORICAL 1996 1995 1994 1993 1992
------------ ---------- ------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................... $28,453 $13,199 $10,819 $10,017 $ 8,799 $ 2,065 $ 3,561
Working capital................................... 27,873 5,138 9,567 6,784 5,938 48 2,889
Total assets...................................... 92,971 56,634 33,203 29,747 29,913 27,861 26,792
Long-term debt, including current portion......... 6,946 13,613 666 2,687 2,192 2,556 2,998
Equity............................................ 73,521 18,789 17,201 14,447 12,495 10,631 10,130
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------ ---------------------------------------------------------
1997 1996
PRO FORMA(1) 1997 1996 PRO FORMA(1) 1996 1995 1994 1993 1992
------------ ------ ------ ------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data (at end of period):
Facilities:
Owned(6).......................... 17 17 19 17 17 20 23 23 11
Managed for third parties......... 15 15 1 15 15 -- -- -- 1
Leased from third party(7)........ 1 1 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
33 33 20 32 32 20 23 23 12
====== ====== ====== ====== ====== ====== ====== ====== ======
Resident capacity:
Owned(6).......................... 2,572 2,572 2,840 2,572 2,572 2,949 3,250 3,250 2,086
Managed for third parties......... 2,372 2,372 117 2,325 2,325 -- -- -- 239
Leased from third party(7)........ 98 98 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
5,042 5,042 2,957 4,897 4,897 2,949 3,250 3,250 2,325
====== ====== ====== ====== ====== ====== ====== ====== ======
Occupancy rates(8):
Owned and operated(9)............. 95% 95% 91% 92% 92% 91% 89% 89% 87%
Managed for third parties(10)..... 95% 95% -- 94% 94% -- -- -- 86%
Leased from third party(7)........ 95% 95% -- -- -- -- -- -- --
</TABLE>

- ---------------

(5) The provision for income taxes to arrive at pro forma net income assumes a
combined Federal and state effective income tax rate of 39.5%.

(7) The Company has managed this community from September 1, 1996 through May
31, 1997 and acquired a leasehold interest in it effective June 1, 1997.

(10) Does not include occupancy information on Buckner Westminster Place and
Buckner Haven. See "Business -- Operating Communities."

27
<PAGE> 28

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion and analysis addresses the Company's results of
operations on an historical combined basis for the six months ended June 30,
1997 and 1996 and for the years ended December 31, 1996, 1995, and 1994. The
following should be read in conjunction with the Company's historical combined
financial statements and the summary and selected financial data and other
information contained elsewhere in this Prospectus.

The Company's historical financial statements include the combined
financial statements of Capital Senior Living Corporation, Capital Senior
Living, Inc., Quality Home Care, Inc., Capital Senior Development, Inc., Capital
Senior Management 1, Inc. and Capital Senior Management 2, Inc. (the
"Contributed Entities"), CSLC, and, since January 1, 1997, HCP. The Contributed
Entities are owned and controlled 50% by James A. Stroud (individually and
through a trust) and 50% by Jeffrey L. Beck, except that Lawrence A. Cohen is
also a stockholder of Quality Home Care, Inc. In addition, Messrs. Beck and
Stroud or entities owned and controlled by them are the managing general
partners of CSLC and HCP.

Due to all of these entities being under the common control of Messrs. Beck
and Stroud, the Company's combined financial statements reflect the assets and
liabilities at their historical values and the accompanying combined statements
of income, equity, and cash flows reflect the combined results for the periods
indicated even though they have historically operated as separate entities. The
Formation Transactions will be accounted for at historical cost in a manner
similar to a pooling of interests to the extent of the percentage ownership by
Messrs. Beck and Stroud of the Company. Assets and liabilities in CSLC will be
recorded at fair value to the extent of any minority interest. CSLC's assets
include investments in HCP and NHP.

From 1990 through June 30, 1997, the Company acquired interests in 17
communities and entered into an operating lease with respect to one community.
In 1996, the Company expanded its senior living management services by taking
over the management service contracts on 15 communities for four independent
third-party owners and commenced providing development and construction
management services for new residence properties in addition to adding a home
health care service agency.

The Company generates revenue from a variety of sources. For the six months
ended June 30, 1997, the Company's revenue was derived as follows: 72.2% from
the operation of five owned and one leased senior living communities that are
operated by the Company; 14.3% from lease rentals from triple net leases of
three skilled nursing facilities and four physical rehabilitation centers; 11.0%
from management fees arising from management services provided for five
affiliate owned and operated senior living communities and fifteen third party
owned and operated senior living communities; and 2.5% derived from development
fees earned for managing the development and construction of new senior living
communities for third parties. As the Company implements its business plan,
management believes that the mix of the Company's revenues may change and that
development activities will take on an increased importance to the Company. The
Company believes that the factors affecting the financial performance of
communities managed under contracts with third parties do not vary substantially
from the factors affecting the performance of owned and leased communities,
although there are different business risks associated with these activities.
See "Risk Factors -- Risks Associated with Third-Party Management Business."

The Company derives the benefits and bears the risk attendant to the
communities it owns. The cash flow and profitability of owned communities
depends on the operating results of such communities and are subject to certain
risks of ownership, including the need for capital expenditures, financing and
other risks such as those relating to environmental matters.

The cash flow and profitability of the Company's owned communities that are
leased to third parties depend on the ability of the lessee to make timely lease
payments. If a lessee should fail to make such payment, the Company has the
ability to pursue its rights under the guarantees of payment and performance
contained in the Company's lease agreements. In the event that the Company
cannot collect amounts owed under such arrangements, profitability and cash flow
would be impacted by the performance of the respective community. The cash flow
and profitability of communities that are leased and operated by the Company are
subject to the Company's obligations to make payments under the lease. To the
extent that the Company is

28
<PAGE> 29

unable to meet its lease obligations, it risks losing the opportunity to
continue to lease and operate such communities.

The Company's third party management fees are primarily based on a
percentage of gross revenues. As a result, the cash flow and profitability of
such contracts to the Company are more dependent on the revenues generated by
such communities and less dependent on net cash flow than for owned communities.
Further, the Company is not responsible for capital investments in managed
communities. While the management contracts are generally terminable only for
cause, in certain cases the contracts can be terminated upon the sale of a
community, subject to the Company's rights to offer to purchase such community.
See "Risk Factors -- Risks Associated with Third-Party Management Business."

The Company's triple net leases extend through the year 2000 for three of
its owned communities and through the year 2001 for four of its owned
communities. The payments under these leases are fixed and are not subject to
change based upon the operating performance of these communities. Following
termination of the lease agreements, the Company intends to convert and operate
the communities as assisted living and Alzheimer's care facilities.

The Company's current management contracts expire on various dates between
July 1998 and February 2004 and provide for management fees based generally upon
rates that vary by contract from 5% of net revenues to 7% of net revenues. In
addition, certain of the contracts provide for supplemental incentive fees that
vary by contract based upon the financial performance of the managed community.
The Company's development fees are generally based upon a percentage of
construction cost and are earned over the period commencing with the initial
development activities and ending with the opening of the community. As of June
30, 1997, development fees have been earned for services performed for one
community under development for a third party.

During 1997, 1996, and 1995, CSLC made various purchases of limited
partnership interests in HCP, an affiliated partnership whose properties are
managed by the Company under management contracts. HCP owns and operates a
skilled nursing facility and owns and leases to third-party operators (under
triple net leases) three skilled nursing facilities and four physical
rehabilitation centers. During 1997, 1996, and 1995, CSLC paid $5,323,000,
$3,201,000, and $309,000, respectively, for partnership interests in HCP. CSLC
changed its method of accounting for its investment in HCP from the cost method
in 1995 to the equity method in 1996. As a result of additional purchases,
CSLC's ownership interest in HCP exceeded 50% on June 26, 1997. Accordingly,
this partial acquisition has been accounted for by the purchase method of
accounting and the assets, liabilities, minority interest, and the results of
operations of HCP have been consolidated in the Company's financial statements
since January 1, 1997.

During 1997, 1996, and 1995, CSLC made various purchases of outstanding
notes of NHP, an affiliated partnership whose properties are managed by the
Company under management contracts. NHP owns and operates five senior living
communities. As of June 30, 1997, CSLC has cumulatively paid $9,620,000 for
ownership of 27.9% of the outstanding NHP Notes, which represents $11,924,000 of
the outstanding note balance and $6,203,269 of the accrued interest. The NHP
Notes bear simple interest at 13% per annum and mature on December 31, 2001.
Interest is paid quarterly at a rate of 7%, with the remaining 6% interest
deferred. Prior to April 1997, CSLC did not accrue the deferred interest on the
NHP Notes due to uncertainties regarding its ultimate realization; rather, CSLC
based its interest accrual on the interest received on its investment. Beginning
April 1, 1997, CSLC began accruing a portion of the deferred interest income due
to improved NHP cash flows and the results of an independent valuation of NHP's
properties, which supported management's analysis that the investment in the NHP
Notes and the deferred interest are recoverable. The operations of NHP have
demonstrated continuing improvement since 1992, and, although there can be no
assurance, management believes that the performance of NHP will be sustained
through the time the NHP Notes mature. The Company acquired the NHP Notes at
discounts to the outstanding principal balance of those Notes based on the
prevailing secondary market prices for the NHP Notes at the dates of
acquisition. The Company believes that the NHP Notes have traded at a
significant discount due primarily to the lack of an organized secondary market
for such Notes, and believes that such discount is not a function of the credit
risks associated with such Notes. Also, during 1996, CSLC paid $1,364 for a 3%
ownership of limited partnership interests in NHP. The Company will account for
its investment in NHP on

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<PAGE> 30

the cost method with respect to the NHP limited partnership interests and as
held-to-maturity securities and reported at amortized cost with respect to the
NHP Notes.

The Company will continue to develop senior living communities and is
currently expanding 12 existing senior living communities. The development of
senior living communities typically involves a substantial commitment of capital
over a 12-month construction period during which time no revenues are generated,
followed by a 12-month lease-up period. The Company anticipates that newly
opened or expanded communities will operate at a loss during a substantial
portion of the lease-up period. See "-- Liquidity and Capital Resources" and
"Risk Factors -- No Assurance as to Ability to Develop and Expand Additional
Senior Living Communities." The Company's growth strategy may also include the
acquisition of senior living communities, home health care agencies, and other
properties or businesses that are complementary to the Company's operations and
growth strategy.

RESULTS OF OPERATIONS

The following tables set forth for the periods indicated, selected
historical Statements of Income data in thousands of dollars and expressed as a
percentage of total revenues.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------- ---------------------------------------------------
1997 1996 1996 1995 1994
--------------- -------------- --------------- --------------- ---------------
$ % $ % $ % $ % $ %
------- ----- ------ ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and health care
revenue......................... $10,428 69.2% $6,955 73.1% $13,692 68.8% $13,238 73.1% $12,761 71.3%
Rental and lease income........... 2,158 14.3 648 6.8 1,101 5.5 1,231 6.8 1,235 6.9
Unaffiliated management services
revenue......................... 949 6.3 53 0.6 801 4.0 -- -- -- --
Affiliated management services
revenue......................... 701 4.7 1,419 14.9 2,708 13.6 2,778 15.3 3,113 17.4
Development fees.................. 370 2.5 -- -- 673 3.4 -- -- -- --
Other............................. 461 3.1 438 4.6 924 4.6 871 4.8 800 4.5
------- ----- ------ ----- ------- ----- ------- ----- ------- -----
Total revenues.................. 15,067 100.0 9,513 100.0 19,899 100.0 18,118 100.0 17,909 100.0
------- ----- ------ ----- ------- ----- ------- ----- ------- -----
Expenses:
Operating expenses................ 8,080 53.6 5,394 56.7 10,798 54.3 10,287 56.8 10,142 56.6
General and administrative
expenses........................ 3,933 26.2 2,465 25.9 5,493 27.6 4,364 24.1 4,595 25.7
Depreciation and amortization..... 950 6.3 779 8.2 1,481 7.4 1,776 9.8 1,707 9.5
------- ----- ------ ----- ------- ----- ------- ----- ------- -----
Total expenses.................. 12,963 86.0 8,638 90.8 17,772 89.3 16,427 90.7 16,444 91.8
------- ----- ------ ----- ------- ----- ------- ----- ------- -----
Income from operations.............. 2,104 14.0 875 9.2 2,127 10.7 1,691 9.3 1,465 8.2
Other income (expense):
Interest income................... 794 5.3 206 2.2 432 2.2 368 2.0 122 0.7
Interest expense.................. (419) (2.8) (75) (0.8) (221) (1.1) (278) (1.5) (261) (1.5)
Gain on sale of properties........ -- -- -- -- 438 2.2 -- -- -- --
Equity in earnings on
investments..................... -- -- 398 4.2 459 2.3 -- -- -- --
Other............................. -- -- 26 0.3 42 0.2 -- -- (16) (0.1)
------- ----- ------ ----- ------- ----- ------- ----- ------- -----
Income before income taxes and
minority interest in combined
partnerships...................... 2,479 16.5 1,430 15.0 3,277 16.5 1,781 9.8 1,310 7.3
Provision for income taxes.......... -- -- -- -- -- -- (18) (0.1) (130) (0.7)
------- ----- ------ ----- ------- ----- ------- ----- ------- -----
Income before minority interest in
combined partnerships............. 2,479 16.5 1,430 15.0 3,277 16.5 1,763 9.7 1,180 6.6
Minority interest in combined
partnerships...................... (1,266) -- (650) (6.8) (1,224) (6.2) (760) (4.2) (634) (3.6)
------- ----- ------ ----- ------- ----- ------- ----- ------- -----
Net income.......................... $ 1,213 8.9% $ 780 8.2% $ 2,053 10.3% $ 1,003 5.5% $ 546 3.0%
======= ===== ====== ===== ======= ===== ======= ===== ======= =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996

Revenues. Total revenues were $15,067,000 in the first six months of 1997
compared to $9,513,000 for the first six months of 1996, representing an
increase of $5,554,000, or 58.4%. The inclusion of HCP revenues in 1997 from
January 1, 1997 contributed $4,653,000 of the increase, as HCP was not
consolidated in 1996. Resident and health care revenue increased $3,473,000, of
which $2,495,000 is a result of the HCP consolidation, $715,000 is improvement
in CSLC's revenues due to recovery of additional billings previously

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<PAGE> 31

limited under the Medicare program for 1994 and $220,000 relates to the Maryland
Gardens facility leased on June 1, 1997. Rental and lease income increased
$1,510,000, of which $2,158,000 was due to the HCP consolidation, offset by
$648,000 due to the sale of CSLC's multifamily properties on November 1, 1996.
Unaffiliated management services revenue increased $896,000 due to 15
third-party management contracts added in the latter part of 1996 and one
contract added in the second quarter of 1997. Affiliated management services
revenue decreased by $718,000, of which $599,000 was due to the HCP
consolidation and $111,000 was due to the sale of an HCP managed property in May
1996. Development fees of $370,000 in 1997 is due to new development contract
management revenue for managing the development and construction of new
third-party owned senior living communities.

Expenses. Total expenses were $12,963,000 in the first six months of 1997
compared to $8,638,000 in 1996, representing an increase of $4,325,000, or
50.1%. The inclusion of HCP expenses from January 1, 1997 contributed $3,190,000
of the increase. Operating expenses increased $2,271,000 as a result of the HCP
consolidation, $214,000 due to Maryland Gardens operating expenses, and an
increase in development expenses of $341,000 owing to increased development
operations. General and administrative expenses increased $1,468,000, which was
due to the HCP consolidation of $397,000, an increase in officers salaries and
bonuses of $942,000, and an increase in other general and administrative
expenses of $129,000, which is primarily the result of expanded business
operations and increased revenues. Depreciation and amortization increased
$171,000, of which $559,000 is related to the HCP consolidation, and an increase
in depreciation of $11,000 was related to office equipment additions, offset by
a $398,000 decrease in CSLC's depreciation associated with multi-family rental
properties sold on November 1, 1996.

Other income and expenses. Interest and other income increased $562,000,
primarily as a result of the HCP consolidation of $164,000 of other income, and
CSLC's increase in interest income of $398,000 associated with its increased
investment in NHP Notes and CSLC's beginning to accrue a portion of the deferred
interest on these notes. Interest expense increased $344,000, primarily as a
result of the HCP consolidation. Income from equity in earnings on investments
decreased $398,000 as a result of the consolidation of HCP on January 1, 1997.

Minority interest. Minority interest in limited partnerships increased
$616,000 in the first six months of 1997 over that of the comparable 1996
period, with $395,000 of the increase a result of the consolidation of HCP,
coupled with improved earnings of CSLC of $379,000, offset by $158,000 due to a
decrease in the weighted average minority interest in CSLC from 40.8% in the
first six months of 1996 to 34.5% in the first six months of 1997.

Net income. As a result of the foregoing factors, net income increased
$433,000 or 55.5% to $1,213,000 for the first six months of 1997 from that of
the comparable six-month period of 1996 of $780,000.

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995

Revenues. Total revenues were $19,899,000 in 1996 compared to $18,118,000
in 1995, representing an increase of $1,781,000, or 9.8%. Resident and health
care revenue increased $454,000 as a result of $241,000 of 1996 revenues
associated with the home health care business established in 1996 and a $213,000
increase in CSLC's senior living and health care revenues caused primarily by
increased rates. Rental and lease income decreased $130,000 as a result of the
sale of CSLC's multi-family properties on November 1, 1996. Unaffiliated
management services revenue increased $801,000 due to the 15 third-party
management contracts added in 1996. Affiliated management services revenue
decreased by $70,000, with $181,000 of the decrease a result of the sale of two
HCP managed properties in 1995 and 1996, offset by improved occupancies in
managed properties and an overall increase in management fees to unconsolidated
affiliates of $110,000. Development fees of $673,000 in 1996 is due to new
development contract management revenue for managing the development and
construction of new third-party owned senior living communities.

Expenses. Total expenses were $17,771,000 in 1996 compared to $16,428,000
in 1995, representing an increase of $1,345,000, or 8.2%. Operating expenses
increased $512,000 as a result of $142,000 of expenses associated with property
development and $218,000 of expenses due to the skilled nursing care businesses
established in 1996, and a $150,000 increase in expenses related to increased
resident and health care

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<PAGE> 32

revenues. General and administrative expenses increased $1,129,000. This
increase is due to an increase in officers salaries and bonuses and a increase
in other general and administrative expenses of $733,000 which is primarily the
result of expanded business operations. Depreciation and amortization decreased
$295,000 and is primarily related to decreases in depreciation of $245,000
associated with multi-family rental properties sold on November 1, 1996 and
amortization of deferred income associated with the equity method of accounting
of acquired interests in HCP in 1996 of $119,000, offset by a $69,000 increase
in amortization expense.

Other income and expenses. Interest and other income increased $106,000
primarily as a result of increased income associated with investment of cash
reserves and interest received on CSLC's investment in the NHP Notes. Interest
expense decreased $57,000 primarily as a result of the retirement of the
mortgage loans associated with the properties sold on November 1, 1996. Equity
in earnings on investments was $459,000 in 1996 as a result of the application
of the equity method of accounting for CSLC's investment in HCP in the first
quarter of 1996. A gain of $438,000 was recorded on November 1, 1996 as a result
of the sale of properties with no corresponding gains being realized in 1995.

Provision for income taxes. Prior to February 1, 1995, one of the Company's
predecessor entities (Capital Senior Living, Inc.) incurred federal and state
income taxes. Effective February 1, 1995, Capital Senior Living, Inc. became an
S corporation and consequently, was not subject to income taxes after February
1, 1995. CSLC and HCP are not subject to Federal income taxes as the partners
are responsible for their respective shares of partnership net income or loss
for income tax purposes and the companies owned by HCP did not generate taxable
income for Federal income tax purposes. As a result, the provision for income
taxes decreased from $18,000 in 1995 to no tax provision in 1996.

Minority interest. Minority interest in combined partnerships increased
$464,000 in 1996 primarily as a result of increased earnings of CSLC offset by a
decrease in minority interest from 42.6% in 1995 to 37.2% in 1996.

Net income. As a result of the foregoing factors, net income increased
$1,050,000 or 104.7% to $2,053,000 for 1996 from $1,003,000 for 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994

Revenues. Total revenues were $18,118,000 in 1995 compared to $17,909,000
in 1994, representing an increase of $209,000, or 1.2%. Resident and health care
revenue increased $477,000 as a result of increased rental rates in the CSLC's
properties. Affiliated management services revenue decreased $335,000 and is
comprised of: (i) a brokerage and sales commission fee of $220,000 earned in
April 1994 from an affiliate for assistance in the sale of a real estate
investment; (ii) reduced management fees of $179,000 earned from one HCP
property which was placed in receivership on December 1, 1994 and subsequently
transferred to the noteholder as an agreed upon settlement on July 19, 1995; and
(iii) a net overall increase in management fees earned from affiliated
properties of $65,000. Other income increased $71,000 and was attributable to
increased therapy income from Medicare.

Expenses. Total expenses were $16,427,000 in 1995 compared to $16,444,000
in 1995, representing a decrease of $17,000. Operating expenses increased
$145,000 which is related to the increase in resident and health care revenues.
General and administrative expenses decreased $231,000, primarily as a result of
reduced officers salaries of $467,000 offset by overall increases in other
administrative expenses of $236,000.

Other income and expenses. Interest and other income increased $262,000
primarily as a result of increased income associated with investment of cash
reserves and interest received on CSLC's investment in NHP Notes. Interest
expense increased $17,000 primarily as a result of the Company's purchasing
management contracts from an affiliate in exchange for a term loan in February
1995, which increased interest expense $31,000, offset by a decrease in mortgage
interest expense of $14,000.

Provision for income taxes. As discussed above, the decrease in the
provision for income taxes in 1995 was due to the change in tax status. Federal
and state income taxes decreased from $130,000 in 1994 to $18,000 in 1995.

Minority interest. Minority interest in combined partnerships increased
$126,000 in 1995 as a result of the increased earnings of CSLC offset by a
decrease in minority interest from 48.5% in 1994 to 42.6% in 1995.

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<PAGE> 33

Net income. As a result of the foregoing factors, net income increased
$457,000 or 83.7% to $1,003,000 for 1995 from $546,000 for 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company has traditionally financed its activities primarily with
related party loans and cash flows from operations. Investments in start-up
costs, real estate and facilities have traditionally been financed with net
proceeds from private placements of equity interests, long-term mortgage
borrowing, and cash flows from operations.

Net cash provided by operating activities of $3,324,000 for the six months
ended June 30, 1997 increased $223,000 or 7.2% over that of the comparable six
months ended June 30, 1996, which was primarily comprised of an increased cash
flow created by improved earnings (after non-cash adjustments of $1,604,000
offset by increases in net operating assets of $1,381,000). Net cash provided by
operating activities of $3,902,000 for the year ended December 31, 1996
increased $1,180,000 or 43.4% over that of the comparable year ended December
31, 1995. This increase was primarily the result of increased cash flow created
by improved earnings (after non-cash adjustments, including a gain on sale of
properties of $438,000 and minority interest of $465,000 and change in net
operating assets of $908,000) of $272,000. Net cash provided by operating
activities of $2,722,000 for the year ended December 31, 1995 decreased $706,000
or 20.6% over that of the comparable year ended December 31, 1994. This decrease
was primarily the result of increases in net operating assets and payment of
affiliate advances in 1995 of $1,446,000 offset by increased cash flow created
by improved earnings (after non cash adjustments and minority interest) of
$749,000.

Net cash used in investing activities of $5,723,000 for the six months
ended June 30, 1997 increased $2,901,000 or 102.8% over that of the comparable
six months ended June 30, 1996. This increase was comprised of an increase in
purchases of limited partnership interests in HCP of $2,562,000 (which is net of
acquired HCP cash of $8,995,000) combined with increases in capital expenditures
of $339,000. Net cash used in investing activities of $1,704,000 for the year
ended December 31, 1996 increased $407,000 or 31.4% over that in 1995 of
$1,297,000. This increase was comprised of an increase in purchases of limited
partnership interests in HCP of $2,505,000 combined with increases in capital
expenditures of $451,000 offset by the proceeds from the sale of the Company's
multi-family properties in November 1996 of $2,549,000. Net cash used in
investing activities of $1,297,000 for the year ended December 31, 1995
decreased $5,079,000 compared with net cash provided by investing activities of
$3,782,000 for the year ended December 31, 1994. This decrease was primarily due
to purchases of HCP limited partnership interests of $461,000, increases in
capital expenditures of $218,000, and the proceeds from sale of limited
partnership interests in 1994 of $4,400,000.

Net cash provided by financing activities of $4,778,000 for the six months
ended June 30, 1997 increased $5,569,000 or 704.0% over the net cash used in
financing activities of $791,000 for the comparable six months ended June 30,
1996. This increase is primarily due to $6,000,000 of borrowings under the
Company's revolving loan and loans from related parties to finance additional
purchases of NHP Notes and HCP limited partnership interests during the six
months ended June 30, 1997, offset by an increase in CSLC's purchases of
outstanding limited partnership interests from minority partners for treasury
purposes of $513,000. Net cash used in financing activities of $1,396,000 for
the year ended December 31, 1996 increased $1,189,000 or 574.4% over that of the
net cash used in financing activities of $207,000 for 1995. This increase is
primarily due to CSLC's purchases of outstanding limited partnership interests
from minority partners for treasury purposes of $1,262,000 in 1996; no such
purchases occurred in 1995. Net cash used in financing activities of $207,000
for the year ended December 31, 1995 decreased $269,000 or 56.5% over the net
cash used in financing activities of $476,000 for 1994. This decrease is
primarily due to a decrease in loan payments of $598,000 in 1995 offset by
$203,000 in dividend payments to shareholders in 1995 and a $126,000 decrease in
other financing activities in 1995.

At June 30, 1997, HCP was operating one of its properties and had leased
seven of its owned properties under triple net leases to third parties until
2000 or 2001. Four of these properties are leased until year 2001 to HealthSouth
Rehabilitation Corp. ("HealthSouth"), which provides acute spinal injury
intermediate care at these properties. HealthSouth closed one of these
facilities in 1994 and closed another facility in February of

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<PAGE> 34

1997 due to low occupancy. HealthSouth has continued to make lease payments on a
timely basis for all four properties. Should the operators of the leased
properties default on payment of their lease obligations prior to termination of
the lease agreements, six of the seven lease contracts contain a continuing
guarantee of payment and performance by the parent company of the operators,
which the Company intends to pursue in the event of default. Following
termination of these leases, the Company intends to convert and operate the
facilities as assisted living and Alzheimer's care facilities. These facilities
are built in a campus-like setting and are believed by the Company to be readily
conducive to conversion to senior living facilities. HCP's other facility leases
are all current in their lease obligations to HCP and, except for one property,
are generating sufficient cash flow from operations to fund their lease
obligations to HCP. The lessee for the remaining property continues to fund the
deficit between the required lease cash flow.

The Company believes that its current cash, expected cash flow from
operations and its available borrowing capacity against unencumbered properties
will be sufficient to meet its operating requirements.

For the longer term, the Company expects that its current cash and net
proceeds from the Offering, together with cash flow from operations and the
proceeds of borrowings that it expects will be available to it, will be
sufficient to meet its operating requirements and to fund its anticipated growth
through 1999. The Company expects to use a wide variety of financing sources to
fund its future growth, including public and private debt and equity,
conventional mortgage financing, and unsecured bank financing, among other
sources. There can be no assurance that financing will be available on terms
acceptable to the Company. The Company has arranged a $20.0 million, three year,
revolving line of credit with a major bank that is contingent upon the
successful completion of the Offering that will be secured by the Company's
Towne Centre, Canton Regency and Harrison at Eagle Valley properties. The line
of credit may be used for acquisition of additional interests in HCP and NHP,
acquisition of additional properties and general working capital purposes.
Outstanding borrowings under the line will bear interest at LIBOR plus 1.7%.

In addition, the Company has entered into a development agreement with Tri
Point, as described under "Certain Transactions -- Tri Point Development
Agreement," pursuant to which Tri Point will employ its capital to develop
Waterford communities. The Company will have an option to purchase each
community at a price equal to fair market value (based upon a third-party
appraisal). The Company believes that the arrangement with Tri Point provides it
an attractive mechanism to develop new communities without employing its own
capital and which will not be dilutive to earnings during the development and
lease-up phases. Tri Point has received and accepted commitments for loan
facilities aggregating up to $100.0 million to fund its development activities.

On June 30, 1997, CSLC entered into the $77.0 million LBHI Loan and pledged
its four communities and its investments in HCP and NHP as collateral. The loan
agreement matures December 31, 1997. Subsequent to June 30, 1997, approximately
$70.0 became outstanding under this loan agreement, excluding borrowings for
construction in progress; $5.5 million was used to repay an outstanding mortgage
loan commitment, and approximately $64.5 million was used to fund the liquidity
requirement under the loan agreement through the purchase of U.S. Treasury
bills. The remaining $7.0 million may be used to fund expenditures associated
with the expansion of one of the Company's communities. The U.S. Treasury bills
were sold under a repurchase agreement with a term equal to their maturity. It
is expected that upon completion of this Offering the repurchase agreement will
be canceled and that the outstanding debt under the loan agreement will be
assumed by the Company and will be repaid from net proceeds of this Offering.
See "The Company -- Formation Transactions." Upon such repayment, the U.S.
Treasury bills will revert to CSLC. Interest costs are based on 30-day LIBOR
plus 50 basis points. The Company intends to retire this loan after completion
of the Asset Acquisition with net proceeds from the Offering. Should the
Offering be delayed beyond December 31, 1997, the Company believes that the U.S.
Treasury bills combined with CSLC's ability to borrow from conventional mortgage
financing sources will be sufficient to retire the LBHI Loan when due on
December 31, 1997.

At June 30, 1997, the Company had $1,166,000 of related party debt
outstanding, including $900,000 of demand notes due Messrs. Beck and Stroud on
December 31, 1997, and a $266,000 note payable to a related party with fixed
maturities of $65,091 extending through December 31, 2001. These notes, plus
accrued interest, will be repaid from the proceeds of the Offering. See "Use of
Proceeds."

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<PAGE> 35

IMPACT OF INFLATION

To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and results of
operations because of, among other things, the Company's dependence on senior
residents, many of whom rely primarily on fixed incomes to pay for the Company's
services. As a result, during inflationary periods, the Company may not be able
to increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.

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<PAGE> 36

BUSINESS

INDUSTRY BACKGROUND

As a senior's need for assistance increases, care in an assisted living
residence is often preferable and more cost-effective than home-based care or
nursing home care. Typically, assisted living represents a combination of
housing and 24-hour a day personal support services designed to aid elderly
residents with ADLs, such as ambulation, bathing, dressing, eating, grooming,
personal hygiene, and monitoring or assistance with medications. Certain
assisted living residences may also provide assistance to residents with low
acuity medical needs, or may offer higher levels of personal assistance for
incontinent residents or residents with Alzheimer's disease or other cognitive
or physical frailties. Generally, assisted living residents require higher
levels of care than residents of independent living residences and retirement
living centers, but require lower levels of care than patients in skilled
nursing facilities. For seniors who need the constant attention of a skilled
nurse or medical practitioner, a skilled nursing facility may be required.

The senior living services industry is highly fragmented and characterized
by numerous small operators. Moreover, the scope of senior living services
varies substantially from one operator to another. Many smaller senior living
providers do not operate purpose-built residences, do not have professional
training for staff and provide only limited assistance with ADLs. The Company
believes that few senior living operators provide the required comprehensive
range of senior living services, such as dementia care and other services
designed to permit residents to "age in place" within the community as they
develop further physical or cognitive frailties.

The Company believes that a number of demographic, regulatory, and other
trends will contribute to the continued growth in the senior living market, the
Company's targeted market for future development and expansion, including the
following:

Consumer Preference

The Company believes that senior living communities are increasingly
becoming the setting preferred by prospective residents and their families for
the care of the elderly. Senior living offers residents greater independence and
allows them to "age in place" in a residential setting, which the Company
believes results in a higher quality of life than that experienced in more
institutional or clinical settings.

The likelihood of living alone increases with age. Most of this increase is
due to an aging population in which women outlive men. In 1993, eight out of ten
noninstitutionalized elderly who lived alone were women. According to the United
States Bureau of Census, based on 1993 data, for women the likelihood of living
alone increases from 32% for 65- to 74-year-olds to 57% for those women aged 85
and older. Men show similar trends with 13% of the 65- to 74-year-olds living
alone rising to 29% of the men aged 85 and older living alone. Societal changes,
such as rising divorce rates and the growing numbers of persons choosing not to
marry, have further increased the number of Americans living alone. This growth
in the number of elderly living alone has resulted in an increasing demand for
services that historically have been provided by a spouse, other family members
or live-in caregivers.

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<PAGE> 37

The table below shows the estimated breakdown of persons needing assistance
with ADLs as of 1990-1991.

PERCENTAGE OF PERSONS BY AGE GROUP NEEDING ADL ASSISTANCE

<TABLE>
<S> <C> <C> <C> <C>
85 AND OLDER 49.5
80 TO 84 31.2
75 TO 79 19.5
70 TO 74 11.0
65 TO 69 9.2
15 TO 64 2.4
</TABLE>

Source: U.S. Census Bureau as of 1990-1

Demographics

The primary market for the Company's senior living services is comprised of
persons aged 65 and older. This age group is one of the fastest growing segments
of the United States population and is expected to double by the year 2030.
According to United States Census Bureau information, the segment of the
population that is aged 75 and older is expected to increase from approximately
13.2 million in 1990 to over 16.6 million by 2000, an increase of 26%. The
population of seniors aged 85 and over is expected to increase from
approximately 3.1 million in 1990 to over 4.3 million by 2000, an increase of
39%. As the number of persons aged 65 and over continues to grow, the Company
believes that there will be corresponding increases in the number of persons who
need assistance with ADLs. According to the United States General Accounting
Office, as of 1990 there are approximately 6.5 million people aged 65 and older
in the United States who needed assistance with ADLs, and the number of people
needing such assistance is expected to double by the year 2020. According to the
Alzheimer's Association the number of persons afflicted with Alzheimer's disease
is expected to grow from the current 4.0 million to 14.0 million by the year
2050.

Restricted Supply of Nursing Beds

The majority of states in the United States have adopted Certificate of
Need or similar statutes generally requiring that, prior to the addition of new
beds, the addition of new services, or the making of certain capital
expenditures, a state agency must determine that a need exists for the new beds
or the proposed activities. The Company believes that this Certificate of Need
process tends to restrict the supply and availability of licensed nursing
facility beds. High construction costs, limitations on government reimbursement
for the full costs of construction, and start-up expenses also act to constrain
growth in the supply of such facilities. At the same time, nursing facility
operators are continuing to focus on improving occupancy and expanding services
to subacute patients generally of a younger age and requiring significantly
higher levels of nursing care. As a result, the Company believes that there has
been a decrease in the number of skilled nursing beds available to patients with
lower acuity levels and that this trend should increase the demand for the
Company's senior living communities, including particularly the Company's
assisted living communities and skilled nursing communities.

Cost-Containment Pressures

In response to rapidly rising health care costs, governmental and private
pay sources have adopted cost containment measures that have reduced admissions
and encouraged reduced lengths of stays in hospitals and other acute care
settings. The federal government had previously acted to curtail increases in
health care costs under Medicare by limiting acute care hospital reimbursement
for specific services to pre-established fixed

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<PAGE> 38

amounts. Private insurers have begun to limit reimbursement for medical services
in general to predetermined charges, and managed care organizations (such as
health maintenance organizations) are attempting to limit hospitalization costs
by negotiating for discounted rates for hospital and acute care services and by
monitoring and reducing hospital use. In response, hospitals are discharging
patients earlier and referring elderly patients, who may be too sick or frail to
manage their lives without assistance, to nursing homes and assisted living
residences where the cost of providing care is typically lower than hospital
care. In addition, third-party payors are increasingly becoming involved in
determining the appropriate health care settings for their insureds or clients,
based primarily on cost and quality of care. Based on industry data, the typical
day-rate in an assisted living facility is two thirds of the cost for comparable
care in a nursing home.

Senior Affluence

The average net worth of senior citizens is higher than non-senior
citizens, partially as a result of accumulated equity through home ownership.
The Company believes that a substantial portion of the senior population thus
has significant resources available for their retirement and long-term care
needs. The Company's target population is comprised of moderate- to upper-income
seniors who have, either directly or indirectly through familial support, the
financial resources to pay for senior living communities, including an assisted
living alternative to traditional long-term care.

Reduced Reliance on Family Care

Historically, the family has been the primary provider of care for seniors.
The Company believes that the increase in the percentage of women in the work
force, the reduction of average family size, and the increased mobility in
society is reducing the role of the family as the traditional caregiver for
aging parents. The Company believes that these factors will make it necessary
for many seniors to look outside the family for assistance as they age.

OPERATING STRATEGY

The Company's operating strategy is to provide high quality senior living
services at an affordable price to its residents, while achieving and sustaining
a strong, competitive position within its chosen markets, as well as to continue
to enhance the performance of its operations. The Company plans on implementing
its operating strategy principally through the following methods:

Continue to Provide Broad Range of High-Quality Personalized Care

Central to the Company's operating strategy is its focus on providing
high-quality care and services that are personalized and tailored to meet the
individual needs of each community resident. The Company's residences and
services are designed to provide a broad range of care that permits residents to
"age in place" as their needs change and as they develop further physical or
cognitive frailties. By creating an environment that maximizes resident autonomy
and provides individualized service programs, the Company seeks to attract
seniors at an earlier stage, before they need the higher level of care provided
in a skilled nursing facility. The Company also maintains a comprehensive
quality assurance program designed to ensure the satisfaction of its residents
and their family members. The Company conducts annual resident satisfaction
surveys. In 1996, the Company achieved a 96% approval rating from its residents
in a polling of its residents' satisfaction.

Offer Services Across a Range of Pricing Options

The Company's range of products and services is continually expanding to
meet the evolving needs of its residents. The Company has developed a menu of
products and service programs which may be further customized to serve both the
moderate and upper income markets of a particular targeted geographic area. By
offering a range of pricing options that are customized for each target market,
the Company believes that it can develop synergies, economies of scale, and
operating efficiencies in its efforts to serve a larger percentage of the
elderly population within a particular geographic market.

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<PAGE> 39

Maintain and Improve Occupancy Rates

The Company continually seeks to maintain and improve occupancy rates by:
(i) retaining residents as they "age in place" by extending optional care and
service programs; (ii) attracting new residents through the on-site marketing
program focus on residents and family members; and (iii) aggressively seeking
referrals from professional community outreach sources, including area churches,
senior social service programs, civic and business networks, as well as the
medical community.

Improve Operating Efficiencies

The Company will seek to improve operating efficiencies at its communities
by continuing to actively monitor and manage operating costs. By having an
established national portfolio of communities with regional management in place,
the Company believes it has established a platform to achieve operating
efficiencies through economies of scale in the purchase of bulk items, such as
food, and in the spreading of fixed costs, such as corporate overhead, over a
larger revenue base, and to provide more effective management supervision and
financial controls.

Emphasize Employee Training and Retention

The Company devotes special attention to the hiring, screening, training,
supervising, and retention of its employees and caregivers to ensure that
quality standards are achieved. In addition to the normal on-site training, the
Company conducts annual national management meetings and encourages sharing of
expertise among managers. The Company's commitment to the total quality
management concept is emphasized throughout its training program. The Company
believes its commitment to and emphasis on employee training and retention
differentiates the Company from many of its competitors.

Utilize Comprehensive Information Systems

The Company employs comprehensive proprietary information systems to manage
financial and operating data in connection with the management of its
communities. Utilizing its computerized systems, the Company is able to collect
and monitor on a regular basis key operating data for its communities. Reports
are routinely prepared and distributed to on-site, district and regional
managers for use in managing the profitability of the communities. The Company's
management information systems provide senior management with the ability to
identify emerging trends, monitor and control costs and develop current pricing
strategies. The Company believes that its proprietary information systems are
sufficient to support future growth and that the Company will have adequate
resources to expand these systems to support the growth envisioned by the
Company's business plan.

CARE AND SERVICES PROGRAMS

The Company provides a wide array of senior living services to the elderly
at its communities, including independent living, assisted living (with special
programs and living units for residents with Alzheimer's and other forms of
dementia), skilled nursing, and home health care services. By offering a variety
of services and encouraging the active participation of the resident and the
resident's family and medical consultants, the Company is able to customize its
service plan to meet the specific needs and desires of each resident. As a
result, the Company believes that it is able to maximize customer satisfaction
and avoid the high cost of delivering unnecessary services to residents.

Independent Living Services

The Company provides independent living services to seniors who do not yet
need assistance or support with ADLs, but who prefer the physical and
psychological comfort of a residential community that offers health care and
other services. The Company currently has ownership interests in nine
communities and manages an additional 14 communities which provide independent
living services, with an aggregate capacity for 1,607 and 1,913 residents,
respectively.

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<PAGE> 40

Independent living services provided by the Company include daily meals,
transportation, social and recreational activities, laundry, housekeeping,
security and health care monitoring. The Company also fosters the wellness of
its residents by offering health screenings (such as blood pressure checks),
periodic special services (such as influenza inoculations), chronic disease
management (such as diabetes with its attendant blood glucose monitoring),
dietary and similar programs, as well as ongoing exercise and fitness classes.
Classes are given by health care professionals to keep residents informed about
health and disease management. Subject to applicable government regulation,
personal care and medical services are available to independent living residents
through either the community staff or through the Company's or independent home
health care agencies. The Company's independent living residents pay a fee
ranging from $1,250 to $2,400 per month, in general, depending on the specific
community, program of services, size of the units, and amenities offered. The
Company's contracts with its independent living residents are generally for a
term of one year and are typically terminable by the resident upon 30 days'
notice.

Assisted Living and Memory Impaired Services

The Company offers a wide range of assisted living care and services 24
hours per day, including personal care services, support services, and
supplemental services. The Company currently has ownership interests in seven
communities, leases a community from a third party, and manages an additional 10
communities which provide assisted living services, with an aggregate capacity
for 219, 38, and 399 residents, respectively. The residents of the Company's
assisted living residences generally need help with some or all ADLs, but do not
require the more acute medical care traditionally given in nursing homes. Upon
admission to the Company's assisted living communities, and in consultation with
the resident, the resident's family and medical consultants, each resident is
assessed to determine his or her health status, including functional abilities,
and need for personal care services, and completes a lifestyles assessment to
determine the resident's preferences. From these assessments, a care plan is
developed for each resident to ensure that all staff members who render care
meet the specific needs and preferences of each resident where possible. Each
resident's care plan is reviewed periodically to determine when a change in care
is needed.

The Company has adopted a philosophy of assisted living care that allows a
resident to maintain a dignified independent lifestyle. Residents and their
families are encouraged to be partners in their care and to take as much
responsibility for their well being as possible. The basic types of assisted
living services offered by the Company include the following:

Personal Care Services. These services include assistance with ADLs
such as ambulation, bathing, dressing, eating, grooming, personal hygiene,
and monitoring or assistance with medications.

Support Services. These services include meals, assistance with social
and recreational activities, laundry services, general housekeeping,
maintenance services, and transportation services.

Supplemental Services. These services include extra transportation
services, personal maintenance, extra laundry services, non-routine care
services, and special care services, such as services for residents with
Alzheimer's and other forms of dementia. Certain of these services require
an extra charge in addition to the pricing levels described below.

In pricing its services, the Company has developed the following three
levels or tiers of assisted living care:

- Level I typically provides for minimum levels of care and service, for
which the Company generally charges a monthly fee per resident ranging
from $1,750 to $1,900, depending upon unit size and the project design
type. Typically, Level I residents need minimal assistance with ADLs.

- Level II provides for relatively higher levels and increased frequency of
care, for which the Company generally charges a monthly fee per resident
ranging from $1,900 to $2,250, depending upon the unit size and the
project design type. Typically, Level II residents require moderate
assistance with ADLs and may need additional personal care, support, and
supplemental services.

40
<PAGE> 41

- Level III provides for the highest level of care and service, for which
the Company generally charges a monthly fee per resident ranging from
$2,250 to $2,400, depending upon the unit size and the project design
type. Typically, Level III residents are either very frail or impaired
and utilize many of the Company's services on a regular basis.

The Company maintains programs and special units at its assisted living
communities for residents with Alzheimer's and other forms of dementia, which
provide the attention, care, and services needed to help those residents
maintain a higher quality of life. Specialized services include assistance with
ADLs, behavior management, and a lifeskills based activities program, the goal
of which is to provide a normalized environment that supports residents'
remaining functional abilities. Whenever possible, residents assist with meals,
laundry, and housekeeping. Special units for residents with Alzheimer's and
other forms of dementia are located in a separate area of the community and have
their own dining facilities, resident lounge areas, and specially trained staff.
The special care areas are designed to allow residents the freedom to ambulate
as they wish while keeping them safely contained within a secure area with a
minimum of disruption to other residents. Special nutritional programs are used
to help ensure caloric intake is maintained in residents. Resident fees for
these special units are dependent on the size of the unit, the design type, and
the level of services provided.

Skilled Nursing Services

In its skilled nursing communities, the Company provides traditional
long-term care through 24-hour per day skilled nursing care by registered
nurses, licensed practical nurses, and certified nursing assistants. The Company
also offers a comprehensive range of restorative nursing and rehabilitation
services in its communities including, but not limited to, physical,
occupational, speech, and medical social services. The Company currently has
ownership interests in seven communities, leases a community, and manages an
additional community which provides nursing services, with an aggregate capacity
for 746, 60, and 60 residents, respectively.

Home Health Care

The Company currently provides home health care services to clients at
certain of its senior living communities through an on-site home health care
agency. The Company believes that the provision of home health care services is
an attractive adjunct to its independent living services because it allows the
Company to provide more services to its residents as they age in place and
increase the length of stay in the Company's communities. The services and
products that the Company provides through its home health care agency include:
(i) general and specialty nursing services to clients with long-term chronic
health conditions, permanent disabilities, terminal illnesses and
post-procedural needs; (ii) rehabilitative therapy services including physical,
occupational and speech therapy through outside contractors; (iii) personal care
services and assistance with ADLs; (iv) enhanced hospice care for clients in the
final phases of incurable disease; and (v) extensive monitoring and educational
services relative to respiratory care, medication administration, medical
equipment, and medical supplies. The Company intends to expand its home health
care service business to additional senior living communities and to develop,
acquire, or manage home health care service businesses at other such
communities. In addition, the Company will make available to residents certain
customized physician, dentistry, podiatry, and other health-related services
that may be offered by third-party providers. The Company may elect to provide
these services directly or through participation in managed care networks.

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<PAGE> 42

OPERATING COMMUNITIES

The table below sets forth certain information with respect to the
independent, senior living, and continuum of care communities currently owned,
leased, and managed by the Company.

<TABLE>
<CAPTION>
RESIDENT CAPACITY(1) COMMENCE- OCCUPANCY RATE
------------------------- OWNER- MENT OF --------------------
COMMUNITY LOCATION IL AL SN TOTAL SHIP(2) OPERATIONS(3) 12-31-96 6-30-97
--------- -------- ----- --- --- ----- ------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED:
Amberleigh............. Buffalo, NY 365 29 -- 394 31% 1/92 98% 96%
Atrium of Carmichael... Sacramento, CA 156 -- -- 156 31% 1/92 98% 99%
Cambridge Nursing
Home................. Cambridge, MA -- -- 120 120 56% 7/93 94% 99%
Canton Regency......... Canton, OH 164 34 50 248 100% 3/91 94% 98%
Cottonwood Village..... Cottonwood, AZ 69 -- -- 69 100% 3/91 95% 100%
Crosswood Oaks......... Sacramento, CA 127 -- -- 127 31% 1/92 86% 88%
Harrison at Eagle
Valley............... Indianapolis, IN 138 -- -- 138 100% 3/91 83% 92%
Heatherwood............ Detroit, MI 188 -- -- 188 31% 1/92 81% 86%
Towne Centre........... Merrillville, IN 165 34 64 263 100% 3/91 92% 94%
Veranda Club........... Boca Raton, FL 235 -- -- 235 31% 1/92 96% 93%
----- --- --- ----- ---- ----
Subtotal............. 1,607 97 234 1,938 92% 95%
---- ----
OWNED AND LEASED TO
OTHERS:
Cane Creek............. Martin, TN -- 8 36 44 56% 7/93 100%(4) 100%(4)
Cedarbrook............. Nashville, TN -- 42 -- 42 56% 7/93 100%(4) 100%(4)
Crenshaw Creek......... Lancaster, SC -- 36 -- 36 56% 7/93 100%(4) 100%(4)
Hearthstone............ Austin, TX -- -- 120 120 56% 7/93 100%(4) 100%(4)
McCurdy................ Evansville, IN -- -- 236 236 56% 7/93 100%(4) 100%(4)
Sandybrook............. Orlando, FL -- 36 -- 36 56% 7/93 100%(4) 100%(4)
Trinity Hills.......... Fort Worth, TX -- -- 120 120 56% 7/93 100%(4) 100%(4)
----- --- --- -----
Subtotal............. -- 122 512 634
LEASED FROM OTHERS:
Maryland Gardens(5).... Phoenix, AZ -- 38 60 98 6/97 -- 95%
----- --- --- -----
Subtotal............. -- 38 60 98
MANAGED:
Buckner Haven.......... Houston, TX 16 69 60 145 4/97 (6) (6)
Buckner Westminster
Place................ Longview, TX 117 -- -- 117 6/96
Crown Pointe........... Omaha, NE 163 -- -- 163 8/96 100% 100%
Crown Villa............ Omaha, NE -- 73 -- 73 8/96 97% 96%
Independence Village... East Lansing, MI 162 -- -- 162 8/96 84% 92%
Independence Village... Peoria, IL 173 -- -- 173 8/96 93% 97%
Independence Village... Raleigh, NC 155 22 -- 177 8/96 100% 95%
Independence Village... Winston-Salem, NC 145 16 -- 161 8/96 93% 95%
Overland Park Place.... Kansas City, KS 126 25 -- 151 8/96 96% 96%
The Palms.............. Fort Myers, FL 235 20 -- 255 8/96 100% 96%
Rio Las Palmas......... Stockton, CA 142 50 -- 192 8/96 87% 85%
Sedwick Plaza.......... Wichita, KS 117 54 -- 171 8/96 81% 95%
Villa at Riverwood..... St. Louis, MO 140 -- -- 140 8/96 98% 95%
Villa Santa Barbara.... Santa Barbara, CA 87 38 -- 125 8/96 93% 94%
West Shores............ Hot Springs, AR 135 32 -- 167 8/96 96% 98%
----- --- --- ----- ---- ----
Subtotal/Average..... 1,913 399 60 2,372 94% 95%
----- --- --- ----- ---- ----
93% 95%
Grand Total.......... 3,520 656 866 5,042
===== === === ===== ==== ====
</TABLE>

- ---------------

(1) Independent living (IL) residences, assisted living (AL) residences
(including areas dedicated to residents with Alzheimer's and other forms of
dementia), and skilled nursing (SN) beds.

(2) In the case of those communities shown as 31% owned by the Company, this
represents ownership of approximately 31% of the outstanding NHP Notes. The
aggregate principal and accrued interest of the NHP Notes is less than the
expected cash flows of NHP through maturity of the NHP Notes plus the
expected value of the properties of NHP at the date of the maturity of the
NHP Notes. In the case of

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<PAGE> 43

those communities shown as approximately 56% owned, this represents the
Company's ownership of approximately 56% of the limited partner interests in
HCP.

(3) Indicates the date on which the Company acquired each of its owned and
leased communities, or commenced operating its managed communities. The
Company operated certain of its communities pursuant to management
agreements prior to acquiring the communities.

(4) Represents communities owned by the Company and leased to third parties
pursuant to master leases under which the Company receives rent regardless
of whether the units are occupied. Does not represent occupancy rate, but
rather percentage of property leased pursuant to the master lease. These
leases were in place at the time the Company acquired its interest in these
communities.

(5) This community is leased pursuant to a 14-month operating lease entered into
by the Company on June 1, 1997, under which the Company has an option to
purchase the community.

(6) It is anticipated that this community will be closed in 1998 and the
residents transferred to Buckner Parkway Place upon its completion in the
first quarter of 1998.

(7) This community was in the initial lease-up phase during the periods
presented above.

(8) Excludes communities owned and leased to others.

THIRD-PARTY MANAGEMENT CONTRACTS

The Company is a party to two separate property management agreements (the
"ILM Management Agreements") with ILM I Lease Corporation and ILM II Lease
Corporation, corporations formed by ILM Senior Living, Inc. and ILM Senior
Living II, Inc. (collectively, "ILM") that operate 13 senior living communities.
The ILM Management Agreements commenced on July 29, 1996 and will expire on
December 31, 1999 and December 31, 2000, respectively, subject to extension
under certain circumstances, but not beyond July 29, 2001. Under the terms of
the ILM Management Agreements, the Company earns a base management fee equal to
4% of the gross operating revenues of the facilities under management (as
defined), and is also eligible to receive an incentive management fee equal to
25% of the amount by which the average monthly net cash flow of the facilities
(as defined) for the 12-month period ending on the last day of each calendar
month exceeds a specified base amount. The ILM Management Agreements are
terminable upon the sale of the related facilities, subject to the Company's
rights to offer to purchase the facilities. In the event of a sale, the Company
has the right to make the first and last offer with respect to the purchase of
the facilities subject to the ILM Management Agreements. The Company earned a
total of $549,000 and $637,000 under the two ILM Management Agreements for the
nine months ended May 31, 1997, which includes the incentive management fee. The
Company believes there is a reasonable likelihood that it will earn such
incentive fee in the future. See "Certain Transactions -- ILM Management
Contracts."

The Company is also a party to two separate property management agreements
(the "Buckner Agreements") with Buckner Retirement Services, Inc. ("Buckner"), a
not-for-profit corporation that operates two senior living communities. The
Buckner Agreements commenced on April 1, 1996 and 1997 and expire on March 31,
2001 and 2002, respectively, except that either party may terminate the
agreements for cause under limited circumstances. Under the terms of the Buckner
Agreements, the Company earns a base management fee equal to 5% of the gross
revenues of the facility (as defined) or $5,000 per month, whichever is greater.
In the case of one of the two Buckner Agreements, the Company is also entitled
to a marketing lease-up fee of $500 for each unit at the time it is initially
occupied. Each agreement provides that the Company is also eligible to receive
an incentive fee equal to 25% of the excess cash flow over budgeted amounts. The
Company earned this incentive fee in each of the last two years and believes
that there is a reasonable likelihood that it will earn such incentive fee in
the future. Pursuant to the terms of the Buckner Agreements, the Company has a
right of first refusal with respect to purchasing the communities subject to
these agreements.

GROWTH STRATEGIES

The Company believes that the fragmented nature of the senior living
services industry and the limited capital resources available to many small,
private operators provide an attractive opportunity for the Company to expand
its existing base of senior living operations. The Company believes that its
current operations

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<PAGE> 44

throughout the United States serve as the foundation on which the Company can
build senior living networks in targeted geographic markets and thereby provide
a broad range of high quality care in a cost-efficient manner.

The following are the principal elements of the Company's growth strategy:

Expand Existing Communities

The Company plans to expand certain of its existing communities to include
additional independent living, assisted living residences (including special
programs and living units for residents with Alzheimer's and other forms of
dementia), and, possibly skilled nursing beds. The Company currently has one
expansion project under construction and 11 expansion projects under
development, representing an aggregate increase in capacity to accommodate an
additional 994 residents. Of these 12 expansion projects, one is at a community
which is owned by the Company, four are at communities in which the Company owns
an interest and manages under multi-year agreements, and seven are at
communities which the Company manages for third parties. The costs of the
expansion of managed communities is borne by the community owner and not by the
Company. However, with respect to the four expansion projects in which the
Company has a partial ownership interest, the Company will manage the expansion
and have rights to lease and purchase the expansion facilities. The expansion of
existing senior living communities allows the Company to create operating
efficiencies and capitalize on its local presence, community familiarity, and
reputation in markets in which the Company currently operates.

The table below summarizes information regarding the expansion of certain
of the Company's existing senior living communities currently in process.

<TABLE>
<CAPTION>
SCHEDULED
COMMUNITY LOCATION COMPLETION IL AL TOTAL STATUS(1)
--------- -------- ------------- --- --- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Cottonwood Village................ Cottonwood, AZ 1st half 1998 66 47 113 Construction
Hearthstone....................... Austin, TX 2nd half 1998 -- 50 50 Development
Buckner Westminister Village...... Longview, TX 2nd half 1998 -- 60 60 Development
Towne Centre...................... Merrillville, IN 1st half 1999 66 70 136 Development
Canton Regency.................... Canton, OH 1st half 1999 100 30 130 Development
Independence Village.............. Raleigh, NC 2nd half 1998 -- 50 50 Development
West Shores....................... Hot Springs, AR 2nd half 1998 -- 65 65 Development
The Palms......................... Ft. Myers, FL 2nd half 1998 -- 48 48 Development
Independence Village.............. Peoria, IL 1st half 1999 46 30 76 Development
Crown Point/Crown Villa........... Omaha, NE 1st half 1999 102 24 126 Development
Amberleigh........................ Buffalo, NY 1st half 1999 -- 80 80 Development
Independence Village.............. East Lansing, MI 2nd half 1999 -- 60 60 Development
--- --- ---
Total......................... 380 614 994
=== === ===
</TABLE>

- ---------------

(1) "Development" indicates that development activities, such as site surveys,
preparation of architectural plans, or initiation of zoning processes, have
commenced (but construction has not commenced). "Construction" indicates
that construction activities, such as ground-breaking activities, exterior
construction, or interior build-out have commenced.

Develop New Senior Living Communities

General. The Company intends to continue to expand its operations through
the development and construction of new senior living communities in selected
markets which provide a quality lifestyle that is affordable to a large segment
of seniors. The Company's national presence provides it with extensive research
and experience in various markets which serve as the basis for the formulation
of its development strategy in the selection of new markets. The Company's
development plan calls for the identification of multiple markets in which
construction can occur within the Company's targeted time frame and budget. The
Company has developed a list of target markets and submarkets based upon local
market conditions, the availability of

44
<PAGE> 45

development sites and local construction capabilities, the existence of
development barriers to entry, the overall health and growth trends of the local
economies, and the presence of a significant elderly population.

The Company's senior management has extensive experience in real estate
development, having developed in excess of $350 million of senior living
communities. The Company has an integrated internal development approach
pursuant to which the Company's management and other personnel (including
designers and architects, market analysts, and construction managers) locate
sites for, develop, and open its communities. Personnel who are experienced in
site selection conduct extensive market and site-specific feasibility studies
prior to the Company's committing significant financial resources to new
projects. The Company believes it can rapidly expand its operations into new
markets and strengthen its presence within its existing markets utilizing its
existing residence models, such as the Waterford model.

Development with Tri Point. Eleven of the 17 senior living communities
referred to in the table below will be Waterford communities, and will be
developed pursuant to an arrangement with Tri Point under which Tri Point will
pay development and management fees to the Company for development and
management services and the Company will have options to purchase the
communities upon their completion. Tri Point will be responsible for funding the
construction and lease-up costs. These communities will have an aggregate
capacity for approximately 1,496 residents at an aggregate estimated cost of
completion and lease-up of approximately $80.0 million to $100.0 million. Tri
Point has outstanding commitments for loan facilities from institutional lenders
aggregating up to $100.0 million to fund these development activities. The
Waterford community model is designed to provide middle income residents with a
senior living community having amenities typical of higher-priced communities
through more efficient space design, emphasizing common areas and providing more
efficient layouts of the living areas. See "Certain Transactions -- Tri Point
Development Agreement."

The Waterford design may be configured in a number of different ways
thereby providing the Company with flexibility in adapting to a particular
geographic market, neighborhood, or site. In addition, the Waterford design has
been developed to facilitate the prompt, efficient, cost-effective delivery of
health care and personal services. Site requirements for the various designs
range from 4.5 to 6.0 acres. The Waterford design may also provide for specially
designed residential units, common areas, and dining rooms for residents with
Alzheimer's and other forms of dementia.

The Company believes that its designs meet the desire of many of its
residents to move into a new residence that approximates, as nearly as possible,
the comfort of their prior home. The Company also believes that its designs
achieve several other objectives, including: (i) lessening the trauma of change
for residents and their families; (ii) facilitating resident mobility and
caregiver access; (iii) enhancing operating efficiencies; (iv) enhancing the
Company's ability to match its products to targeted markets; and (v)
differentiating the Company from its competitors.

Development through Other Strategic Alliances. The Company has also formed
strategic alliances with for-profit and not-for-profit organizations (such as
Buckner Retirement Services, Inc.) to develop, lease-up and manage additional
communities while reducing the investment of, and associated risks to, the
Company. The Company's alliances are with established development companies or
not-for-profit owner/operators of senior living communities. Six of the 17
senior living communities referred to in the table below will be developed
through strategic alliances. The for-profit entities generally provide
construction management experience, existing relationships with local
contractors, suppliers, and municipal authorities, knowledge of local and state
building codes and building laws, and assistance with site selection for new
communities. The not-for-profit organizations generally provide existing
relationships with church and other religious organizations, a community
reputation of caring for seniors, a tax-exempt status that permits tax- exempt
bond financing, and in certain instances, home health care services. The Company
contributes its operational and industry expertise, has had, in most cases,
leasing and management responsibilities for communities owned by these
organizations, as well as has the right of first refusal to acquire the
communities in most cases. Through June 30, 1997, the Company had one new
community with a 385-resident capacity under construction and six communities
with 1,445 resident capacity under development with these organizations. The
Company intends to continue to evaluate opportunities to form similar joint
ventures and strategic alliances in the future.

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<PAGE> 46

The Company is currently evaluating a number of potential development
projects. The table below summarizes information regarding those developments
which the Company expects to complete by 1999.

<TABLE>
<CAPTION>
SCHEDULED
LOCATION OF DEVELOPMENT PROJECTS: COMPLETION IL AL SN TOTAL STATUS(1)
- --------------------------------- ------------- ----- --- --- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Houston, TX...................... 1st half 1998 243 82 60 385 Construction
Carrollton, TX................... 2nd half 1998 136 -- -- 136 Development
Mesquite, TX..................... 1st half 1999 136 -- -- 136 Development
Duncanville, TX.................. 1st half 1999 136 -- -- 136 Development
Jacksonville, FL................. 1st half 1999 136 -- -- 136 Development
N. Richland Hills, TX............ 1st half 1999 136 -- -- 136 Development
Euless, TX....................... 1st half 1999 136 -- -- 136 Development
Shreveport, LA................... 1st half 1999 136 -- -- 136 Development
Brownwood, TX.................... 1st half 1999 125 30 -- 155 Development
Oklahoma City, OK................ 1st half 1999 136 -- -- 136 Development
San Antonio, TX.................. 1st half 1999 136 -- -- 136 Development
Las Vegas, NV.................... 1st half 1999 136 -- -- 136 Development
Beaumont, TX..................... 1st half 1999 156 54 30 240 Development
Oklahoma City, OK................ 1st half 1999 136 -- -- 136 Development
Trumbull, CT..................... 1st half 1999 120 30 -- 150 Development
Dallas, TX....................... 1st half 1999 270 40 -- 310 Development
Georgetown, TX................... 2nd half 1999 270 84 40 394 Development
----- --- --- -----
Total....................... 2,680 320 130 3,130
===== === === =====
</TABLE>

- ---------------

Development of Joint Venture Operations in China

The Company has recently entered into a joint venture agreement with New
World Development, Ltd. ("New World") for the purpose of investing, developing
and managing senior living communities in several cities in mainland China. New
World is a publicly traded property development company based in Hong Kong that
currently develops condominium and office projects in China. To date, New World
estimates that it has invested approximately $2.6 billion in real estate
ventures in China. Pursuant to the agreement with New World, the Company and New
World will form an entity which will develop and operate senior living
communities in major cities in China. New World will contribute its expertise in
constructing properties in China and will bear substantially of all of the
construction costs. The Company will be responsible for development of senior
living communities and for property management services. The Company currently
expects that following its initial development of senior living communities in
China, the joint venture will sell individual units in the communities to
prospective residents, and the Company will retain the operating
responsibilities in such communities. The Company's target cities currently
include Shanghai, Guangzhou and Beijing.

Pursue Strategic Acquisitions

The Company intends to continue to pursue single or portfolio acquisitions
of senior living communities and, to a lesser extent, other assisted living and
long-term care communities. Through strategic acquisitions, the Company plans to
enter new markets or acquire communities in existing markets as a means to
increase market share, augment existing clusters, strengthen its ability to
provide a broad range of care, and create operating efficiencies. As the
industry continues to consolidate, the Company believes that opportunities will
arise to acquire other senior living companies. The Company believes that the
current fragmented nature of the senior living industry, combined with the
Company's financial resources, national presence, and extensive

46
<PAGE> 47

contacts within the industry, should provide it with the opportunity to evaluate
a number of potential acquisition opportunities. In reviewing acquisition
opportunities, the Company will consider, among other things, geographic
location, competitive climate, reputation and quality of management and
communities, and the need for renovation or improvement of the communities.

Develop and Acquire Additional Home Health Care Agencies

The Company intends to expand its home health care services by developing,
acquiring, and managing new home health care agencies and expanding its range of
existing home health care services. The Company currently anticipates that its
home health care agencies will be based at the Company's communities, and will
serve both the Company's communities and the surrounding area. The Company
believes that the expansion of its home health care services will enhance its
ability to provide a broad range of health care services, increase its market
visibility, augment the creation of senior living networks in targeted areas,
and further enhance efforts to coordinate with managed care networks, increase
company profitability, as well as aid in the maintaining of current occupancy
levels. The Company currently operates one home health care agency, and intends
to establish approximately five new home health care agencies at its owned
properties by the fourth quarter of 1998.

Expand Referral Networks

The Company intends to continue to develop relationships (which, in certain
instances, may involve strategic alliances or joint ventures) with local and
regional hospital systems, managed care organizations, and other referral
sources to attract new residents to the Company's communities. The Company
believes that such arrangements or alliances, which could range from joint
marketing arrangements to priority transfer agreements, will enable it to be
strategically positioned within the Company's markets if, as the Company
believes, senior living programs become an integral part of the evolving health
care delivery system.

OPERATIONS

Centralized Management

The Company centralizes its corporate and other administrative functions so
that the community-based management and staff can focus their efforts on
resident care. The Company maintains centralized accounting, finance, human
resources, training, and other operational functions at its national corporate
office in Dallas, Texas. The Company's corporate office is generally responsible
for: (i) establishing Company-wide policies and procedures relating to, among
other things, resident care and operations; (ii) performing accounting
functions; (iii) developing employee training programs and materials; (iv)
coordinating human resources; (v) coordinating marketing functions; and (vi)
providing strategic direction. In addition, financing, development, construction
and acquisition activities, including feasibility and market studies, and
community design, development, and construction management, are conducted by the
Company's corporate offices.

The Company seeks to control operational expenses for each of its
communities through standardized management reporting and centralized controls
of capital expenditures, asset replacement tracking, and purchasing for larger
and more frequently used supplies. Community expenditures are monitored by
regional and district managers who are accountable for the resident satisfaction
and financial performance of the communities in their region.

Community-Based Management

An executive director manages the day-to-day operations at each senior
living community, including oversight of the quality of care, delivery of
resident services, and monitoring of financial performance, and is responsible
for all personnel, including food service, maintenance, activities, security,
assisted living, housekeeping, and, where applicable, nursing. In most cases,
each community also has department managers who direct the environmental
services, nursing or care services, business management functions, dining
services, activities, transportation, housekeeping, and marketing functions.

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<PAGE> 48

The assisted living and skilled nursing components of the senior living
communities are managed by licensed professionals, such as a nurse and/or a
licensed administrator. These licensed professionals have many of the same
operational responsibilities as the Company's executive directors, but their
primary responsibility is to oversee resident care. Many of the Company's
assisted living communities and some of its skilled nursing facilities are part
of a campus setting, which includes independent living. This campus arrangement
allows for cross-utilization of certain support personnel and services,
including administrative functions, which results in greater operational
efficiencies and lower costs than free-standing facilities.

The Company actively recruits personnel to maintain adequate staffing
levels at its existing communities as well as new staff for new or acquired
communities prior to opening. The Company has adopted comprehensive recruiting
and screening programs for management positions that utilize corporate office
team interviews and thorough background and reference checks. The Company offers
system-wide training and orientation for all of its employees at the community
level through a combination of Company-sponsored seminars and conferences.

Home Health Management

The Company collects all home health care financial data through the use of
an electronic data system. This system gives senior management the ability to
identify emerging trends, monitor cost controls and develop current pricing
strategies. All accounting functions are performed at the corporate office.

The Company's home health care agency is managed under the auspices of the
executive director of the community where that agency is located and under the
direct control of an agency director who is a registered nurse. This director
and his or her team of registered nurses, licensed practical nurses, home health
care aides and various allied medical professionals focus on assessing and
subsequently managing the health care needs of residents in that senior living
community.

Quality Assurance

Quality assurance programs are coordinated and implemented by the Company's
corporate and regional staff. The Company's quality assurance is targeted to
achieve maximum resident and resident family member satisfaction with the care
and services delivered by the Company. The Company's primary focus in quality
control monitoring includes routine in-service training and performance
evaluations of care givers and other support employees. Additional quality
assurance measures include:

Resident and Resident Family Input. On a routine basis the Company provides
residents and family members the opportunity to provide valuable input regarding
the day-to-day delivery of services. On-site management at each community has
fostered and encouraged active resident councils and resident committees who
meet independently. These resident bodies meet with on-site management on a
monthly basis to offer input and suggestions to the quality and delivery of
services. Additionally, at each community the Company conducts annual resident
satisfaction surveys to further monitor the satisfaction levels of both
residents and family members. These surveys are sent directly to the corporate
headquarters for tabulation and distribution to on-site staff and residents. For
any departmental area of service scoring below a 90%, a plan of correction is
developed jointly by on-site, regional and corporate staff for immediate
implementation.

Regular Community Inspections. On a monthly basis a community inspection is
conducted by regional and/or corporate staff. Included as part of this
inspection is the monitoring of the overall appearance and maintenance of the
community interiors and grounds. The inspection also includes monitoring staff
professionalism and departmental reviews of maintenance, housekeeping,
activities, transportation, marketing, administration and food service as well
as health care, if applicable. The monthly inspection also includes the
observation of residents in their daily activities and community compliance with
government regulations.

Independent Service Evaluations. The Company engages the services of
outside professional independent consulting firms to evaluate various components
of the community operations. These services include "mystery shops," competing
community analysis, pricing recommendations and product positioning. This
provides management with valuable unbiased product and service information. A
plan of action regarding any

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<PAGE> 49

areas requiring improvement or change is implemented based on information
received. At communities where health care is delivered, these consulting
service reviews include the on-site handling of medications, record-keeping, and
general compliance with all governmental regulations.

Marketing

Each community is staffed by on-site marketing directors and additional
marketing staff depending on the community size. The primary focus of the
on-site marketing staff is to create awareness of the Company and its services
among prospective residents and family members, professional referral sources
and other key decision makers. The marketing efforts incorporate an aggressive
marketing plan to include monthly and annual goals for leasing, new lead
generation, prospect follow up, community outreach, and resident and family
referrals. Additionally, the marketing plan includes a calendar of promotional
events and a comprehensive media program. On-site marketing departments perform
a competing community assessment twice annually. Corporate and regional
marketing directors monitor the on-site marketing departments' effectiveness and
productivity on a monthly basis. Routine detailed marketing department audits
are performed on an annual basis or more frequently if deemed necessary.
Corporate and regional personnel assist in the development of marketing
strategies for each community and produce creative media, assist in direct mail
programs and necessary marketing collateral materials. Ongoing sales training of
on-site marketing staff is implemented by corporate and regional marketing
directors.

In the case of new development, the corporate and regional staff develop a
comprehensive community outreach program that is implemented at the start of
construction. A marketing pre-lease program is developed and on-site marketing
staff are hired and trained to begin the program implementation six to nine
months prior to the community opening. Extensive use of media to include radio,
television, print, direct mail and telemarketing is implemented during this
pre-lease phase.

After the community is opened and sustaining occupancy levels are attained,
the on-site marketing staff is more heavily focused on resident and resident
family referrals, as well as professional referrals. A maintenance program of
print media and direct mail is then implemented.

GOVERNMENT REGULATION

Changes in existing laws and regulations, adoption of new laws and
regulations and new interpretations of existing laws and regulations could have
a material effect on the Company's operations. Failure by the Company to comply
with applicable regulatory requirements could have a material adverse effect on
the Company's business, financial condition, and results of operations.
Accordingly, the Company monitors legal and regulatory developments on local and
national levels.

The health care industry is subject to extensive regulation and frequent
regulatory change. At this time, no federal laws or regulations specifically
regulate assisted or independent living residences. While a number of states
have not yet enacted specific assisted living regulations, the Company's
communities are subject to regulation, licensing, Certificate of Need and
permitting by state and local health and social service agencies and other
regulatory authorities. While such requirements vary from state to state, they
typically relate to staffing, physical design, required services, and resident
characteristics. The Company believes that such regulation will increase in the
future. In addition, health care providers are receiving increased scrutiny
under anti-trust laws as integration and consolidation of health care delivery
increases and affects competition. The Company's communities are also subject to
various zoning restrictions, local building codes, and other ordinances, such as
fire safety codes. Failure by the Company to comply with applicable regulatory
requirements could have a material adverse effect on the Company's business,
financial condition, and results of operations. Regulation of the assisted
living industry is evolving. The Company is unable to predict the content of new
regulations and their effect on its business. There can be no assurance that the
Company's operations will not be adversely affected by regulatory developments.

The Company believes that its communities are in substantial compliance
with applicable regulatory requirements. However, in the ordinary course of
business, one or more of the Company's communities could be cited for
deficiencies. In such cases, the appropriate corrective action would be taken.
To the Company's

49
<PAGE> 50

knowledge, no material regulatory actions are currently pending with respect to
any of the Company's communities.

Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state, and
local laws exist that also may require modifications to existing and planned
properties to permit access to the properties by disabled persons. While the
Company believes that its communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.

In addition, the Company is subject to various federal, state and local
environmental laws and regulations. Such laws and regulations often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such contamination properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator or an entity
that arranges for the disposal of hazardous or toxic substances, such as
asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties. The Company has completed Phase I environmental audits of the
communities in which the Company owns interests, and such surveys have not
revealed any material environmental liabilities that exist with respect to these
communities.

The Company believes that the structure and composition of government, and
specifically health care, regulations will continue to change and, as a result,
regularly monitors developments in the law. The Company expects to modify its
agreements and operations from time to time as the business and regulatory
environments change. While the Company believes it will be able to structure all
its agreements and operations in accordance with applicable law, there can be no
assurance that its arrangements will not be successfully challenged.

COMPETITION

The senior living services industry is highly competitive, and the Company
expects that all segments of the industry will become increasingly competitive
in the future. Although there are a number of substantial companies active in
the senior living services industry and in the markets in which the Company
operates, the industry continues to be very fragmented and characterized by
numerous small operators. For example, the Company competes with American
Retirement Corporation in Texas, Sunrise Assisted Living, Inc. in North Carolina
and New York, Atria Communities in New York, and Marriott Senior Living Services
in Florida. The Company believes that the primary competitive factors in the
senior living services industry are: (i) reputation for and commitment to a high
quality of care; (ii) quality of support services offered (such as home health
care and food services); (iii) price of services; (iv) physical appearance and
amenities associated with the communities; and (v) location. The Company
competes with other companies providing independent living, assisted living,
skilled nursing, home health care, and other similar service and care
alternatives, some of whom may have greater financial resources than the
Company. Because seniors tend to choose senior living communities near their
homes, the Company's principal competitors are other senior living and long-term
care communities in the same geographic areas as the Company's communities. The
Company also competes with other health care businesses with respect to
attracting and retaining nurses, technicians, aides, and other high quality
professional and non-professional employees and managers.

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<PAGE> 51

INSURANCE AND LEGAL PROCEEDINGS

The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the senior living and health care
services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs. The Company
currently maintains property, liability, and professional medical malpractice
insurance policies for the Company's owned and managed communities under a
master insurance program in amounts and with such coverages and deductibles that
the Company believes are within normal industry standards based upon the nature
and risks of the Company's business, and the Company believes that such
insurance coverage is adequate. The Company also has an umbrella excess
liability protection policy in the amount of $10.0 million per location. There
can be no assurance that a claim in excess of the Company's insurance will not
arise. A claim against the Company not covered by, or in excess of, the
Company's insurance could have a material adverse effect upon the Company. In
addition, the Company's insurance policies must be renewed annually. There can
be no assurance that the Company will be able to obtain liability insurance in
the future or that, if such insurance is available, it will be available on
acceptable terms.

On July 29, 1996, ILM terminated management agreements with Angeles Housing
Concepts, Inc. ("AHC") covering the management of its senior living communities
and entered into the ILM Management Agreements described herein under
"Business -- Third-Party Management Contracts." On February 4, 1997, AHC filed a
lawsuit in the Superior Court of the State of California against Capital Senior
Management 2, Inc., one of the Contributed Entities, and others alleging that
the defendants intentionally interfered with AHC's property management
agreements with ILM by inducing ILM to terminate the agreements. The complaint
seeks damages of at least $2 million. On March 4, 1997, the defendants removed
the case to the U.S. District Court for the Central District of California.
Trial in the action has been set for January 12, 1998, and discovery in the
action has begun. The Company is vigorously defending the claims and believes
that it has adequate insurance to cover the claim if the matter is determined
adversely to the Company. In an action pending in the U.S. District Court for
the Eastern District of Virginia that the Company is not a party to, ILM
initiated a lawsuit against AHC for breach of contract and other claims, and AHC
filed a counterclaim against ILM. AHC has obtained a judgment against ILM in
this action in the amount of $1 million, which judgment ILM has appealed.

EMPLOYEES

As of June 30, 1997, the Company employed approximately 1,558 persons, of
which approximately 882 are full-time employees (approximately 32 of whom are
located at the Company's corporate offices) and 676 are part-time employees.
None of the Company's employees is currently represented by a labor union and
the Company is not aware of any union organizing activity among its employees.
The Company believes that its relationship with its employees is good.

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<PAGE> 52

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The following table sets forth certain information concerning each of the
Company's executive officers, directors and key employees:

<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
Jeffrey L. Beck...................... 52 Co-Chairman and Chief Executive Officer
James A. Stroud...................... 47 Co-Chairman, Chief Operating Officer, and
Secretary
Lawrence A. Cohen.................... 43 Vice Chairman and Chief Financial Officer
Keith N. Johannessen................. 40 President
Rob L. Goodpaster.................... 44 Vice President -- National Marketing
David W. Beathard, Sr................ 50 Vice President -- Operations
Charles W. Allison................... 48 Vice President -- Development
David R. Brickman.................... 39 Vice President and General Counsel
Kathleen L. Granzberg................ 36 Controller -- Corporate
Robert F. Hollister.................. 41 Controller -- Property
Dr. Gordon I. Goldstein.............. 60 Director -- Nominee
J. Frank Miller, III................. 45 Director -- Nominee
James A. Moore....................... 63 Director -- Nominee
Dr. Victor W. Nee.................... 62 Director -- Nominee
</TABLE>

Messrs. Goldstein, Miller, Moore and Nee have agreed to become members of
the Board of Directors of the Company effective upon completion of the Offering.

JEFFREY L. BECK has served as a director and Chief Executive Officer of the
Company and its predecessors since January 1986. He currently serves as
Co-Chairman and Chief Executive Officer of the Company. Mr. Beck also serves on
the boards of various educational, religious and charitable organizations and in
varying capacities with several trade associations. Mr. Beck served as Vice
Chairman of the American Seniors Housing Association from 1992 to 1994, and as
Chairman from 1994 to 1996, and remains a member of its Executive Board, and is
a council member of the Urban Land Institute. Mr. Beck is Chairman of the Board
of Directors of United Texas Bank of Dallas and is Chairman and President of
Beck Properties Trophy Club.

JAMES A. STROUD has served as a director and Chief Operating Officer of the
Company and its predecessors since January 1986. He currently serves as
Co-Chairman and Chief Operating Officer of the Company. Mr. Stroud also serves
on the boards of various educational and charitable organizations, and in
varying capacities with several trade organizations, including as a member of
the Founder's Council and Board of Directors of the Assisted Living Federation
of America, and as Housing Commissioner, President-Elect, and as a member of the
Board of Directors of the National Association For Senior Living Industries. Mr.
Stroud also serves as an Advisory Group member to the National Investment
Conference. Mr. Stroud was a Founder of the Texas Assisted Living Association
and serves as a member of its Board of Directors. Mr. Stroud has earned a
Masters in Law, is a licensed attorney and is also a Certified Public
Accountant.

LAWRENCE A. COHEN has served as a director and Vice Chairman and Chief
Financial Officer of the Company since November 1996. From 1991 to 1996, Mr.
Cohen served as President and Chief Executive Officer of Paine Webber Properties
Incorporated, which controlled a real estate portfolio having a cost basis of
approximately $3.0 billion, including senior living facilities of approximately
$110.0 million. Mr. Cohen is also president and a member of the boards of
directors of ILM Senior Living, Inc. and ILM Senior Living II, Inc., and is a
member of the boards of directors of ILM I Lease Corporation and ILM II Lease
Corporation. In addition, he serves as a member of the Corporate Finance
Committee and chairman of the Direct Participation Programs Subcommittee of the
NASD Regulation, Inc., and was a founding member of the

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<PAGE> 53

executive committee of the Board of the American Seniors Housing Association.
Mr. Cohen has earned a Masters in Law, is a licensed attorney and is also a
Certified Public Accountant. Mr. Cohen has had positions with businesses
involved in senior living for 12 years.

KEITH N. JOHANNESSEN has served as President of the Company and its
predecessors since March 1994, and previously served as Executive Vice-President
since May 1993. From 1992 to 1993, Mr. Johannessen served as Senior Manager in
the health care practice of Ernst & Young. From 1987 to 1992, Mr. Johannessen
was Executive Vice President of Oxford Retirement Services, Inc. Mr. Johannessen
has served on the State of the Industry and Model Assisted Living Regulations
Committees of the American Seniors Housing Association. Mr. Johannessen has been
active in operational aspects of senior housing for 19 years.

ROB L. GOODPASTER has served as Vice President -- National Marketing of the
Company and its predecessors since December 1992. From 1990 to 1992, Mr.
Goodpaster was National Director for Marketing for Autumn America, an owner and
operator of senior housing facilities. Mr. Goodpaster is a member of the Board
of Directors of the National Association For Senior Living Industries. Mr.
Goodpaster has been active in the operational, development and marketing aspects
of senior housing for 21 years.

DAVID W. BEATHARD, SR. has served as Vice President -- Operations of the
Company and its predecessors since August 1996. From 1992 to 1996, Mr. Beathard
owned and operated a consulting firm which provided operational, marketing and
feasibility consulting regarding senior housing facilities. Mr. Beathard serves
as a Designated Alternate member of the Board of Directors of the Texas Assisted
Living Association. Mr. Beathard has been active in the operational, sales and
marketing, and construction oversight aspects of senior housing for 23 years.

CHARLES W. ALLISON has served as Vice President -- Development of the
Company and its predecessors since February 1997. From 1996 to 1997, Mr. Allison
served as Vice President of Development with Greenbriar Corporation, and from
1993 to 1996 as Regional Director of Development for Sterling House Corporation,
both of which are in the senior housing and health care development and
operational business. Mr. Allison has been active in site selection, feasibility
phase, design phase, and construction of senior housing properties and
multi-family commercial real estate for 29 years. Mr. Allison has earned a
Masters Degree in Business Administration.

DAVID R. BRICKMAN has served as Vice President and General Counsel of the
Company and its predecessors since July 1992. From 1989 to 1992, Mr. Brickman
served as in-house counsel with LifeCo Travel Management Company, a corporation
which provided travel services to U.S. corporations. Mr. Brickman has earned a
Masters of Business Administration and a Masters in Health Administration. Mr.
Brickman has either practiced law or performed in-house counsel functions for 11
years.

KATHLEEN L. GRANZBERG, a Certified Public Accountant, has served as the
Corporate Controller for the Company and its predecessors since December 1991,
and as Property Controller since 1987. Ms. Granzberg is a member of the American
Institute of Certified Public Accountants and is also a member of the Texas
Society of Certified Public Accountants.

ROBERT F. HOLLISTER, a Certified Public Accountant, has served as Property
Controller for the Company and its predecessors since April 1992. From 1985 to
1992, Mr. Hollister was Chief Financial Officer and Controller of Kavanaugh
Securities, Inc., a NASD broker dealer. Mr. Hollister is a Certified Financial
Planner. Mr. Hollister is a member of the American Institute of Certified Public
Accountants and is also a member of the Texas Society of Certified Public
Accountants.

DR. GORDON I. GOLDSTEIN has been an attending anesthesiologist at
Presbyterian Hospital in Dallas, Texas since 1967 and at the Surgery Center
Southwest since 1990. He is board certified by the American Board of
Anesthesiology and has been a Fellow of the American College of Anesthesiology
since 1966. Dr. Goldstein has published Diagnosis and Treatment of Reactions of
Chymopapain and Successful Treatment of Cafe Coronary. Dr. Goldstein received
his undergraduate degree in biology and chemistry from East Tennessee State
University, his M.D. from the University of Tennessee Medical School and has
served in the medical profession in the northeast and currently in the
southwest. Dr. Goldstein served as the Chairman of the

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<PAGE> 54

Department of Anesthesiology at Presbyterian Hospital in Dallas, Texas from 1994
to 1997, and currently serves as Chairman of Dallas Anesthesiology Associates.

J. FRANK MILLER, III, is currently the President and Chief Executive
Officer of JPI, the largest multi-family developer in the United States. Mr.
Miller has served in this capacity from 1989 to the present. Mr. Miller has over
20 years of experience in real estate investment management and development. As
managing partner and president of JPI, he is responsible for the ongoing
operations of JPI's acquisitions, development, construction and management
activities and establishes and maintains JPI's financial relationship. Mr.
Miller was recognized as Builder of the Year for 1997 by Multifamily Executive
Magazine. Prior to joining JPI, Mr. Miller was President of Southland Financial
Corporation.

JAMES A. MOORE is currently President of Moore Diversified Services, Inc.,
a senior living consulting firm engaged in market feasibility studies,
investment advisory services, and marketing and strategic consulting in the
senior living industry. Mr. Moore has 35 years of industry experience and has
conducted over 1,600 senior living consulting engagements in approximately 475
markets, in 46 states and six countries. Mr. Moore has authored numerous senior
living and health care industry technical papers and trade journal articles, as
well as the book Assisted Living -- Pure & Simple Development and Operating
Strategies, which is required assisted living certification course material for
the American College of Health Care Administrators. Mr. Moore is the immediate
past president of The National Association for Senior Living Industries and is
the current chairman of The National Foundation for Retirement Living.

DR. VICTOR W. NEE, has been a Professor in the Department of Aerospace and
Mechanical Engineering at the University of Notre Dame since 1965. In addition
to his professorial duties, Dr. Nee served as Director of the Advanced
Technology Center at the University of Massachusetts, Dartmouth from 1993 to
1995, and as Director of the Advanced Engineering Research Laboratory at the
University of Notre Dame from 1991 to 1993. Dr. Nee received a Bachelors of
Science from the National Taiwan University in Civil Engineering and a Ph.D. in
Fluid Mechanics from The Johns Hopkins University. Dr. Nee holds international
positions as an advisor to governmental, educational and industrial
organizations in China. Dr. Nee has an ongoing relationship with New World and
will continue as Company's principal liaison with New World in connection with
the Company's China development operations.

Mr. Stroud experienced personal difficulties in 1993 surrounding a
prolonged terminal illness of his daughter. In 1994, Mr. Stroud pled guilty to
felony charges of driving while intoxicated, and was sentenced to, among other
obligations, five years probation and after care obligations, and as a result, a
probated sentence in 1992 of convictions of driving while intoxicated charges
was extended. If Mr. Stroud were to be convicted of similar charges in the
future, the risk exists that he would be unable to continue his employment with
the Company. In 1993, Mr. Stroud pled guilty to misdemeanor possession of
marijuana and paid a minor fine. The Board of Directors has concluded that these
matters do not adversely affect his fitness to serve as an officer or director
of the Company.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company's Board of Directors, which will consist of seven members upon
consummation of the Offering, is divided into three classes of as nearly equal
size as possible. At each annual meeting of stockholders, directors constituting
one class are elected for a three-year term. The terms of Messrs. Miller, Moore,
and Nee will expire at the 1998 Annual Meeting of Stockholders, the terms of
Messrs. Cohen and Goldstein will expire at the 1999 Annual Meeting of
Stockholders, and the terms of Messrs. Beck and Stroud will expire at the 2000
Annual Meeting of Stockholders. See "Description of Capital Stock -- Certain
Charter and Bylaw Provisions."

The Board of Directors has established a policy of holding meetings on a
regular monthly basis and on other occasions when required by special
circumstances. Certain directors also devote their time and attention to the
Board's principal standing committees. The committees and their primary
functions are as follows:

Executive Committee. The members of the Executive Committee are Messrs.
Beck, Stroud and Cohen. The Executive Committee has been delegated all of the
powers of the Board of Directors to the extent

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<PAGE> 55

permitted under the Delaware General Corporation Law, other than those powers
delegated to other committees of the Board of Directors.

Audit Committee. The members of the Audit Committee will be Messrs.
Goldstein, Miller, and Moore, all of whom are non-employee directors. The Audit
Committee, among other things, will make recommendations concerning the
engagement of independent auditors, reviews the results and scope of the annual
audit and other services provided by the Company's independent auditors and
reviews the adequacy of the Company's internal accounting controls.

Compensation Committee. The members of the Compensation Committee will be
Messrs. Goldstein, Moore, and Nee, all of whom are non-employee directors. The
Compensation Committee will make recommendations to the full Board of Directors
concerning salary and bonus compensation and benefits for executive officers of
the Company. The Compensation Committee has the power and authority to take all
actions and make all determinations under the Company's 1997 Stock Incentive
Plan, including the grant of options thereunder.

EXECUTIVE COMPENSATION

The following table sets forth certain summary information concerning the
compensation paid to the Company's Chief Executive Officer and each of the other
three most highly compensated executive officers whose salary exceeded $100,000
in 1996 for services rendered in all capacities to the Company for fiscal 1996.
All of the executive officers named below are referred to herein as the "named
executive officers."

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
NAME AND PRINCIPAL POSITION(1) SALARY BONUS
------------------------------ -------- ----------
<S> <C> <C>
Jeffrey L. Beck............................................. $175,000(2) $1,483,300(2)
Co-Chairman and Chief Executive Officer
James A. Stroud............................................. $175,000(2) $1,483,300(2)
Co-Chairman, Chief Operating Officer, and Secretary
Keith N. Johannessen........................................ $128,750 $ 20,000
President
David R. Brickman........................................... $ 85,000 $ 52,857(3)
Vice President and General Counsel
</TABLE>

- ---------------

(1) The Company has entered into an Employment Agreement with Mr. Lawrence A.
Cohen to be the chief financial officer of the Company. Pursuant to the
terms of such agreement, Mr. Cohen's annual salary will be $250,000 plus a
minimum annual bonus of 25% of Mr. Cohen's base salary. See "-- Employment
Agreements."

(2) Following the consummation of the Offering, the annual salary of Messrs.
Beck and Stroud will be $175,000 each, subject to annual adjustments and
bonuses as approved by the Compensation Committee. Bonus distributions were
paid based in part on Federal income tax regulations relating to
distributions of closely held corporations and S corporations that will not
apply to the Company after the Offering. See note (2) to the table under
"Selected Financial Data" and "-- Employment Agreements."

(3) The bonus amount includes a commission of $33,000 paid on the sale of CSLC's
multi-family properties in 1996.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with each of its named
executive officers. Messrs. Beck and Stroud entered into employment agreements
with the Company in May 1997; and Mr. Cohen, Mr. Brickman, and Mr. Johannessen
entered into employment agreements with the Company in November 1996. Messrs.
Beck and Stroud's employment agreements contain terms that renew annually for

55
<PAGE> 56

successive four-year periods, and the compensation thereunder consists of a
minimum base salary of $175,000 and a bonus that may be given at the option of
the Compensation Committee, in an amount that is at the Compensation Committee's
discretion. Mr. Cohen's employment agreement is for a term of three years, and
the compensation thereunder consists of a minimum annual base salary of $250,000
and a minimum annual bonus of 25% of Mr. Cohen's base salary. Messrs. Brickman
and Johannessen's employment agreements are for a term of three years and
automatically extend for a two-year term on a consecutive basis, and the
compensation thereunder consists of an annual base salary of $140,000 in the
case of Mr. Johannessen, and $100,000 in the case of Mr. Brickman, and an annual
bonus as determined by the Board of Directors or Compensation Committee.
Included in each employment agreement is a covenant of the employee not to
compete with the Company during the term of his employment and for a period of
one year thereafter (two years in the case of Mr. Cohen).

Messrs. Beck and Stroud's employment agreements also provide that if they
are terminated by the Company other than for cause or for reasons of death or
disability or if they voluntarily resign for good reason, then the Company will
pay their base salary plus their minimum annual bonus for the balance of the
term of the agreement, but not less than two years (base salary plus minimum
annual bonus for three years if the termination is due to a Fundamental Change,
as defined therein). Mr. Cohen's employment agreement provides that if Mr. Cohen
is terminated by the Company other than for cause or for reasons of death or
disability or Mr. Cohen voluntarily resigns for good reason, then the Company
will pay to Mr. Cohen his base salary plus his minimum annual bonus for the
balance of the term of his employment agreement, but not less than one year
(base salary plus minimum annual bonus for two years if the termination is due
to a Fundamental Change, as defined therein). Messrs. Brickman and Johannessen's
employment agreements provide that if the employee is terminated by the Company
other than for cause or for reasons of death or disability or the employee
voluntarily resigns for good reason, then the Company will pay the employee his
base salary for the balance of the term of the employment agreement, but in any
event not to exceed two years, and not less than one year from the date of
notice of the termination.

Mr. Beck and Mr. Stroud's employment agreements also contain provisions
that allow them, in the event of their termination without cause, to require the
Company to register under the Securities Act and the right to include in a
Company initiated registration statement the shares of Common Stock that are
owned by them on the date of their termination plus all shares of Common Stock
that they may acquire after their termination pursuant to the exercise of
options.

DIRECTOR COMPENSATION

Directors who are employees of the Company do not receive additional
compensation for serving as directors of the Company. Non-employee directors are
entitled to an annual retainer of $7,000 payable, in arrears, on the date of
each annual meeting of stockholders, commencing with the 1998 Annual Meeting of
Stockholders. Non-employee directors are also entitled to a fee of $500 for each
board meeting attended by such director, and $200 for each committee meeting
attended by such director that is not on the same day as a meeting of the Board
of Directors. All directors are entitled to reimbursement for their actual
out-of-pocket expenses incurred in connection with attending meetings. In
addition, non-employee directors receive options to purchase shares of Common
Stock in accordance with the provisions of the 1997 Stock Incentive Plan. See
"-- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan."

COMPENSATION PURSUANT TO PLANS

1997 Stock Incentive Plan

The Company has adopted the 1997 Omnibus Stock and Incentive Plan for
Capital Senior Living Corporation (the "1997 Stock Incentive Plan"). The Stock
Incentive Plan was approved by the Board of Directors and stockholders of the
Company in August 1997. Under the 1997 Stock Incentive Plan, the Compensation
Committee has the authority to grant to key employees and consultants of the
Company the following types of awards: (i) stock options in the form of
incentive stock options ("ISO") or non-qualified stock options, or both; (ii)
stock appreciation rights; (iii) restricted stock; and/or (iv) other stock-based

56
<PAGE> 57

awards. Pursuant to the 1997 Stock Incentive Plan, the maximum number of shares
of Common Stock which may be issued is 1,565,000 shares, plus shares which are
reacquired pursuant to the share repurchase plan. Under the share repurchase
plan, which is expressly set forth in the 1997 Stock Incentive Plan, shares may
be repurchased by the Company in the open market with the cash proceeds received
by the Company with respect to options exercised and shares (restricted) sold
under the 1997 Stock Incentive Plan, up to a maximum of 50% of the total shares
authorized for grant under the 1997 Stock Incentive Plan (determined by taking
into account any increase based on new issuance of shares, but without regard to
the share repurchase plan). The shares issued with respect to the 1997 Stock
Incentive Plan may include authorized and unissued shares or treasury shares.
The maximum number of shares for which ISOs may be granted is 1,565,000. The
maximum number of shares of Common Stock for which awards may be made under the
1997 Stock Incentive Plan to an officer of the Company or other person whose
compensation may be subject to the limitations on deductibility under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), is 100,000
during any single year. Any shares as to which an option or other award expires,
lapses unexpired, or is forfeited, terminated, or canceled may become subject to
a new option or other award. The 1997 Stock Incentive Plan will terminate on,
and no award may be granted later than, the tenth anniversary of the date of
adoption of the 1997 Stock Incentive Plan, but the exercise date of awards
granted prior to such tenth anniversary may extend beyond that date.

The 1997 Stock Incentive Plan provides for automatic grants of
non-qualified stock options to purchase shares of Common Stock to Outside
Directors. Options to purchase 9,000 shares of Common Stock have been
automatically granted to each person serving as an Outside Director as of the
consummation of the Offering at an exercise price equal to the initial public
offering price. If any person who was not previously a member of the Board of
Directors is elected or appointed an Outside Director following the consummation
of the Offering but prior to the date of the annual meeting of stockholders of
the Company in the year 2000, such Outside Director will automatically be
granted an option to purchase 7,000 shares of Common Stock if such Outside
Director's service begins prior to the second anniversary of the Offering and
5,000 shares of Common Stock if such Outside Director's service begins after the
second anniversary of the Offering. The Board of Directors may, in its
discretion, increase or decrease the number of shares subject to such option to
reflect the extent to which such Outside Director's expected service may exceed
two years or may be less than one year. Such options shall vest with respect to
3,000 shares on the date of the first annual meeting of stockholders following
the date of grant, 3,000 shares on the date of the second annual meeting of
stockholders following the date of grant, and any remaining shares on the date
of the third annual meeting of stockholders following the date of grant.

On the date of each annual meeting of the stockholders of the Company
beginning with the annual meeting of stockholders held in the year 2000, unless
the 1997 Stock Incentive Plan has been terminated, each Outside Director who
will continue as a director following such meeting will receive an option to
purchase 3,000 shares of Common Stock. Such options will vest with respect to
all 3,000 shares on the date of the next annual meeting of stockholders. All
options automatically granted to an Outside Director will enable the optionee to
purchase shares of Common Stock at the fair market value of the Common Stock on
the date of grant. Outside Director optionees will not be able to transfer or
assign their options without the prior written consent of the Board of Directors
other than (i) transfers by the optionee to a member of his or her immediate
family or a trust for the benefit of the optionee or a member of his or her
immediate family, or (ii) transfers by will or by the laws of descent and
distribution. Options automatically granted to Outside Directors will have a
term of ten years from the date of grant. The exercise price may be paid in
cash, shares of Common Stock, or a combination thereof. The Board of Directors
has the discretion to reduce, but not increase, the number of shares awardable
to Outside Directors and to postpone, but not accelerate, the vesting of such
options.

ISOs and non-qualified stock options may be granted to employees for such
number of shares as the Board of Directors or Compensation Committee may
determine and may be granted alone, in conjunction with, or in tandem with other
awards under the 1997 Stock Incentive Plan or cash awards outside the 1997 Stock
Incentive Plan. A stock option will be exercisable at such times and subject to
such terms and conditions as the Compensation Committee will determine, but the
term will be no more than ten years after the date of grant (five years in the
case of ISOs for certain 10% stockholders). The option price for an ISO

57
<PAGE> 58

will not be less than 100% (110% in the case of certain 10% stockholders) of the
fair market value of the Common Stock as of the date of grant. ISOs granted
under the 1997 Stock Incentive Plan may not be transferred or assigned other
than by will or by the laws of descent and distribution. Non-qualified stock
options, restricted stock awards and stock appreciation rights may not be
transferred or assigned without the prior written consent of the Compensation
Committee, other than (i) transfer by the optionee to a member of his or her
immediate family or a trust for the benefit of the optionee or a member of his
or her immediate family, or (ii) transfers by will or by the laws of descent and
distribution.

Stock appreciation rights may be granted under the 1997 Stock Incentive
Plan alone, or in conjunction with all or part of a stock option. If issued in
conjunction with a stock option, it will be exercisable only when the underlying
stock option is exercisable and once a stock appreciation right has been
exercised, the related portion of the stock option underlying the stock
appreciation right will terminate. Upon the exercise of a stock appreciation
right, the Company will pay to the employee or consultant in cash, Common Stock,
or a combination thereof (the method of payment to be at the discretion of the
Compensation Committee), an amount equal to the excess of the fair market value
of the Common Stock on the exercise date over the option price, multiplied by
the number of stock appreciation rights being exercised.

Restricted stock awards may be granted alone, in addition to, or in tandem
with, other awards under the 1997 Stock Incentive Plan or cash awards made
outside the 1997 Stock Incentive Plan. The provisions attendant to a grant of
restricted stock may vary from participant to participant. In making an award of
restricted stock, the Compensation Committee will determine the periods during
which the restricted stock is subject to forfeiture. During the restriction
period, the employee or consultant may not sell, transfer, pledge, or assign the
restricted stock, but will be entitled to vote the restricted stock and to
receive, at the election of the Compensation Committee, cash or deferred
dividends.

The Compensation Committee also may grant other types of awards such as
performance shares, convertible preferred stock, convertible debentures, or
other exchangeable securities that are valued, as a whole or in part, by
reference to or otherwise based on the Common Stock. These awards may be granted
alone, in addition to, or in tandem with stock options, stock appreciation
rights, restricted stock, or cash awards outside of the 1997 Stock Incentive
Plan. Awards will be made upon such terms and conditions as the Compensation
Committee may determine.

If there is a change in control or a potential change in control of the
Company (as defined in the 1997 Stock Incentive Plan), unless otherwise
determined by the Compensation Committee in its sole discretion, stock
appreciation rights and limited stock appreciation rights, and any stock options
which are not then exercisable, will become fully exercisable and vested and the
restrictions and deferral limitations applicable to restricted stock and other
stock-based awards may lapse and such shares and awards will be deemed fully
vested. Stock options, stock appreciation rights, limited stock appreciation
rights, restricted stock and other stock-based awards, will, unless otherwise
determined by the Compensation Committee in its sole discretion, be cashed out
on the basis of the change in control price (as defined in the 1997 Stock
Incentive Plan and as described below). The change in control price will be the
highest price per share paid in any transaction reported on the NYSE or paid or
offered to be paid in any bona fide transaction relating to a change in control
or potential change in control at any time during the immediately preceding
60-day period, as determined by the Compensation Committee.

Effective upon the completion of the Offering, options to purchase up to
782,500 shares of Common Stock, exercisable at the initial public offering
price, will be awarded to 60 key employees and directors of the Company. Each
such option will become exercisable over a five-year period and will expire on
the tenth anniversary of the date of grant.

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<PAGE> 59

CERTAIN TRANSACTIONS

ILM MANAGEMENT CONTRACTS

The Company is a party to two separate property management agreements (the
"ILM Management Agreements") with ILM I Lease Corporation and ILM II Lease
Corporation, two finite-life corporations formed by ILM Senior Living, Inc. and
ILM Senior Living II, Inc. (collectively, "ILM") that operate 13 senior living
communities. The ILM Management Agreements commenced on July 29, 1996 and expire
on December 31, 1999 and December 31, 2000, respectively, subject to extension
under certain circumstances, but not beyond July 29, 2001. Lawrence A. Cohen is
a director of ILM I Lease Corporation and ILM II Lease Corporation and is the
president and a director of ILM. Effective in November 1996, Mr. Cohen was
elected Vice Chairman and Chief Financial Officer of the Company. The Company
earned a total of $549,000 and $637,000 under the two ILM Management Agreements
for the nine months ended May 31, 1997. The Company has an agreement with Mr.
Cohen whereby he has agreed that, without the Company's prior consent, he will
not spend a significant portion of his time on matters not related to his duties
with the Company. See "Business -- Third-Party Management Contracts."

The Company has discussed various strategic transactions with ILM, although
there can be no assurance that these discussions will result in a transaction
that is acceptable to the parties.

TRI POINT DEVELOPMENT AGREEMENT

On September 16, 1997, the Company and Tri Point Communities, L.P. ("Tri
Point"), a limited partnership owned by the Company's founders, Jeffrey L. Beck
and James A. Stroud and their affiliates, entered into a Development and Turnkey
Agreement (the "Tri Point Agreement") in connection with the development and
management of Waterford communities by the Company for Tri Point. The Company
believes that the arrangement with Tri Point provides it with an attractive
mechanism to develop new communities without employing its own capital and which
will not be dilutive to earnings during the development and lease-up phases.
Further, the Company has the right to purchase communities developed by Tri
Point upon their completion pursuant to a purchase option under the Tri Point
Agreement.

Pursuant to the Tri Point Agreement, upon the closing of the purchase of
the real estate by Tri Point and the receipt of final, non-appealable zoning
approvals for the community to be developed, the parties expect to enter into a
development agreement for the construction of the community. The development
agreement provides for a development fee payable to the Company that the Company
expects will range between 4% and 7% of total project costs, depending on the
individual transaction and determined on the date of signing. Upon completion of
the construction of a community and pursuant to the development agreement, the
parties will enter into a management agreement, pursuant to which the Company
expects to earn a management fee equal to the greater of 5% of gross revenues or
$5,000 per month and a lease-up fee equal to approximately $500 for each unit
leased and occupied. The Company believes that the development and management
fees to be paid to the Company approximate fair market fees. The Company expects
that each management agreement will have a 10-year term with a five-year renewal
option in favor of the Company. The Company will have an option to purchase each
community at a price equal to the then fair market value (to be determined by a
third-party appraisal). The Company has made no determination as of the date of
this Prospectus as to whether it will exercise any purchase option. The Company
will evaluate the possible exercise of each purchase option based upon the
business and financial factors which may exist at the time those options become
exercisable. The Company has implemented a policy requiring any material
transaction (or series of related transactions) between the Company and Tri
Point (including exercise of any purchase options) to be approved by all of the
directors who have no beneficial or economic interest in Tri Point upon such
directors' determination that the terms of the transaction are no less favorable
to the Company than those that could have been obtained from third parties.

Tri Point has received and accepted commitments for loan facilities from
institutional lenders aggregating up to $100.0 million to fund its development
activities.

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<PAGE> 60

PRIOR TRANSACTIONS INVOLVING CSLC, HCP AND NHP

Set forth below is a summary of prior transactions involving CSLC, HCP, and
NHP pursuant to which the founders of the Contributed Entities derived economic
benefits through their ownership of the Contributed Entities. As a result of the
Formation Transactions, the Company will succeed to the founders' interests in
these entities.

Project and Partnership Management

Capital Senior Living, Inc. ("CSL") (one of the Contributed Entities) and
until February 1, 1995, Capital Realty Group Senior Housing, Inc. ("Senior
Housing"), each an affiliate of Messrs. Beck and Stroud, have provided community
management services to CSLC, HCP and NHP pursuant to separate management
agreements and were paid management fees pursuant to the terms of the management
agreements. The management agreements provide for reimbursement of all expenses
of managing the communities owned by these entities, including salaries of
on-site managers and out-of-pocket expenses of CSL, and provide for payment of a
property management fee to CSL equal to 5% of the gross revenues of each
project. For the periods ended December 31, 1996, 1995 and 1994, and the six
months ended June 30, 1997, CSLC paid CSL and Senior Housing $987,104, $986,877,
$975,710, and $516,000 respectively, in property management fees for managing
the projects, and CSL and Senior Housing were paid $332,438 in 1996, $430,329 in
1995 and $354,313 in 1994 and $179,000 in the six months ended June 30, 1997 for
the reimbursement of expenses under the management agreements. For the periods
ended December 31, 1996, 1995 and 1994, and the six months ended June 30, 1997,
HCP paid CSL and Senior Housing $208,000, $252,000, $472,000, and $170,000,
respectively, in property management fees for managing the projects, and was
paid $256,000 in 1996, $235,000 in 1995 and $266,000 in 1994 and $86,000 in the
six months ended June 30, 1997 for reimbursable expenses under the management
agreements. For the periods ended December 31, 1996, 1995 and 1994 and the six
months ended June 30, 1997, NHP paid CSL and Senior Housing $1,351,527,
$1,326,188, $1,312,855 and $709,000, respectively in management fees, dietary
services fees and other operating expense reimbursements related to services
provided to NHP, and paid $3,816,530 in 1996, $3,925,369 in 1995, $3,858,879 in
1994 and $2,019,388 in the six months ended June 30, 1997 for reimbursable
expenses, including reimbursements for salaries, related benefits and overhead
reimbursements, under the management agreements. Messrs. Beck and Stroud are the
beneficial owners of all of the capital stock of CSL and Senior Housing, and
consequently, had an indirect interest in such payments.

The general partners of CSLC, HCP and NHP are affiliates of Messrs. Beck
and Stroud. These general partners are not paid a fee for serving as such. All
property employees of each of CSLC, HCP and NHP are paid by an affiliate of the
general partner of these partnerships, which in turn is reimbursed by the
applicable partnership. Reimbursed gross payroll and health insurance premiums
paid by CSLC in 1996, 1995, 1994 and the six months ended June 30, 1997 was
$5,254,000, $5,213,000, $5,104,000, and $2,493,000, respectively. Reimbursed
gross payroll and health insurance premiums paid by HCP in 1996, 1995, 1994 and
the six months ended June 30, 1997 was $2,068,000, $2,491,000, $4,048,000, and
$1,548,000, respectively. Reimbursed gross payroll and health insurance premiums
paid by NHP in 1996, 1995, and the six months ended June 30, 1997 was
$3,538,657, $3,561,140, $3,552,630, and $1,744,000, respectively.

Transactions with CSLC

In connection with obtaining a $12 million mortgage loan for CSLC, an
affiliate of Messrs. Beck and Stroud received a 2% financing fee of $240,000 in
1994. In 1995, an affiliate of Messrs. Beck and Stroud received a 2% financing
fee of $110,000 in connection with increasing CSLC's mortgage loan commitment
from $12 million to $17.5 million. In connection with the extension of one of
CSLC's mortgages, an affiliate of Messrs. Beck and Stroud received $40,453 and
$20,830 in 1996 and 1995, respectively, as a financing fee.

In April 1996, an affiliate of Messrs. Beck and Stroud sold to CSLC
$1,269,000 of limited partnership interests in HCP at the then current fair
market value and recognized a $878,592 gain on such transaction.

Upon the sale by CSLC of the two communities in November 1996, an affiliate
of Messrs. Beck and Stroud received a $79,883 brokerage fee.

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On December 10, 1996, CSLC entered into contract with Capital Senior
Development, Inc., an affiliate of Messrs. Beck and Stroud (one of the
Contributed Entities), to construct a 97 unit expansion of the Cottonwood
community, consisting of 49 units for independent living and 48 units for
assisted living. The budgeted cost for the expansion is approximately
$6,756,000.

Transactions with HCP

HCP may pay to Senior Housing or its affiliates, for services rendered in
connection with the sale of an HCP community, and shall be entitled to receive
the lesser of the following: (i) 3% of the sale price of HCP's community or (ii)
an amount not to exceed 50% of the standard real estate commission. Amounts
earned by Senior Housing in 1996 for the sale of HCP communities were $66,000
and $92,250 in 1996 and 1995, respectively.

For property management services, Senior Housing or its affiliates are
entitled to receive leasing and property management fees. Since most of HCP's
communities have long-term, triple-net leases and others have independent fee
management engagements for most services, Senior Housing or its affiliates
received 1% of the monthly gross rental or operating revenues, totaling
approximately $72,000, $80,000, and $113,000 in 1996, 1995, and 1994,
respectively. Asset management fees paid to Senior Housing were approximately
$740,000, $712,000, and $731,000 in 1996, 1995, and 1994, respectively.

ORGANIZATION OF THE COMPANY

The Company was incorporated in October 1996 in anticipation of the
Offering. In connection with the organization of the Company, Messrs. Beck,
Stroud and Cohen contributed cash to the Company in the following amounts in
return for Common Stock in the Company as follows: Mr. Beck -- $5,600 paid for
560,000 shares; Mr. Stroud (through a trust) -- $5,600 paid for 560,000 shares;
and Mr. Cohen -- $5,600 paid for 560,000 shares. In August 1997, Mr. Cohen
transferred 110,000 of his shares of Common Stock to Messrs. Beck and Stroud in
exchange for shares of capital stock of Quality Home Care, Inc., one of the
Contributed Entities. In connection with the organization of the Company, Mr.
Cohen entered into a certain stock purchase and shareholders' agreement (the
"Shareholders' Agreement") with Messrs. Beck and Stroud (through a trust)
pursuant to which Messrs. Beck and Stroud were granted rights of first refusal
and certain specified call rights. The Shareholders' Agreement will terminate
according to its terms upon the completion of the Offering. See "The
Company -- Formation Transactions."

FORMATION TRANSACTIONS

In connection with the Formation Transactions, Messrs. Beck, Stroud (and
his affiliate), and Cohen will contribute the capital stock of the Contributed
Entities to the Company and will receive in exchange shares of Common Stock and
the issuance of the Formation Note, which will be repaid upon completion of the
Offering as set forth in the table below. See "Use of Proceeds."

<TABLE>
<CAPTION>
PROCEEDS FROM
NUMBER OF SHARES THE FORMATION
NAME OF COMMON STOCK(1) NOTE($)
---- ------------------ -------------
<S> <C> <C>
Jeffrey L. Beck...................................... 3,843,673 $9,041,950
James A. Stroud...................................... 3,843,673 $9,041,950
Lawrence A. Cohen.................................... -- $1,372,500
</TABLE>

- ---------------

(1) See Notes to "Principal Stockholders" for certain beneficial ownership
information.

The number of shares of Common Stock to be issued and the principal amount
of the Formation Notes were established by Messrs. Beck and Stroud and the
Company based upon independent appraisals of the value of the Acquired Assets
and an assessment of the combined value of the Company after giving effect to
the Formation Transactions by reference to the market value of comparable
publicly-traded senior living companies. The shares of the Contributed Entities
were issued to Messrs. Beck and Stroud for nominal consideration, totalling less
than $50,000, in connection with the formation of the Contributed Entities.

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<PAGE> 62

Also as part of the Formation Transactions, the Company will purchase the
Acquired Assets (which are described herein under "The Company -- Formation
Transactions") from CSLC for the assumption of the LBHI Loan, which will be
reduced promptly following the consummation of the Offering, and cash for the
balance of the purchase price. A part of the assets to be acquired by the
Company from CSLC (an affiliate of Messrs. Beck and Stroud) in the Formation
Transactions consists of limited partnership interests in HCP and NHP and the
NHP Notes, which were acquired by CSLC since April 30, 1995. CSLC paid an
aggregate of $9.9 million, $1,364 and $10.8 million, respectively, for the 56%
of limited partnership interests in HCP, the 3% of limited partnership interests
in NHP and the NHP Notes being sold by CSLC to the Company in the Formation
Transactions. Approximately $14.8 million, $1,364 and $18.5 million of the
purchase price for the Acquired Assets has been allocated to the HCP and NHP
limited partnership interests and the NHP Notes, respectively. The purchase
price to be paid for the Acquired Assets will be determined as follows: (i)
CSLC's communities, other than construction in process, are valued based on the
appraised value of such communities; (ii) CSLC's investment in HCP is valued
based on the appraised value of HCP's communities, adjusted for working capital
items and other assets and liabilities that would be settled in cash, multiplied
by the percentage of HCP owned by CSLC; (iii) CSLC's investment in the NHP Notes
is valued based on discounting the amount of principal and interest payments to
be made following the maturity date (December 31, 2001) of the NHP Notes
(assuming a six month lag between maturity and full repayment); and (iv) CSLC's
investment in the NHP limited partnership interests is valued at its historical
cost basis, which approximates fair value. The appraised values of the
communities have been determined by third-party appraisals. See "The
Company -- Formation Transactions." Messrs. Beck and Stroud (through a trust)
beneficially own approximately 66% of the limited partnership interests in CSLC
and own the general partner of CSLC, and consequently have an indirect interest
in the debt assumption and repayment of CSLC's debt through net proceeds of this
Offering. In addition, in connection with the sale of the Acquired Assets, CSLC
will pay an affiliate of Messrs. Beck and Stroud a brokerage fee of
approximately $2.9 million.

LBHI LOAN

On June 30, 1997, CSLC entered into a mortgage loan agreement with an
affiliate of Lehman Brothers, LBHI, pursuant to which LBHI agreed to make a
mortgage loan of $77.0 million to CSLC which is secured by four senior living
communities owned by CSLC and CSLC's investment in HCP and NHP. The loan
agreement matures on December 31, 1997. On October 30, 1997, approximately $70.0
million was outstanding under this loan agreement (excluding borrowings for
construction in progress) of which $5.5 million was used to repay outstanding
amounts under CSLC's prior credit facility, and the balance was used to purchase
U.S. Treasury securities. The remaining $7.0 million is available to fund
expenditures associated with the expansion of one of CSLC's communities. The
U.S. Treasury securities were sold under a repurchase agreement with a term
equal to their maturity. It is expected that at consummation of the Offering,
and as part of the Formation Transactions, the Acquired Assets of CSLC will be
acquired by the Company through assumption of the LBHI Loan, the repurchase
agreement will be canceled and the LBHI Loan will be reduced by the Company with
net proceeds of the Offering. See "Use of Proceeds." The U.S. Treasury
securities will revert to CSLC. Through their ownership interests in CSLC,
Messrs. Beck and Stroud will indirectly derive financial benefits from CSLC's
sale of the Acquired Assets to the Company and the reversion of the U.S.
Treasury securities to CSLC.

OTHER

During the years ended December 31, 1996 and 1995 and the six months ended
June 30, 1997, the Company was advanced $400,000, $250,000 and $500,000,
respectively, by Messrs. Beck and Stroud. Such funds were advanced pursuant to
separate demand notes bearing interest at 10% per annum. As of June 30, 1997,
$900,000 remains outstanding under such notes. In addition, at June 30, 1997,
the Company owed $266,481 to an affiliate of Messrs. Beck and Stroud pursuant to
a promissory note, dated February 1, 1995 in the original principal amount of
$467,164, bearing interest at 10% per annum and payable in seven annual
installments of $65,091 on December 31, plus accrued interest. This indebtedness
will be repaid by the Company upon completion of the Offering. See "Use of
Proceeds."

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<PAGE> 63

Jeffrey L. Beck is the chairman of the board and principal stockholder of a
bank where the majority of the Company's and CSLC, HCP and NHP's operating cash
accounts are maintained.

POLICY OF THE BOARD OF DIRECTORS

The Company has implemented a policy requiring any material transaction (or
series of related transactions) between the Company and related parties to be
approved by a majority of the directors (all of the directors in the case of any
such transaction between the Company and Tri Point) who have no beneficial or
economic interest in such related party, upon such directors' determination that
the terms of the transaction are no less favorable to the Company than those
that could have been obtained from third parties. There can be no assurance that
these policies will always be successful in eliminating the influence of
conflicts of interest.

The Bylaws of the Company provide that at least from the period from the
closing of the Offering until the first anniversary thereof, except during a
period not to exceed 90 days following the death, resignation, incapacity or
removal of a director prior to the expiration of each director's term of office,
a majority of the board of directors shall be comprised of persons who are not
related to any members of the families of Jeffrey L. Beck or James A. Stroud and
not officers or employees of the Company.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of June 30, 1997, after giving
effect to the 7,687,347 shares of Common Stock to be issued in the Formation
Transactions as described under "The Company -- Formation Transactions," and as
adjusted to reflect the sale of the shares offered hereby, by: (i) each person
known by the Company to be the beneficial owner of more than five percent of the
Common Stock; (ii) each director, and persons nominated to become a director, of
the Company; (iii) each named executive officer of the Company; and (iv) all
executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
------------------- -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
Jeffrey L. Beck.............................. 4,458,673 47.6 4,458,673 24.3
James A. Stroud(2)........................... 4,458,674 47.6 4,458,674 24.3
Lawrence A. Cohen............................ 450,000 4.8 450,000 2.4
Executive officers as a group (11 persons)... 9,367,347 100.0% 9,367,347 51.0%
</TABLE>

- ---------------

* Less than one percent.

(1) Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial
ownership of any securities as to which such person, directly or indirectly,
through any contract, arrangement, undertaking, relationship or otherwise
has or shares voting power and/or investment power and as to which such
person has the right to acquire such voting and/or investment power within
60 days. Percentage of beneficial ownership as to any person as of a
particular date is calculated by dividing the number of shares beneficially
owned by such person by the sum of the number of shares outstanding as of
such date and the number of shares as to which such person has the right to
acquire voting and/or investment power within 60 days.

(2) Includes 4,366,843 shares beneficially owned by a family trust of which Mr.
Stroud is beneficiary.

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<PAGE> 64

DESCRIPTION OF CAPITAL STOCK

Upon completion of the Offering, the Company's authorized capital stock
will consist of 65,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), and 15,000,000 shares of Preferred Stock, par value $.01 per
share (the "Preferred Stock"). At June 30, 1997, after giving pro forma effect
to the Formation Transactions, there were outstanding 9,367,347 shares of Common
Stock. All of the currently outstanding shares of Common Stock are validly
issued, fully paid and nonassessable under the Delaware General Corporation Law
(the "DGCL").

The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") and by the provisions of
applicable law. A copy of the form of Certificate is included as an exhibit to
the Registration Statement of which this Prospectus is a part.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share on all
matters submitted to a vote of stockholders. The Certificate does not provide
for cumulative voting, and accordingly, the holders of a majority of the shares
of Common Stock entitled to vote in any election of directors may elect all of
the directors standing for election. The Certificate provides that whenever
there is paid, or declared and set aside for payment, to the holders of the
outstanding shares of any class of stock having preference over the Common Stock
as to the payment of dividends, the full amount of dividends and of sinking fund
or retirement fund or other retirement payments, if any, to which such holders
are entitled, then dividends may be paid on the Common Stock out of any assets
legally available therefor, but only when and as declared by the Board of
Directors. The Certificate also provides that in the event of any liquidation,
dissolution or winding up of the Company, after there is paid to or set aside
for the holders of any class of stock having preference over the Common Stock
the full amount to which such holders are entitled, then the holders of the
Common Stock, shall be entitled, after payment or provision for payment of all
debts and liabilities of the Company, to receive the remaining assets of the
Company available for distribution, in cash or in kind. The holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of Common Stock will be subject to
the rights of the holders of any shares of any series of Preferred Stock that
the Company may issue in the future.

PREFERRED STOCK

The Certificate provides that the Board of Directors of the Company is
authorized to issue Preferred Stock in series and to fix and state the voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights of the shares of
each such series and the qualifications, limitations and restrictions thereof.
Such action may be taken by the Board without stockholder approval. Under the
Certificate, each share of each series of Preferred Stock is to have the same
relative rights as, and be identical in all respects with, all other shares of
the same series. While providing flexibility in connection with possible
financings, acquisitions and other corporate purposes, the issuance of Preferred
Stock, among other things, could adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, be used as a means of
discouraging, delaying or preventing a change in control of the Company. There
will be no shares of Preferred Stock outstanding upon completion of the Offering
and the Company has no present plan to issue shares of its Preferred Stock.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Section 102(b)(7) of the DGCL authorizes corporations to limit or eliminate
the personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. Although
Section 102(b)(7) does not change directors' duty of care, it enables
corporations to limit available relief to equitable remedies such as injunction
or rescission. The Certificate limits the liability of directors to the Company
or its stockholders to the full extent permitted by Section 102( b)(7).
Specifically,

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<PAGE> 65

directors of the Company are not personally liable for monetary damages to the
Company or its stockholders for breach of the director's fiduciary duty as a
director, except for liability: (i) for any breach of the director's duty of
loyalty to the Company or its stockholders; (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law;
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL; or (iv) for any transaction
from which the director derived an improper personal benefit.

To the maximum extent permitted by law, the Certificate provides for
mandatory indemnification of directors and officers of the Company against any
expense, liability and loss to which they may become subject, or which they may
incur as a result of being or having been a director or officer of the Company.
In addition, the Company must advance or reimburse directors and officers for
expenses incurred by them in connection with indemnifiable claims.

The Company also maintains directors' and officers' liability insurance.

CERTAIN CHARTER AND BYLAW PROVISIONS

Upon completion of the Offering, the Certificate and the Bylaws will
contain, among other things, certain provisions described below that may reduce
the likelihood of a change in the Board of Directors or voting control of the
Company without the consent of the Board of Directors. These provisions could
have the effect of discouraging, delaying or preventing tender offers or
takeover attempts that some or a majority of the stockholders might consider to
be in the stockholders' best interest, including offers or attempts that might
result in a premium over the market price for the Common Stock.

Classified Board. The number of directors of the Company shall be such
number as from time to time fixed by, or in the manner provided in, the Bylaws
within the range of a minimum of three and a maximum of nine directors specified
in the Certificate. Pursuant to the Bylaws, the number of directors within the
range set forth in the Certificate shall be determined by resolution of the
Board passed by at least two-thirds of the directors then in office. Directors
are divided into three classes, each consisting of approximately one-third of
the total number of directors. The term of office of each class is three years
and expires in successive years at the time of the annual meeting of
stockholders.

Filling of Board Vacancies; Removal. Any vacancy occurring in the Board of
Directors, including any vacancy created by an increase in the number of
directors, shall be filled for the unexpired term by the concurring vote of a
majority of the directors then in office, whether or not a quorum, and any
director so chosen shall hold office for the remainder of the full term of the
class in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified. Directors
may only be removed with cause by the affirmative vote of the holders of at
least a majority of the outstanding shares of capital stock then entitled to
vote at an election of directors.

Stockholder Action by Unanimous Written Consent. Any action required or
permitted to be taken by the stockholders must be effected at a duly called
annual or special meeting of such holders and may not be effected by any consent
in writing by such holders, unless such consent is unanimous.

Call of Special Meeting. Special meetings of stockholders may be called at
any time but only by the Chairman of the Board, by a majority of the directors
then in office or by stockholders possessing at least 25% of the voting power of
the issued and outstanding voting stock entitled to vote generally in the
election of directors.

Bylaw Amendments. The stockholders may amend the Bylaws by the affirmative
vote of the holders of at least two-thirds of the outstanding shares of stock of
the Company entitled to vote thereon. Directors may also amend the Bylaws by a
majority vote of the directors then in office.

Certificate Amendments. Except as set forth in the Certificate or as
otherwise specifically required by law, no amendment of any provision of the
Certificate shall be made unless such amendment has been first proposed by the
Board of Directors upon the affirmative vote of at least two-thirds of the
outstanding shares of stock of the Company entitled to vote thereon; provided,
however, if such amendment is to the provisions

65
<PAGE> 66

described above or the provisions in the Certificate relating to the Company's
name, business purpose or authorized number of shares of Common Stock, such
amendment must be approved by the affirmative vote of the holders of a majority
of the outstanding shares of stock entitled to vote thereon.

Stockholder Nominations and Proposals. Notice of stockholder proposals and
director nominations must be timely given in writing to the Secretary of the
Company prior to the meeting at which the matters are to be acted upon or the
directors are to be elected. To be timely, notice must be received at the
principal offices of the Company not less than 60, nor more than 90, days prior
to the meeting of stockholders; provided, that if less than 70 days' notice or
prior public disclosure of the date of the meeting is given or made, notice by
the stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which notice of the date of the
meeting was mailed or the day on which public disclosure was made, whichever
first occurs. The purpose of requiring advance notice is to afford the Board of
Directors an opportunity to consider the qualifications of the proposed nominees
or the merits of other stockholder proposals and, to the extent deemed necessary
or desirable by the Board of Directors, to inform stockholders about those
matters.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

Section 203 of the DGCL provides, in general, that a stockholder acquiring
more than 15% of the outstanding voting shares of a corporation subject to the
statute (an "Interested Stockholder"), but less than 85% of such shares, may not
engage in certain "Business Combinations" with the corporation for a period of
three years subsequent to the date on which the stockholder became an Interested
Stockholder unless: (i) prior to such date the corporation's board of directors
approved either the Business Combination or the transaction in which the
stockholder became an Interested Stockholder; or (ii) the Business Combination
is approved by the corporation's board of directors and authorized by a vote of
at least two-thirds of the outstanding voting stock of the corporation not owned
by the Interested Stockholder.

Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder,
transactions with the corporation which increase the proportionate interest of
the Interested Stockholder or a transaction in which the Interested Stockholder
receives certain other benefits.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.

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<PAGE> 67

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
18,367,347 shares of Common Stock. The 9,000,000 shares sold in the Offering (or
a maximum of 10,350,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the Securities Act, unless held by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining 9,367,347 shares outstanding are "restricted securities" as that term
is defined under Rule 144 and were issued by the Company in private transactions
in reliance upon one or more exemptions under the Securities Act. Such
restricted securities may be resold in a public distribution only if registered
under the Securities Act (which registration is contemplated with respect to all
of such restricted securities as described below) or pursuant to an exemption
therefrom, including Rule 144. Certain of the existing stockholders and
executive officers and directors of the Company have agreed, subject to certain
exceptions, that they will not sell any shares of Common Stock prior to the
expiration of 180 days from the date of this Prospectus without the prior
written consent of Lehman Brothers, subject to certain exceptions.

In addition to the outstanding shares of Common Stock, the Company has
reserved for issuance 1,565,000 shares of Common Stock pursuant to the Company's
stock option programs, none of which will be exercisable until the first
anniversary of the Offering.

In general, under Rule 144 a person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
restricted securities for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of the
average weekly trading volume during the four calendar weeks preceding such sale
or 1% of the then outstanding shares of Common Stock, provided certain manner of
sale and notice requirements and requirements as to the availability of current
public information about the Company are satisfied. In addition, affiliates of
the Company must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period, to sell shares of Common Stock. A person
who is deemed not to have been an "affiliate" of the Company at any time during
the 90 days preceding a sale by such person, and who has beneficially owned such
shares for at least two years, would be entitled to sell such shares without
regard to the volume limitations described above.

Subject to certain exceptions, the Company and all holders as of the date
of this Prospectus of outstanding shares of Common Stock, including the
executive officers of the Company, and optionees holding options to purchase a
total of 782,500 shares of Common Stock have agreed, subject to certain
exceptions, with the Underwriters not to sell or otherwise dispose of any shares
of Common Stock, any options to purchase Common Stock or any securities
convertible into or exchangeable for shares of Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of
Lehman Brothers.

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<PAGE> 68

UNDERWRITING

The underwriters of the Offering (the "Underwriters"), for whom Lehman
Brothers Inc., J.C. Bradford & Co., Donaldson, Lufkin & Jenrette Securities
Corporation and Smith Barney Inc. are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement (the form of which is filed as an
exhibit to the Registration Statement of which this Prospectus forms a part) to
purchase from the Company and the Company has agreed to sell to each
Underwriter, the aggregate number of shares of Common Stock set forth below
opposite the name of each such Underwriter.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Lehman Brothers Inc......................................... 1,785,000
J.C. Bradford & Co.......................................... 1,785,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,785,000
Smith Barney Inc............................................ 1,785,000
A.G. Edwards & Sons, Inc.................................... 160,000
BancAmerica Robertson Stephens.............................. 160,000
Bear Stearns & Co. Inc...................................... 160,000
BT Alex. Brown Incorporated................................. 160,000
EVEREN Securities Inc....................................... 160,000
Goldman, Sachs & Co......................................... 160,000
Advest, Inc................................................. 90,000
Cowen & Company............................................. 90,000
First Southwest Company..................................... 90,000
Friedman, Billings, Ramsey & Co., Inc....................... 90,000
McDonald & Company Securities, Inc.......................... 90,000
Pennsylvania Merchant Group Ltd............................. 90,000
Principal Financial Securities, Inc......................... 90,000
Rauscher Pierce Refsnes, Inc................................ 90,000
Southwest Securities, Inc................................... 90,000
H.C. Wainwright & Co., Inc.................................. 90,000
---------
Total.................................................. 9,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to certain
conditions, and that if any of the shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all of the shares agreed to
be purchased by the Underwriters under the Underwriting Agreement must be so
purchased.

The Company has been advised that the Underwriters propose to offer the
shares of Common Stock directly to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to certain selected
dealers who may include the Underwriters at such public offering price less a
selling concession not in excess of $.50 per share. The selected dealers may
reallow a discount not in excess of $.10 per share to certain brokers or
dealers. After the Offering, the public offering price, the discount to selected
dealers and the reallowance may be changed by the Representatives.

The Company has granted to the Underwriters an option to purchase up to an
additional 1,350,000 shares of Common Stock at the public offering price less
the aggregate underwriting discounts and commissions shown on the cover page of
this Prospectus, solely to cover overallotments, if any. Such option may be
exercised at any time within 30 days after the date of the Underwriting
Agreement. To the extent that such option is exercised, each Underwriter will be
committed, subject to certain conditions, to purchase a number of additional
shares of Common Stock proportionate to such Underwriter's initial commitment as
indicated in the preceding table.

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<PAGE> 69

The Company has agreed that it will not, without the prior written consent
of Lehman Brothers Inc., offer for sale, contract to sell, sell or otherwise
dispose of (or enter into any transaction or device which is designed to, or
could be expected to, result in the disposition by any person at any time in the
future of), directly or indirectly, any shares of Common Stock (other than
shares offered hereby and shares issued pursuant to the 1997 Stock Incentive
Plan), or sell or grant options, rights or warrants with respect to any shares
of Common Stock (other than the grant of options pursuant to the 1997 Stock
Incentive Plan), for a period of 180 days after the date of this Prospectus.

In addition, certain directors and officers of the Company and their
affiliates have agreed that they will not, without the prior written consent of
the Company and Lehman Brothers Inc., subject to certain exceptions, offer for
sale, contract to sell, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected to, result in
the disposition by any person at any time in the future of), directly or
indirectly, any shares of Common Stock received by them in connection with the
Formation Transactions or the Offering, for an initial period of 180 days after
the date of this Prospectus.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to the payments they may be required to make in respect
thereto.

The Underwriters do not intend to confirm sales of Common Stock to any
account over which they exercise discretionary authority.

Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price has been determined through
negotiations between the Company and the Representatives. Among the factors
considered in such negotiations were the history of and the prospects for the
industry in which the Company competes, the past and present operations of the
Company, the historical results of operations of the Company, the prospects for
future earnings of the Company, the recent market prices of securities of
generally comparable companies, and the general condition of the securities
market at the time of the Offering. The initial price per share to the public
set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the Common Stock. Such price is
subject to change as a result of market conditions and other factors.

The Common Stock has been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "CSU."

Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing Common Stock in the open market. The
Representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described herein.

The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security by purchasers in an offering.

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<PAGE> 70

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

The Underwriters have reserved for sale at the public offering price up to
450,000 shares of Common stock to directors, officers, employees and consultants
of the Company, their business affiliates and related parties who have expressed
an interest in purchasing shares. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase the reserved
shares. Any reserved shares not so purchased will be offered by the Underwriters
to the general public on the same basis as the others have been offered hereby.

In consideration of investment banking services provided by Lehman Brothers
Inc. in connection with the structuring of the Company and the Formation
Transactions, the Company will pay Lehman Brothers Inc. an advisory and
structuring fee equal to 0.75% of the gross proceeds of the Offering. Under the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
(the "NASD"), when more than 10% of the net proceeds of a public offering of
equity securities are to be paid to members of the NASD or affiliates of members
participating in the offering, the price at which the equity securities are
distributed to the public must be no lower than that recommended by a "qualified
independent underwriter" meeting certain standards. Lehman Brothers Inc. is a
member of the NASD. Lehman Brothers Inc. will receive more than 10% of the net
proceeds from the Offering as the result of the use of such proceeds to repay
the LBHI Loan. See "Use of Proceeds." J.C. Bradford & Co. has agreed to act as
the qualified independent underwriter in connection with the Offering, has
participated in the preparation of this Prospectus and of the Registration
Statement of which this Prospectus forms a part and has exercised the usual
standard of due diligence with respect thereto. The price of the Common Stock
when sold will be no lower than that recommended by J.C. Bradford & Co. The
Company has agreed to indemnify J.C. Bradford & Co. against certain liabilities
under the Securities Act, or to contribute to payments which J.C. Bradford & Co.
may be required to make in respect thereof.

LEGAL MATTERS

The validity of the Common Stock to be offered hereby will be passed upon
for the Company by Jenkens & Gilchrist, a Professional Corporation, Dallas,
Texas. Certain legal matters in connection with the Offering will be passed upon
for the Underwriters by Rogers & Wells, New York, New York.

EXPERTS

The combined financial statements of Capital Senior Living Corporation at
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.

The consolidated financial statements of HealthCare Properties, L.P. and
Subsidiaries as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996, have been included herein in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.

The independent accountants of a predecessor to the Company for fiscal 1995
were Coopers & Lybrand LLP. Coopers & Lybrand LLP was replaced as the
independent auditors in May 1997. None of the reports of Coopers & Lybrand LLP
on the financial statements for either of fiscal 1994 or 1995 contained an
adverse opinion or a disclaimer of opinion, or was qualified as to uncertainty,
audit scope, or accounting principles. During the two most recent fiscal years
and the subsequent interim period preceding such dismissal, there

70
<PAGE> 71

were no disagreements with Coopers & Lybrand LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.

In May 1997, Ernst & Young LLP was engaged as principal accountants for the
Company, among other things, to audit the financial statements of the Company
for fiscal 1996. The selection of Ernst & Young LLP, and the replacement of
Coopers & Lybrand LLP, was made by the Board of Directors. Prior to its
engagement, the Company did not consult with Ernst & Young LLP on either the
application of accounting principles to a completed or proposed specific
transaction, or the type of audit opinion that might be rendered on the
Company's or its predecessors' financial statements.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. As used herein, the term "Registration Statement" means
the initial Registration Statement and any and all amendments thereto. This
Prospectus omits certain information contained in the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto.
Statements herein concerning the contents of any contract or other document am
not necessarily complete and in each instance reference is made to such contract
or other document filed with the Commission as an exhibit to the Registration
Statement, each such statement being qualified by and subject to such reference
in all respects.

As a result of the Offering, the Company will become subject to the
informational requirements of the Exchange Act, and in accordance therewith will
file reports and other information with the Commission. Reports, registration
statements, proxy statements, and other information filed by the Company with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the Commission's Regional Offices: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
New York, New York 10048. Copies of such materials can be obtained at prescribed
rates from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding registrants that file electronically with the
Commission.
---------------------

The Company intends to furnish holders of the Common Stock with annual
reports containing among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited, condensed financial information for the first three
quarters of each fiscal year. The Company also intends to furnish such other
reports as it may determine or as may be required by law.

71
<PAGE> 72

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Combined Financial Statements of Capital Senior
Living Corporation (unaudited):
Introduction to Pro Forma Combined Financial Statements... F-2
Pro Forma Combined Balance Sheet -- June 30, 1997......... F-3
Pro Forma Combined Statement of Income -- Six months ended
June 30, 1997 and year ended December 31, 1996......... F-4
Notes to Pro Forma Combined Financial Statements.......... F-6
Combined Financial Statements of Capital Senior Living
Corporation:
Report of Ernst & Young LLP, Independent Auditors......... F-15
Combined Balance Sheets -- June 30, 1997 (unaudited) and
December 31, 1996 and 1995............................. F-16
Combined Statements of Income -- Six months ended June 30,
1997 and 1996 (unaudited) and years ended December 31,
1996, 1995 and 1994.................................... F-17
Combined Statements of Equity -- Six months ended June 30,
1997 (unaudited) and years ended December 31, 1996,
1995 and 1994.......................................... F-18
Combined Statements of Cash Flows -- Six months ended June
30, 1997 and 1996 (unaudited) and years ended December
31, 1996, 1995 and 1994................................ F-19
Notes to Combined Financial Statements.................... F-20
Consolidated Financial Statements of HealthCare Properties,
L.P. and Subsidiaries
Report of KPMG Peat Marwick LLP, Independent Auditors..... F-34
Consolidated Balance Sheets -- June 30, 1997 (unaudited)
and December 31, 1996 and 1995......................... F-35
Consolidated Statements of Operations -- Six months ended
June 30, 1997 and 1996 (unaudited) and years ended
December 31, 1996, 1995 and 1994....................... F-36
Consolidated Statements of Partnership Equity -- Six
months ended June 30, 1997 (unaudited) and years ended
December 31, 1996, 1995 and 1994....................... F-37
Consolidated Statements of Cash Flows -- Six months ended
June 30, 1997 and 1996 (unaudited) and years ended
December 31, 1996, 1995 and 1994....................... F-38
Notes to Consolidated Financial Statements................ F-39
</TABLE>

F-1
<PAGE> 73

INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS

The unaudited Pro Forma Combined Balance Sheet as of June 30, 1997 and
unaudited Pro Forma Combined Statements of Income for the six months ended June
30, 1997 and the year ended December 31, 1996, represent the financial position
and results of operations of the Company for such periods after giving effect to
the adjustments described in the accompanying notes, relating to the
transactions contemplated in connection with the Offering and the Formation
Transactions, as if these transactions had occurred as of June 30, 1997 for the
unaudited Pro Forma Combined Balance Sheet, and as of January 1, 1996 for the
unaudited Pro Forma Combined Statements of Income.

The unaudited Pro Forma Combined Balance Sheet and unaudited Pro Forma
Combined Statements of Income are presented for informational purposes only and
do not necessarily reflect the financial position or results of operations of
the Company which would have actually resulted had the Offering and Formation
Transactions occurred as of the dates indicated, or the future results of
operations of the Company. The unaudited Pro Forma Combined Balance Sheet and
unaudited Pro Forma Combined Statements of Income and the accompanying notes
should be read in conjunction with the historical combined financial statements
and the notes thereto of the Company, the consolidated financial statements and
the notes thereto of HCP, and "The Company -- Formation Transactions" and "Use
of Proceeds" contained elsewhere in this Prospectus.

F-2
<PAGE> 74

CAPITAL SENIOR LIVING CORPORATION

PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------
THE COMPANY PRO FORMA THE COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------ -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $13,198,573[1] $ 15,254,766 $28,453,339
Cash, restricted............................... 169,046[2] (169,046) --
Accounts receivable, net....................... 2,072,546[2] (836,917) 1,235,629
Accounts receivable from affiliates............ 6,738 -- 6,738
Prepaid expenses and other assets.............. 195,522[2] (77,688) 117,834
Deferred income taxes.......................... --[3] 27,780 27,780
----------- ------------ -----------
Total current assets................... 15,642,425 14,198,895 29,841,320
Property and equipment, net...................... 30,991,942[4] 8,995,442 39,987,384
Investments in limited partnerships.............. 9,621,412[5] 2,404,355 12,025,767
Goodwill......................................... --[6] 1,220,853 1,220,853
Management contract rights, net.................. 267,523 -- 267,523
Deferred financing charges, net.................. 72,828[7] (72,828) --
Deferred income taxes............................ --[8] 9,589,674 9,589,674
Other assets..................................... 38,248 -- 38,248
----------- ------------ -----------
Total assets........................... $56,634,378 $ 36,336,391 $92,970,769
=========== ============ ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable............................... $ 951,847[2] $ (580,600) $ 371,247
Accrued expenses............................... 2,204,371[9] (1,232,470) 971,901
Current portion of notes payable to
affiliates.................................. 965,091[10] (965,091) --
Current portion of notes payable............... 555,849 -- 555,849
Mortgage note payable.......................... 5,500,000[11] (5,500,000) --
Customer deposits.............................. 257,948[2] (257,948) --
Due to affiliates.............................. 69,355 -- 69,355
LBHI Loan...................................... --[12] -- --
Formation Note................................. --[13] -- --
----------- ------------ -----------
Total current liabilities.............. 10,504,461 (8,536,109) 1,968,352
Notes payable to affiliates, net of current
portion........................................ 201,390[10] (201,390) --
Notes payable, net of current portion............ 6,390,574 -- 6,390,574
Minority interest in combined partnerships....... 20,749,173[14] (9,658,803) 11,090,370
Equity:
Partners' capital.............................. 19,370,768[15] (19,370,768) --
Common stock................................... 16,800[16] 166,873 183,673
Additional paid in capital..................... 26,558[16] 73,981,636 74,008,194
Retained earnings (deficit).................... (625,346)[17] (45,048) (670,394)
----------- ------------ -----------
Total equity........................... 18,788,780 54,732,693 73,521,473
----------- ------------ -----------
Total liabilities and equity........... $56,634,378 $ 36,336,391 $92,970,769
=========== ============ ===========
</TABLE>

The accompanying notes are an integral part of these
pro forma combined financial statements.

F-3
<PAGE> 75

CAPITAL SENIOR LIVING CORPORATION

PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------
THE COMPANY PRO FORMA THE COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Resident and health care revenue.............. $10,427,471 $ -- $10,427,471
Rental and lease income....................... 2,157,973 -- 2,157,973
Unaffiliated management services revenue...... 949,007 -- 949,007
Affiliated management services revenue........ 701,126 -- 701,126
Development fees.............................. 370,410 -- 370,410
Other income.................................. 461,410 -- 461,410
----------- ----------- -----------
Total revenues........................ 15,067,397 -- 15,067,397
----------- ----------- -----------
Expenses:
Operating expenses............................ 8,080,062 -- 8,080,062
General and administrative expenses........... 3,933,008[1] (1,932,816) 2,000,192
Depreciation and amortization................. 949,954[2] 43,605 993,559
----------- ----------- -----------
Total expenses........................ 12,963,024 (1,889,211) 11,073,813
----------- ----------- -----------
Income from operations.......................... 2,104,373 1,889,211 3,993,584
Other income (expense):
Interest income............................... 794,439[3] 37,127 831,566
Interest expense.............................. (419,397)[4] 75,574 (343,823)
----------- ----------- -----------
Income before income taxes and minority interest
in combined partnerships...................... 2,479,415 2,001,912 4,481,327
Provision for income taxes...................... --[5] (1,613,917) (1,613,917)
----------- ----------- -----------
Income before minority interest in combined
partnerships.................................. 2,479,415 387,995 2,867,410
Minority interest in combined partnerships...... (1,266,026)[6] 870,564 (395,462)
----------- ----------- -----------
Net income...................................... $ 1,213,389 $ 1,258,559 $ 2,471,948
=========== =========== ===========
Pro forma net income per share.................. $ 0.13
===========
Shares used in computing pro forma net income
per share..................................... 18,367,347
===========
</TABLE>

The accompanying notes are an integral part of these
pro forma combined financial statements.

F-4
<PAGE> 76

CAPITAL SENIOR LIVING CORPORATION

PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------
THE COMPANY HCP, OTHER PRO FORMA THE COMPANY
HISTORICAL L.P.(7) ADJUSTMENTS PRO FORMA
----------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Resident and health care
revenue....................... $13,691,984 $2,969,991 $ -- $16,661,975
Rental and lease income.......... 1,101,317 4,590,113 -- 5,691,430
Unaffiliated management services
revenue....................... 800,961 -- -- 800,961
Affiliated management services
revenue....................... 2,708,077 --[8] (955,269) 1,752,808
Development fees................. 673,587 -- -- 673,587
Other income..................... 923,700 -- -- 923,700
----------- ---------- ----------- -----------
Total revenues........... 19,899,626 7,560,104 (955,269) 26,504,461
----------- ---------- ----------- -----------
Expenses:
Operating expenses............... 10,798,431 2,727,909 -- 13,526,340
General and administrative
expenses...................... 5,492,873 2,457,884[1] (2,983,869) 4,966,888
Depreciation and amortization.... 1,481,056 1,418,293[2] (759,853) 2,139,496
----------- ---------- ----------- -----------
Total expenses........... 17,772,360 6,604,086 (3,743,722) 20,632,724
----------- ---------- ----------- -----------
Income from operations............. 2,127,266 956,018 2,788,453 5,871,737
Other income (expense):
Interest income.................. 432,342 239,215[3] (188,515) 483,042
Interest expense................. (221,521) (784,092)[4] 39,093 (966,520)
Gain on sale of properties....... 437,819 387,617 -- 825,436
Equity in earnings on
investments................... 458,992 --[9] (458,992) --
Other............................ 42,042 (114,107) -- (72,065)
----------- ---------- ----------- -----------
Income before income taxes and
minority interest in combined
partnerships..................... 3,276,940 684,651 2,180,039 6,141,630
Provision for income taxes......... -- --[5] (2,217,707) (2,217,707)
----------- ---------- ----------- -----------
Income before minority interest in
combined partnerships............ 3,276,940 684,651 (37,668) 3,923,923
Minority interest in combined
partnerships..................... (1,223,997) --[6] 696,816 (527,181)
----------- ---------- ----------- -----------
Net income......................... $ 2,052,943 $ 684,651[10] $ 659,148 $ 3,396,742
=========== ========== =========== ===========
Pro forma net income per share..... $ 0.18
===========
Shares used in computing pro forma
net income per share............. 18,367,347
===========
</TABLE>

The accompanying notes are an integral part of these
pro forma combined financial statements.

F-5
<PAGE> 77

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The transactions contemplated in connection with the contribution of all of
the capital stock of the Contributed Entities have been accounted for as an
exchange between entities under common control and, accordingly, have been
accounted for in a manner similar to a pooling of interests.

2. FINANCING TRANSACTION OF CSLC

On June 30, 1997, CSLC entered into a $77,000,000 mortgage loan agreement
with Lehman Brothers Holdings, Inc. (LBHI Loan) and pledged four retirement
communities and its investments in HCP and NHP as collateral. The purpose of the
LBHI Loan is to provide for refinancing the outstanding debt due under CSLC's
prior credit facility and to provide construction financing for the expansion of
one of CSLC's communities. Subsequent to June 30, 1997, approximately
$70,000,000 was borrowed under this loan agreement; $5,500,000 was used to repay
the prior credit facility and approximately $64,500,000 was used to fund the
liquidity and collateral requirements under the loan agreement, through the
purchase of U.S. Treasury bills. The purpose of the liquidity requirement is to
fund amounts that may be due from CSLC upon maturity of the LBHI Loan. The U.S.
Treasury bills were sold under a repurchase agreement with a term equal to their
maturity. It is expected that upon completion of the Offering, the repurchase
agreement will be canceled and the outstanding debt under the loan agreement
will be assumed by the Company and repaid from the proceeds of the Offering.
Upon such repayment, the U.S. Treasury bills will revert to CSLC. Interest costs
are based on 30-day LIBOR plus 50 basis points. The loan agreement matures
December 31, 1997.

3. CSLC TRANSACTION

As part of the Formation Transactions, the Company will purchase
substantially all the assets, other than working capital items, of CSLC, for
approximately $72.9 million, consisting of the assumption of the LBHI Loan for
approximately $70.0 million and the payment of approximately $2.9 million in
cash. This transaction has been accounted for as an exchange between entities
under common control and, accordingly, has been accounted for in a manner
similar to a pooling of interests to the extent of the common ownership of CSLC.
To the extent of the ownership of CSLC by unrelated third parties, the assets
acquired have been adjusted to reflect the prorata portion of their fair market
value.

The assets of CSLC to be acquired include, but are not limited to, its
interest in HCP (54.0% at June 30, 1997), and its interest in the NHP Notes
issued by NHP (27.9% at June 30, 1997). The purchase price paid for these assets
has been calculated as of June 30, 1997 utilizing the ownership percentages of
the investments in HCP and the NHP Notes existing as of that date. As a result
of changes in assets and liabilities of HCP and increases in the investments in
HCP (increased approximately 0.7%) and the NHP Notes (increased approximately
2.8%) and changes in the discount period relating to the NHP Notes, the purchase
price at closing of the transaction will be approximately $75.6 million,
excluding any construction in progress financed through the LBHI Loan. The
increase in the purchase price from $72.9 million will be paid in cash.

F-6
<PAGE> 78

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

As a result of CSLC's increased ownership of HCP through June 30, 1997 of
54.0% (55.1% of the LP units), HCP has been consolidated in the historical
combined financial statements as though a controlling financial interest in HCP
had been acquired by CSLC at January 1, 1997. During 1996, HCP was accounted for
utilizing the equity method of accounting. The pro forma results of operations
for the year ended December 31, 1996 have been adjusted to consolidate HCP on a
basis consistent with operating results for June 30, 1997. CSLC's historical
weighted average ownership in HCP of 23% for the year ended December 31, 1996
was used in consolidating HCP's operating results for the year ended December
31, 1996.

4. BASIS OF VALUATION

The Company has obtained independent valuations of properties from third
party valuation firms, which were utilized in determining the purchase price of
the CSLC assets acquired in the Formation Transactions. The purchase price to be
paid by the Company for each of the assets being acquired was determined as
follows:

CSLC Properties............ Based on the appraised value of the properties
(including all real property, personal property
and goodwill) plus the historical basis of
construction in progress less any construction
related indebtedness and other related
liabilities.

Investment in NHP LP
Units...................... In the opinion of management the fair value
approximates its historical cost basis.

Investment in NHP Notes.... Based on the present value of the NHP Notes owned
by CSLC utilizing a discount rate of 10 1/2%. The
expected cash flows of NHP through maturity of
the NHP Notes plus the value of the properties of
NHP at the date of maturity of the NHP Notes
exceeds the total amount of principal and
interest payable through maturity.

Investment in HCP LP
Units...................... Based on the appraised value of the properties of
HCP (including all real property, personal
property and goodwill), plus net working capital
items, plus other assets that would result in the
receipt of cash, less long term debt, to arrive
at the estimated fair value of HCP, which is then
multiplied by the percentage of HCP owned by CSLC
to arrive at the estimated purchase price to be
paid by the Company

F-7
<PAGE> 79

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

5. PRO FORMA ADJUSTMENTS

The pro forma adjustments to the combined balance sheet and combined
statements of income, and related assumptions, are detailed below:

PRO FORMA COMBINED BALANCE SHEET

<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C> <C>
[1] Adjustments to reflect the net increase in cash and cash
equivalents:
Proceeds from the issuance of 9,000,000 shares of common
stock assuming an initial Offering price of $13.50 per
share..................................................... $121,500,000
Payment of estimated fees and expenses related to the
issuance of common stock.................................. (9,720,000)
Proceeds received by CSLC under the LBHI Loan............... 70,000,000
Repayment of prior credit facility by CSLC.................. (5,500,000)
Reduction for cash of $2,997,183 and cash equivalents of
$64,500,000 which were not acquired by the Company from
CSLC...................................................... (67,497,183)
Repayment by the Company of the LBHI Loan assumed in the
purchase of assets from CSLC.............................. (70,000,000)
Purchase of assets from CSLC................................ (2,867,197)
Repayment of the Formation Note............................. (19,456,401)
Repayment of notes payable to affiliates including accrued
interest.................................................. (1,204,453)
------------
$ 15,254,766
============
[2] Adjustment to reflect the reduction for certain working
capital items of CSLC which were not acquired or assumed
by the Company............................................
[3] Adjustment to reflect deferred income taxes upon the
transition from S corporation to C corporation status as a
result of the Formation Transactions......................
[4] Adjustments to reflect the net increase in property and
equipment:
Increase in value of CSLC's investment in HCP based upon
the fair market value of the investment to the extent
of the prorata portion of the ownership of CSLC by
unrelated third parties. (Purchase price of CSLC's
investment in HCP, net of goodwill, of $14,366,963 less
the historical cost basis of $13,582,655 multiplied by
the 34.2% owned by unrelated third parties.)........... $ 268,271
Increase in value of CSLC's property and equipment
acquired based upon the fair market value of the assets
to the extent of the prorata portion of the ownership
of CSLC by unrelated third parties. (Purchase price of
property and equipment acquired from CSLC of
$38,279,299 less the historical cost basis of
$12,764,826, multiplied by the 34.2% owned by unrelated
third parties.) The property and equipment acquired
from CSLC is being depreciated on a straight line basis
over the lives of the assets, which range from four to
thirty years........................................... 8,727,171
------------
$ 8,995,442
============
</TABLE>

F-8
<PAGE> 80

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C> <C>
[5] Adjustment to reflect the increase in value of the NHP Notes
acquired based upon the present value of the NHP Notes,
utilizing a discount rate of 10.5%, to the extent of the
prorata portion of the ownership of CSLC by unrelated
third parties. (Purchase price of $16,650,326 less
historical cost basis of $9,620,048 multiplied by the
34.2% owned by unrelated third parties.) The purchase
price for the NHP LP Units owned by CSLC of $1,364 is
equivalent to CSLC's historical cost basis which, in the
opinion of management, approximates fair value............
[6] Adjustment to reflect goodwill:
Recording of the excess of the purchase price over the
fair market value of HCP's tangible property (to the
extent of the prorata portion of the ownership of CSLC
by unrelated third parties) as a result of the
consolidation of CSLC's investment in HCP. (Excess of
the purchase price over the fair market value of
tangible property (goodwill) of HCP of $144,245
multiplied by the 34.2% owned by unrelated third
parties.) The goodwill is being amortized on a straight
line basis over its estimated life of 20 years......... $ 49,339
Recording of the excess of the purchase price over the
fair market value of tangible property acquired, to the
extent of the prorata portion of the ownership of CSLC
by unrelated third parties. (Excess of the purchase
price over the fair market value of tangible property
of $3,425,000 multiplied by the 34.2% owned by
unrelated third parties.) The goodwill acquired from
CSLC is being amortized on a straight line basis over
its estimated life of thirty years..................... 1,171,514
------------
$ 1,220,853
============
[7] Adjustment to reflect the elimination of deferred financing
charges of CSLC as a result of the repayment and
termination of the prior credit facility..................
[8] Adjustment to establish a deferred tax asset to the extent
of the tax effected difference between the recorded basis
and tax basis of CSLC assets acquired.....................
[9] Adjustment to reflect the net decrease in accrued
liabilities:
Reduction for accrued liabilities of CSLC which were not
acquired by the Company................................ $ (1,194,498)
Repayment of accrued interest on notes payable to
affiliates............................................. (37,972)
------------
$ (1,232,470)
============
[10] Adjustment to reflect repayment of notes payable to
affiliates................................................
[11] Adjustment to reflect repayment of prior credit facility by
CSLC......................................................
[12] Adjustment to reflect the LBHI Loan activity:
Recording of LBHI Loan by CSLC............................ $ 70,000,000
Repayment of the LBHI Loan with Offering proceeds......... (70,000,000)
------------
$ --
============
[13] Adjustment to reflect the Formation Note activity:
Recording of the Formation Note........................... $ 19,456,401
Repayment of the Formation Note with Offering proceeds.... (19,456,401)
------------
$ --
============
</TABLE>

F-9
<PAGE> 81

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C> <C>
[14] Adjustment to reflect elimination of the 34.2% minority
interest of CSLC upon the acquisition of substantially all
the assets, except working capital, of CSLC...............
[15] Adjustment to reclassify partners' capital of CSLC to
additional paid in capital upon the acquisition of
substantially all the assets, except working capital, of
CSLC......................................................
[16] Adjustments to reflect the net increase in common stock and
additional paid in capital:
Issuance of 9,000,000 shares of common stock in the
Offering assuming an initial public offering price of
$13.50 per share....................................... $121,500,000
Payment of estimated fees and expenses related to the
issuance of common stock............................... (9,720,000)
Issuance of the Formation Note............................ (19,456,401)
Reduction of cash and other working capital items of CSLC
which were not acquired or assumed by the Company
(which includes $64,500,000 of cash equivalents)....... (66,547,788)
Purchase of assets from CSLC, net of the LBHI Loan
assumed................................................ (2,867,197)
Purchase accounting adjustments relating to the
acquisition of CSLC's assets (increase in value of
property and equipment $8,995,442, excess of the
purchase price over the fair market value of tangible
assets acquired of $1,220,853, increase in the value of
NHP Notes $2,404,355, establishment of deferred tax
asset for tax effected difference between recorded
basis and tax basis of assets acquired and liabilities
assumed of $9,589,674 and elimination of minority
interest of $9,658,803)................................ 31,869,127
Reclassification of partners' capital upon the acquisition
of substantially all of the assets, except working
capital, of CSLC....................................... 19,370,768
------------
$ 74,148,509
============
Common stock (increase of 16,687,347 shares of common stock
at $.01 par value consisting of 9,000,000 shares issued in
the Offering and 7,687,347 shares issued in the Formation
Transactions, resulting in total outstanding shares of
18,367,347)............................................... $ 166,873
Additional paid in capital.................................. 73,981,636
------------
$ 74,148,509
============
[17] Adjustment to reflect the net increase in the deficit:
Recording of deferred income tax asset arising as a result
of the transition from S Corporation to C Corporation
status................................................. $ 27,780
Elimination of deferred financing charges as a result of
the repayment of the prior credit facility by CSLC..... (72,828)
------------
$ (45,048)
============
</TABLE>

F-10
<PAGE> 82

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

PRO FORMA COMBINED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C> <C>
[1] Adjustments to reflect the net decrease in general and
administrative expenses:
Additional expenses related to operating a public
entity consisting of additional annual directors'
and officers' liability insurance of $150,000 and
additional annual expenses and professional fees
of $500,000....................................... $ 325,000 $ 650,000
Reduction of officers' salaries and bonuses resulting
from new employment contracts..................... (2,257,816) (2,678,600)
Elimination of intercompany management fees.......... -- (955,269)
----------- -----------
$(1,932,816) $(2,983,869)
=========== ===========
[2] Adjustments to reflect the net increase (decrease) in
depreciation and amortization:
Addition (reduction) of depreciation expense as a
result of the purchase of CSLC's properties and
reevaluation of asset lives. (The adjustment in
the six month period ended June 30, 1997 was
affected by approximately $4.0 million of
equipment becoming fully depreciated during
1996.)............................................ $ 66,220 $ (363,925)
Additional depreciation expense as a result of the
purchase of CSLC's investment in HCP.............. 10,998 21,996
Reduction of depreciation and amortization expense as
a result of the consolidation of HCP.............. -- (426,378)
Elimination of amortization of financing charges as a
result of the repayment and termination of the
prior credit facility by CSLC..................... (33,613) (110,178)
Elimination of the amortization of deferred income
related to CSLC's change in method of accounting
for its investment in HCP from the cost to the
equity method, as a result of the consolidation of
HCP............................................... -- 118,632
----------- -----------
$ 43,605 $ (759,853)
=========== ===========
</TABLE>

F-11
<PAGE> 83

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C> <C>
[3] Adjustments to reflect the net increase (decrease) in
interest income:
Elimination of interest income related to cash balances
of CSLC not acquired by the Company.................. $ (72,707) $ (309,277)
Increase in interest income on NHP Notes resulting from
utilizing a discount rate of 10.5% compounding
quarterly applied to the purchase price of the NHP
Notes instead of a simple interest rate of 10.5% (for
the six month period June 30, 1997) and 7.0% (for the
year ended December 31, 1996) on the par value of the
NHP Notes............................................ 109,834 120,762
----------- -----------
$ 37,127 $ (188,515)
=========== ===========
The pro forma combined statements of income do not
include any estimated interest earned on
approximately $15.3 million of cash and cash
equivalents arising from proceeds of the Offering.
(Total net proceeds from the Offering of $111.8
million less; repayment of the LBHI Loan of $70.0
million, repayment of the Formation Note of $19.5
million, cash paid for assets of CSLC of $2.9
million, repayment of notes payable and accrued
interest to the Company founders and an affiliate of
$1.2 million, and cash and cash equivalents of CSLC
not acquired of $3.0 million.) At a simple interest
rate of 5%, interest earned would be approximately
$381,000 and $763,000 for the six month period ended
June 30, 1997 and for the year ended December 31,
1996, respectively. Additionally, the pro forma
combined statements of income do not reflect
estimated interest income on additional NHP Notes
acquired by CSLC through June 30, 1997. Had such NHP
Notes been owned at January 1, 1996 interest earned
would have been approximately $884,000 for the six
month period ended June 30, 1997, and approximately
$1,768,000 for the year ended December 31, 1996. This
interest income is approximately $226,000 and
$1,544,000 higher than reflected herein relative to
the NHP Notes for the six month period ended June 30,
1997 and the year ended December 31, 1996,
respectively.........................................
[4] Adjustment to reflect the net decrease in interest
expense resulting from:
Repayment of the prior credit facility............... $ 42,524 $ --
Repayment of notes payable to affiliates............. 33,050 39,093
----------- -----------
$ 75,574 $ 39,093
=========== ===========
[5] Adjustment to reflect the federal and state income tax
expense associated with operating as a C corporation
using an effective rate of 39.5%.....................
</TABLE>

F-12
<PAGE> 84

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C> <C>
[6] Adjustment to reflect the decrease in the minority
interest in combined partnerships:
Elimination of the minority interest of CSLC upon the
acquisition of substantially all the assets,
except working capital, of CSLC................... $ 870,564 $ 1,223,997
Recording of minority interest of HCP (utilizing the
weighted average of 77%) for the year ended
December 31, 1996, upon consolidation with CSLC... -- (527,181)
----------- -----------
$ 870,564 $ 696,816
=========== ===========
[7] Adjustments to include the historical financial
statements of HCP as a result of CSLC's ownership
interest in HCP exceeding 50% (54.0% at June 30,
1997). For pro forma combined statement of income
purposes the 1996 extraordinary gain related to the
early extinguishment of debt in the amount of
$952,692 has not been included.......................
[8] Adjustment to reflect the elimination of intercompany
management fees......................................
[9] Adjustment to eliminate equity in earnings on
investments due to the consolidation of HCP upon
CSLC's ownership interest in HCP exceeding 50% (54.0%
at June 30, 1997)....................................
[10] In the fourth quarter of 1996, CSLC sold two
multi-family properties, Silver Lakes and Lake Ridge.
Pro forma information for the year ended December 31,
1996 includes the historical financial results of
these two properties and the gain on the sale.
Summary financial information regarding the 1996
financial results of Silver Lakes and Lake Ridge,
including the gain on sale are summarized below......
Revenues.......................... $1,101,317
Other income...................... 70,592
Operating expenses................ (705,785)
General and administrative
expenses........................ (58,960)
Depreciation and amortization..... (235,121)
Interest income................... 22,431
Interest expense.................. (183,908)
Gain on sale of properties........ 437,819
----------
Income before income taxes...... $ 448,385
==========
</TABLE>

F-13
<PAGE> 85

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

6. OTHER

F-14
<PAGE> 86

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Shareholders
Capital Senior Living Corporation

We have audited the accompanying combined balance sheets of Capital Senior
Living Corporation as of December 31, 1996 and 1995, and the related combined
statements of income, equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Capital Senior
Living Corporation as of December 31, 1996, and the results of its combined
operations and its combined cash flows for each of the three years in the period
ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.

Ernst & Young LLP

Dallas, Texas
July 3, 1997

F-15
<PAGE> 87

CAPITAL SENIOR LIVING CORPORATION

COMBINED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $13,198,573 $10,818,512 $10,016,702
Cash, restricted.................................... 169,046 206,376 203,788
Accounts receivable, net (Note 13).................. 2,072,546 607,028 409,486
Accounts receivable from affiliates................. 6,738 90,075 148,886
Prepaid expenses and other.......................... 195,522 121,993 145,352
----------- ----------- -----------
Total current assets........................ 15,642,425 11,843,984 10,924,214
Property and equipment, net (Note 3).................. 30,991,942 12,668,539 17,367,074
Investments in limited partnerships (Note 12)......... 9,621,412 8,275,920 896,405
Management contract rights, net (Note 2).............. 267,523 291,487 382,411
Deferred financing charges, net (Note 6).............. 72,828 106,440 173,665
Other assets.......................................... 38,248 16,644 3,032
----------- ----------- -----------
Total assets................................ $56,634,378 $33,203,014 $29,746,801
=========== =========== ===========

LIABILITIES AND EQUITY

Current liabilities:
Accounts payable.................................... $ 951,847 $ 396,867 $ 311,539
Accrued expenses (Note 4)........................... 2,204,371 1,084,686 1,177,916
Current portion of notes payable to affiliates (Note
5)............................................... 965,091 465,091 315,091
Current portion of notes payable (Note 6)........... 555,849 -- 2,035,148
Mortgage loan payable (Note 6)...................... 5,500,000 -- --
Customer deposits................................... 257,948 248,458 279,982
Due to affiliates................................... 69,355 81,456 20,146
----------- ----------- -----------
Total current liabilities................... 10,504,461 2,276,558 4,139,822
Deferred income (Note 12)............................. -- 3,400,684 --
Notes payable to affiliates, net of current portion
(Note 5)............................................ 201,390 201,390 336,982
Notes payable, net of current portion (Note 6)........ 6,390,574 -- --
Minority interest in combined partnerships (Note 7)... 20,749,173 10,123,858 10,822,619
Commitments and contingencies (Notes 10 and 14)
Equity (Note 7):
Partners' capital................................... 19,370,768 17,257,778 14,655,669
Common stock, $.01 par value:
Authorized shares -- 40,000,000
Issued and outstanding shares -- 1,680,000....... 16,800 16,800 16,800
Additional paid-in capital.......................... 26,558 26,558 (13,242)
Retained earnings (deficit)......................... (625,346) (100,612) (211,849)
----------- ----------- -----------
Total equity................................ 18,788,780 17,200,524 14,447,378
----------- ----------- -----------
Total liabilities and equity................ $56,634,378 $33,203,014 $29,746,801
=========== =========== ===========
</TABLE>

See accompanying notes.

F-16
<PAGE> 88

CAPITAL SENIOR LIVING CORPORATION

COMBINED STATEMENTS OF INCOME

See accompanying notes.

F-17
<PAGE> 89

CAPITAL SENIOR LIVING CORPORATION

COMBINED STATEMENTS OF EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
PARTNERS' ------------------- PAID-IN EARNINGS
CAPITAL SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- --------- ------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 (Notes 1 and
7)................................... $10,352,228 1,680,000 $16,800 $(15,800) $ 277,450 $10,630,678
Capital contribution................. -- -- -- 2,558 -- 2,558
Purchase of BUCs (Note 7)............ 1,316,220 -- -- -- -- 1,316,220
Net income (loss).................... 589,548 -- -- -- (43,712) 545,836
----------- --------- ------- -------- --------- -----------
Balance at December 31, 1994........... 12,257,996 1,680,000 16,800 (13,242) 233,738 12,495,292
Dividend upon acquisition of
management contract rights (Note
1)................................. -- -- -- -- (517,719) (517,719)
Purchase of BUCs (Note 7)............ 1,466,411 -- -- -- -- 1,466,411
Net income........................... 931,262 -- -- -- 72,132 1,003,394
----------- --------- ------- -------- --------- -----------
Balance at December 31, 1995........... 14,655,669 1,680,000 16,800 (13,242) (211,849) 14,447,378
Issuance of common stock (Note 7).... -- -- -- 16,800 -- 16,800
Capital contributions................ -- -- -- 23,000 -- 23,000
Purchase of BUCs (Note 7)............ 660,403 -- -- -- -- 660,403
Net income........................... 1,941,706 -- -- -- 111,237 2,052,943
----------- --------- ------- -------- --------- -----------
Balance at December 31, 1996........... 17,257,778 1,680,000 16,800 26,558 (100,612) 17,200,524
Purchase of BUCs (Note 7)............ 374,867 -- -- -- -- 374,867
Net income........................... 1,738,123 -- -- -- (524,734) 1,213,389
----------- --------- ------- -------- --------- -----------
Balance at June 30, 1997 (Unaudited)... $19,370,768 1,680,000 $16,800 $ 26,558 $(625,346) $18,788,780
=========== ========= ======= ======== ========= ===========
</TABLE>

See accompanying notes.

F-18
<PAGE> 90

CAPITAL SENIOR LIVING CORPORATION

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
-------------------------- --------------------------------------
1997 1996 1996 1995 1994
------------ ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................. $ 1,213,389 $ 779,905 $ 2,052,943 $ 1,003,394 $ 545,836
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 891,410 741,181 1,397,258 1,632,371 1,581,794
Amortization.............................. 58,544 36,636 83,798 143,897 125,574
Deferred income tax benefit............... -- -- -- -- (49,235)
Non cash interest expense................. -- -- -- 1,616 15,737
Minority interest in combined
partnerships............................ 1,266,026 649,592 1,223,997 759,407 634,366
Equity in earnings on investments......... -- (398,508) (458,992) -- --
Gain on sale of properties................ -- -- (437,819) -- --
Provision for bad debts................... -- 16,500 22,312 71,098 --
Loss on sale of limited partnership
interests............................... -- -- -- -- 15,523
Changes in operating assets and
liabilities:
Cash, restricted........................ 37,330 -- (2,588) (152,803) (1,604)
Accounts receivable..................... (671,284) 77,063 (219,854) (215,233) 70,734
Accounts receivable from affiliates..... 83,337 (20,180) 58,811 (294,237) (25,482)
Prepaid expenses and other.............. 11,766 5,802 23,359 (36,141) 20,584
Other assets............................ (22,572) (7,801) (14,940) 6,766 (22,298)
Accounts payable........................ 343,676 450,311 85,328 256,183 (102,911)
Accrued expenses........................ 115,481 774,462 (5,402) (1,136,510) 472,391
Customer deposits....................... 9,490 15,175 32,295 26,204 (3,311)
Due to affiliates....................... (12,101) (20,146) 61,310 655,936 150,578
------------ ----------- ----------- ----------- ----------
Net cash provided by operating activities... 3,324,492 3,101,992 3,901,816 2,721,948 3,428,276
INVESTING ACTIVITIES
Capital expenditures........................ (562,255) (222,939) (851,732) (400,701) (182,729)
Proceeds from sale of properties............ -- -- 2,549,352 -- --
Sale of limited partnership interests....... -- -- -- -- 4,400,000
Cash acquired upon acquisition of HCP....... 8,995,455 -- -- -- --
Investments in limited partnerships......... (14,155,888) (2,599,228) (3,401,207) (896,405) (435,636)
------------ ----------- ----------- ----------- ----------
Net cash (used in) provided by investing
activities................................ (5,722,688) (2,822,167) (1,703,587) (1,297,106) 3,781,635
FINANCING ACTIVITIES
Proceeds from notes payable................. $ -- $ -- $ -- $ -- $ 93,815
Repayments of notes payable................. (260,991) (24,982) (145,319) (58,565) (272,740)
Repayments of notes payable to affiliates... -- (320,490) (455,592) (65,091) (448,646)
Proceeds from notes payable to affiliates... 500,000 -- 470,000 250,000 248,646
Proceeds from mortgage note payable......... 5,500,000 -- -- -- --
Issuance of common stock.................... -- -- 16,800 -- --
Capital contribution........................ -- 22,000 23,000 -- 2,558
Repurchase of BUCs.......................... (960,752) (447,504) (1,262,355) -- --
Deferred loan charges paid.................. -- (20,352) (42,953) (130,829) (99,596)
Cash portion of dividend (Note 1)........... -- -- -- (202,698) --
------------ ----------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities................................ 4,778,257 (791,328) (1,396,419) (207,183) (475,963)
------------ ----------- ----------- ----------- ----------
(Decrease) increase in cash and cash
equivalents............................... 2,380,061 (511,503) 801,810 1,217,659 6,733,948
Cash and cash equivalents at beginning of
period.................................... 10,818,512 10,016,702 10,016,702 8,799,043 2,065,095
------------ ----------- ----------- ----------- ----------
Cash and cash equivalents at end of
period.................................... $ 13,198,573 $ 9,505,199 $10,818,512 $10,016,702 $8,799,043
============ =========== =========== =========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest.................................. $ 347,847 $ 112,959 $ 188,510 $ 276,062 $ 245,705
============ =========== =========== =========== ==========
Income taxes.............................. $ -- $ -- $ -- $ 21,633 $ 155,876
============ =========== =========== =========== ==========
</TABLE>

See accompanying notes.

F-19
<PAGE> 91

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS

1. ORGANIZATION, FORMATION AND PLANNED INITIAL PUBLIC OFFERING

Capital Senior Living Corporation, a Delaware corporation, was incorporated
on October 25, 1996. Capital Senior Living Corporation is owned by James A.
Stroud (through a trust), Jeffrey L. Beck, and Lawrence A. Cohen.

The accompanying financial statements include the combined financial
statements of Capital Senior Living Corporation (Corporation); Capital Senior
Living Communities, L.P. (CSLC); Capital Senior Living, Inc. (Living); Quality
Home Care, Inc. (Quality); Capital Senior Development, Inc. (Development);
Capital Senior Management 1, Inc. (Management 1); and Capital Senior Management
2, Inc. (Management 2) (collectively referred to with Capital Senior Living
Corporation as the Company). CSLC includes the accounts of CSLC and HealthCare
Properties, L.P. (HCP) (as of January 1, 1997). HCP includes the accounts of HCP
and its wholly owned subsidiaries, Danville Care, Inc., Foothills Care, Inc.,
Countryside Care, Inc., Countryside Care, L.P., and Cambridge Nursing Home
Limited Liability Company. All intercompany balances and transactions have been
eliminated in combination.

The Company is a provider of senior living services. The Company owns,
operates and manages senior living communities.

The Company is currently planning the registration of its common stock for
sale in an initial public offering (Offering). Simultaneously with the closing
of the Offering, Corporation will acquire Living, Quality, Development,
Management 1, and Management 2 (Formation) in exchange for common stock and a
note payable (Formation Note) to Jeffrey L. Beck and James A. Stroud or a
related trust (collectively, the Stockholders) and Lawrence A. Cohen.
Additionally, the Corporation will purchase certain assets and all of the
business and retire certain debt of CSLC; at June 30, 1997, these assets include
a controlling interest of 55% of the limited partner units in HCP. After the all
of above transactions, including the Offering, the Stockholders will own 49% of
the common stock of the Company (assuming the underwriters do not exercise their
over-allotment option). The Stockholders and other members of management will
own over 50% of the Company.

Due to all of these entities being under the common control of the
Stockholders for all periods presented, these combined financial statements
reflect the assets and liabilities at their historical values and the
accompanying combined statements of income, equity, and cash flows reflect the
combined results for the periods indicated even though they have historically
operated as separate entities. The Formation will be accounted for at historical
cost in a manner similar to a pooling of interests to the extent of the
percentage ownership by the Stockholders. Assets and liabilities in CSLC will be
recorded at fair value to the extent of any minority interest. CSLC's assets
include investments in HCP and NHP.

As of June 30, 1997, CSLC had increased its ownership in HCP to 55% of the
limited partner units. In the accompanying combined financial statements, HCP is
consolidated as though a controlling financial interest in HCP had been acquired
by CSLC at January 1, 1997. At December 31, 1996 and 1995, CSLC owned
approximately 31% and 6% of HCP's limited partner units, respectively.
Preacquisition earnings for 1997 applicable to HCP are included in minority
interest.

HCP is a Delaware limited partnership established for the purpose of
acquiring, leasing, and operating existing or newly constructed long-term health
care properties. One property is operated by HCP and seven properties are leased
to qualified operators who provide specialized health care services. Capital
Realty Group Senior Housing, Inc. (Housing), an entity controlled by the
Stockholders, is the general partner.

The general partner of CSLC is Retirement Living Communities, an Indiana
limited partnership (RLC). RLC is owned by James A. Stroud and Jeffrey L. Beck.
Additionally, CSLC has issued 1,264,000 Beneficial Unit Certificates (BUCs). At
June 30, 1997 and December 31, 1996 and 1995, BUCs outstanding were 1,117,692,
1,172,146, and 1,264,000, respectively. At June 30, 1997 and December 31, 1996,
1995, and 1994,

F-20
<PAGE> 92

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

James A. Stroud, Jeffrey L. Beck, and RLC collectively owned 66.5%, 63.4%,
57.4%, and 51.5% of the outstanding BUCs, respectively.

A description of the senior living communities now owned and operated by
CSLC is as follows:

Towne Centre Retirement Community (Towne Centre) -- This project is located
on a 15-acre site in Merrillville, Indiana, and includes a 148-unit senior
living community, a 34-bed assisted living unit which is licensed as
residential, and a 64-bed intermediate and skilled healthcare unit licensed
under a comprehensive license. The facility was approximately 92%, 95%, and 95%
occupied at December 31, 1996, 1995, and 1994, respectively.

Canton Regency Retirement Community (Canton Regency) -- This project is
located on a 10-acre site in Canton, Ohio, and includes a 147-unit senior living
community, a 34-bed assisted living unit, and a 50-bed intermediate and skilled
healthcare unit licensed by the Ohio Department of Health. The facility was
approximately 94% occupied at December 31, 1996, 1995, and 1994.

Cottonwood Village Retirement Community (Cottonwood Village) -- This
project is a 65-unit senior living community located on a 2-acre site in
Cottonwood, Arizona. The facility was approximately 95%, 100%, and 100% occupied
at December 31, 1996, 1995, and 1994, respectively.

On December 10, 1996, the Company began development on a 97-unit expansion
of the Cottonwood facility, comprised of 49 units for independent living and 48
units for assisted living. The budgeted cost for the expansion is approximately
$7,000,000 and includes funding for kitchen and dining room renovation. The
Company intends to finance 100% of the costs and estimates completion by March
1998. As of December 31, 1996, costs incurred for construction were $280,946.

Harrison Retirement Community (Harrison) -- This project is a 124-unit
senior living community located on a 4 1/2-acre site in Indianapolis, Indiana.
The facility was approximately 83%, 85%, and 90% occupied at December 31, 1996,
1995, and 1994, respectively.

On November 1, 1996, CSLC sold its two multi-family properties to a
non-related third party for a combined sales price of $4,793,000. This sale
resulted in the recognition of a $437,819 gain and net cash proceeds of
$2,549,352 after repayment of the related mortgage payable of $1,889,829.

Living, an S corporation, was incorporated on August 17, 1992, and
completed its initial issuance of shares in 1993. Living is owned 50% by James
A. Stroud (through a trust) and 50% by Jeffrey L. Beck.

Prior to February 1, 1995, Living's operations were limited to payroll
services provided to affiliated entities. On February 1, 1995, Living acquired
14 management contracts from Housing in exchange for a note payable to Housing
of $467,164. The acquisition was accounted for in a manner similar to that for a
pooling of interests. Accordingly, the management contracts were recorded at
Housing's historical basis and the financial statements were restated to include
the operations stemming from the management contracts for all periods prior to
the February 1, 1995 acquisition date. Effective February 1, 1995, a dividend of
$517,719 (including cash of $202,698) was recorded to eliminate the carrying
value of the net assets of the business stemming from the property management
contracts which were not acquired.

Development, Management 1, and Management 2, all S corporations, are owned
50% by James A. Stroud (directly or through a trust) and 50% by Jeffrey L. Beck.
Quality will be owned immediately prior to the Formation 42.5% by James A.
Stroud (directly or through a trust), 42.5% by Jeffrey L. Beck, and 15% by
Lawrence A. Cohen.

F-21
<PAGE> 93

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Investments with original maturities of three months or less are considered
to be cash equivalents.

Property and Equipment

Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets, which range
from three to 31 years.

Management Contract Rights

Management contract rights are stated at cost and amortized on a
straight-line basis over their respective contract lives. Accumulated
amortization for management contract rights at June 30, 1997, and December 31,
1996 and 1995, was $248,640, $224,676, and $178,507, respectively.

At each balance sheet date, the Company reviews the carrying value of its
management contract rights and property and equipment to determine if facts and
circumstances suggest that they may be impaired or that the amortization and
depreciation period may need to be changed. The Company considers external
factors relating to each intangible asset, including contract changes, local
market developments, and other publicly available information. If these external
factors indicate the intangible assets and property and equipment will not be
recoverable, the carrying value of the intangible assets and property and
equipment will be analyzed and adjusted accordingly. During 1996, 1995, and
1994, management contract rights of $44,755, $52,771, and $72,932, respectively,
were written off due to the termination of certain contracts which has been
reflected as additional amortization expense. The Company does not believe there
are any indicators that would require an adjustment to the carrying value of the
management contract rights or property and equipment or their remaining useful
lives as of June 30, 1997 or December 31, 1996.

Income Taxes

The Company accounts for income taxes under the liability method. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.

CSLC and HCP are partnerships and, consequently, are not subject to income
taxes. Taxable income or loss is directly allocated to the individual partners.
HCP's wholly-owned subsidiaries file federal corporate income tax returns. None
of these subsidiaries had significant net income for financial reporting or
income tax purposes in 1997. Accordingly, no provision has been made for income
taxes for these subsidiaries during 1997.

Living, Quality, Development, Management 1, and Management 2 are S
corporations and consequently, are not subject to income taxes. Thus, taxable
income or loss is directly allocated to the individual stockholders. Prior to
February 1, 1995, Living was subject to federal and state income taxes.

Housing was part of a consolidated group for tax reporting purposes during
the period in which it owned the management contracts acquired by Living in
February 1995. Taxes were allocated to Housing during this period as if it were
a separate taxpayer. Current tax expense (benefit) was offset against the due to
affiliates balance and deferred tax assets and liabilities were recorded. Cash
paid for income taxes during the year ended December 31, 1994, included a
federal tax payment of $137,000 paid on behalf of this consolidated group.

F-22
<PAGE> 94

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Revenue Recognition

Resident and healthcare revenue is recognized at estimated net realizable
amounts due from residents in the period to which the rental and other services
relate.

Revenues from the Medicare and Medicaid programs accounted for less than
10% each of the Company's net revenues for the year ended December 31, 1996. One
community is a provider of services under the Indiana Medicaid program.
Accordingly, the community is entitled to reimbursement under the foregoing
program at established rates which are lower than private pay rates. Patient
service revenue for Medicaid patients is recorded at the reimbursement rates as
the rates are set prospectively by the state upon the filing of an annual cost
report. Two communities are providers of services under the Medicare program and
are entitled to reimbursement under the foregoing programs in amounts determined
based on the filing of an annual cost report prepared in accordance with Federal
regulations, which reports are subject to audit and retroactive adjustments in
future periods. Revenue from the Medicare program is recorded at established
rates and adjusted for differences between such rates and estimated amounts
reimbursable from the program. Any differences between estimated and actual
reimbursements are included in operations in the year of settlement, which have
not been material. Under Federal regulations, Medicare reimbursements to these
facilities are limited to routine cost limits determined on a geographical
region. The Company has filed exception reports to request reimbursement in
excess of its routine cost limit for the years 1992, 1993, and 1994, as of
December 31, 1996, and has recorded $310,000 in the six months ended June 30,
1997, as a result of being granted exception requests for 1994. There can be no
assurance that an exception to a facility's routine cost limits will be granted.

Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.

Management services revenue, resident and healthcare revenue, and
development fees are recognized when earned. Management services revenue relates
to providing certain management and administrative support services under
management contracts, which have terms expiring through 2002 and provide for
termination fees upon early cancellation. Development fees are billed in
accordance with the terms under a development agreement. Management services
revenue are shown net of reimbursed expenses. The reimbursed expenses to
affiliates were $6,462,046, $6,165,622, $12,683,838, $14,501,425, and
$15,772,798, for the six months ended June 30, 1997 and 1996, and the years
ended December 31, 1996, 1995, and 1994, respectively. Reimbursed expenses to
unaffiliated parties were $4,095,905, $34,780, $2,600,529, $-0-, and $-0-, for
the six months ended June 30, 1997 and 1996, and the years ended December 31,
1996, 1995, and 1994, respectively.

Credit Risk

The Company's receivables are generally due within 30 days. The Company
does not require collateral. Credit losses have been within management's
expectations, and management believes that the allowance for doubtful accounts
adequately provides for any expected losses.

Advertising

Advertising expenses are expensed as incurred. Advertising expenses for the
six months ended June 30, 1997 and 1996 and the year ended December 31, 1996,
1995 and 1994 were $79,496, $109,792, $210,028, $223,862, and $230,270,
respectively.

F-23
<PAGE> 95

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

New Accounting Pronouncements

The Financial Accounting Standards Board issued Statement No. 128, Earnings
per Share, effective for fiscal 1997, and Statement No. 130, Reporting
Comprehensive Income and Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, both effective for fiscal 1998. Statement
No. 128 requires changes to the calculation of earnings per share. Statement No.
130 requires reporting and display of comprehensive income and its components in
the financial statements. Statement No. 131 requires reporting about operating
segments and other disclosures about the business in its annual and interim
financial statements. The Company does not believe adoption of these new
Statements will have a material impact on its financial statements.

Interim Financial Data (Unaudited)

The unaudited combined balance sheet as of June 30, 1997, the unaudited
combined statements of income and cash flows for the six months ended June 30,
1996 and 1997, and the unaudited combined statement of equity for the six months
ended June 30, 1997, include, in the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
Company's combined financial position, results of operations and cash flows. The
data disclosed in these notes to the combined financial statements for these
periods is unaudited. Operating results for the six month period ended June 30,
1997, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................ $ 3,489,139 $ 879,723 $ 1,281,070
Land improvements........................... 131,909 127,481 418,665
Buildings and building improvements......... 29,063,612 13,562,383 17,586,575
Furniture and equipment..................... 6,343,055 4,606,048 4,803,054
Construction in process..................... 379,299 280,946 --
----------- ----------- -----------
39,407,014 19,456,581 24,089,364
Less accumulated depreciation............... 8,415,072 6,788,042 6,722,290
----------- ----------- -----------
Property and equipment, net................. $30,991,942 $12,668,539 $17,367,074
=========== =========== ===========
</TABLE>

F-24
<PAGE> 96

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

4. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1997 1996 1995
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued salaries, bonuses, and related
expenses..................................... $ 408,596 $ 460,646 $ 466,050
Accrued property taxes......................... 459,018 506,418 527,233
Third party settlements........................ 216,951 -- 123,000
Other.......................................... 1,119,806 117,622 61,633
----------- ---------- ----------
$ 2,204,371 $1,084,686 $1,177,916
=========== ========== ==========
</TABLE>

5. NOTES PAYABLE TO AFFILIATES

Notes payable to affiliates consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Demand notes payable to stockholders; principal
and interest at 10%; due December 31, 1997...... $ 900,000 $400,000 $ --
Demand notes payable to stockholders.............. -- -- 250,000
Note payable to Housing; interest at 10%; payable
in seven annual installments of $65,091 on or
before December 31 of each year and in one final
installment of $6,117........................... 266,481 266,481 402,073
---------- -------- --------
1,166,481 666,481 652,073
Less current portion.............................. 965,091 465,091 315,091
---------- -------- --------
$ 201,390 $201,390 $336,982
========== ======== ========
</TABLE>

At December 31, 1996, the aggregate maturities of notes payable to
affiliates are as follows:

F-25
<PAGE> 97

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

6. NOTES PAYABLE AND MORTGAGE LOAN PAYABLE

Notes payable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------
1997 1996 1995
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
HCP mortgage loans, bearing interest ranging from
6.8% to 10.75%; payable in monthly installments
of
$101,092 including interest, secured by certain
properties of HCP................................ $6,946,423 $ -- $ --
Mortgage loan, bearing interest at 11%, secured by
real estate...................................... -- -- 2,035,148
---------- ---------- ----------
Less current portion............................... 555,849 -- 2,035,148
---------- ---------- ----------
$6,390,574 $ -- $ --
========== ========== ==========
</TABLE>

On November 1, 1996, the mortgage loan was repaid upon sale of a
multi-family property.

On June 30, 1997, CSLC entered into a $77,000,000 mortgage loan agreement
with Lehman Brothers Holdings, Inc. and pledged the Cottonwood, Harrison, Towne
Centre, and Canton Regency senior living communities and its investments in HCP
and NHP Retirement Housing Partners I, L.P. (NHP) as collateral. The loan
agreement matures December 31, 1997. Subsequent to June 30, 1997, approximately
$70,000,000 became outstanding under this loan agreement; $5,500,000 was used to
repay an outstanding mortgage loan commitment (the prior credit facility) and
approximately $64,500,000 was used to fund the liquidity requirement under the
loan agreement through the purchase of three-month U.S. Treasury bills. The U.S.
Treasury bills were sold under a repurchase agreement with a term equal to their
maturity. It is expected that upon completion of the Offering, the repurchase
agreement will be canceled and the outstanding debt under the loan agreement
will be assumed by the Corporation and repaid from the proceeds of the Offering.
Upon such repayment, the U.S. Treasury bills will revert to CSLC. Interest costs
are based on 30-day LIBOR plus 50 basis points.

CSLC's prior credit facility from a non-affiliated mortgage company was for
$17,500,000. CSLC borrowed $5,500,000 under this prior credit facility in 1997,
and repaid the loan on July 1, 1997.

In connection with obtaining the prior credit facility, the Company
incurred $273,070 in deferred financing charges, which were amortized over the
life of the loan commitment using the straight-line method and written-off on
July 1, 1997. Accumulated amortization was $200,551, $166,630 and $56,452 in
1997, 1996, and 1995, respectively. In connection with obtaining the loan
agreement, the Company incurred $80,000 in deferred financing charges on July 1,
1997.

HCP leases four of its properties under a master lease. The rentals under
the master lease provide additional security for two notes payable used to
finance two of the master lease properties. One of these notes is due December
1, 2001. The other note for $686,542 was extended during 1997 to June 30, 1997.
HCP is currently negotiating the extension of this note until December 1, 2001.

7. EQUITY

On October 25, 1996, the Company issued 1,680,000 shares of $.01 par value
common stock for $16,800 in cash. For financial reporting purposes, as the
combined entities are under common control, the Company's common stock is
presented as outstanding as of January 1, 1994.

During 1996, Development, Management 1, Management 2, and Quality each
issued 1,000 shares of $.01 par value common stock for $1,000. All shares
authorized are outstanding at December 31, 1996. At

F-26
<PAGE> 98

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1996 and 1995, Living has 1,000 shares of $.01 par value common
stock authorized, issued, and outstanding. The par value and associated paid-in
capital are included in additional paid-in capital in the accompanying financial
statements.

Net operating income of CSLC, if distributed as determined by its general
partner in its sole discretion, is to be distributed 99% to the BUC holders and
1% to RLC until the BUC holders receive distributions equal to a cumulative
noncompounded annual return of 11% on their adjusted capital contributions.
Thereafter, remaining net operating income is distributed 90% to the BUC holders
and 10% to RLC. The general partner of CSLC has sole discretion in determining
cash distributions. There were no distributions for 1996, 1995, and 1994.
Proceeds from the refinancing, sale, or other dispositions of CSLC assets, less
expenses directly attributable thereto (net residual proceeds), will be
distributed 100% to the BUC holders until the BUC holders have received an
amount equal to the sum of their adjusted capital contributions plus an amount
equal to a cumulative noncompounded annual return of 11% on their adjusted
capital contributions. All remaining net residual proceeds will be distributed
100% to RLC until such amount equals 1% of all net residual proceeds distributed
to the BUC holders. Thereafter, any remaining net residual proceeds will be
distributed 90% to the BUC holders and 10% to RLC.

Purchases of BUCs represent additional purchases by the Stockholders and
are accounted for at the book value of the BUCs and as an addition to partners'
capital and as a reduction in minority interest.

CSLC purchased 91,854 BUCs for $1,262,355 during 1996, at an average cost
of $13.74 per unit. These repurchase of BUCs have been reflected as a reduction
in minority interest at December 31, 1996.

Net income (loss) of HCP is generally allocated 98% to the limited partners
and 2% to the general partner. The net income of HCP from the disposition of a
property is allocated: (i) to partners with deficit capital accounts on a pro
rata basis; (ii) to limited partners until they have been paid an amount equal
to the amount of their adjusted investment (as defined); (iii) to the limited
partners until they have been allocated income equal to their 12% Liquidation
Preference; and (iv) thereafter, 80% to the limited partners and 20% to the
general partner. The net loss of HCP from the disposition of a property is
allocated: (i) to partners with positive capital accounts on a pro rata basis
and (ii) thereafter, 98% to the limited partners and 2% to the general partner.
Distributions of available cash flow are generally distributed 98% to the
limited partners and 2% to the general partner, until the limited partners have
received an annual preferential distribution, as defined. Thereafter, available
cash flow is distributed 90% to the limited partners and 10% to the general
partner. No distributions were made in 1997.

8. INCOME TAXES

The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $15,903 $156,077
State.............................................. -- 2,339 22,953
Deferred:
Federal............................................ -- -- (42,923)
State.............................................. -- -- (6,312)
------- ------- --------
$ -- $18,242 $129,795
======= ======= ========
</TABLE>

F-27
<PAGE> 99

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes differed from the amounts computed by
applying the U.S. federal income tax rate to income before provision for income
taxes as a result of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Computed tax expense................................... $ -- $15,903 $110,868
State income tax expense............................... -- 2,339 16,641
Other.................................................. -- -- 2,286
------- ------- --------
$ -- $18,242 $129,795
======= ======= ========
</TABLE>

No tax expense arose in 1997.

Upon completion of the initial public offering, the Company will accrue
deferred tax assets and liabilities arising from differences in book and tax
basis for the S corporations and partnerships.

CSLC

CSLC reports certain transactions differently for tax than for financial
statement purposes. A reconciliation between the financial statement net income
and the net income for tax purposes follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
CSLC net income.................................. $3,105,703 $1,630,669 $1,198,914
(Decrease) increase in vacation expense
accrual..................................... (715) 10,766 6,350
Nondeductible bad debt expense................. 23,370 55,403 --
Other nondeductible expenses................... 1,250 1,253 1,250
Increase in workers compensation accrual....... 120 2,463 1,271
Excess of book over tax depreciation........... 101,069 347,376 170,485
Investment income accounted for under the
equity method for book and not tax.......... (603,147) -- --
Tax adjustment on sale of properties........... 268,068 -- --
Prepaid rent recognized for book purposes...... -- -- (41,416)
Decrease in bad debt reserve................... -- -- (72,415)
Income (loss) from joint ventures.............. 181,660 51,970 (62,523)
---------- ---------- ----------
Tax income....................................... $3,077,378 $2,099,900 $1,201,916
========== ========== ==========
</TABLE>

The tax basis of the partners' capital accounts are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
General Partner............................................ $ 19,024 $ (11,602)
BUC Holders................................................ 22,285,615 20,515,980
----------- -----------
$22,304,639 $20,504,378
=========== ===========
</TABLE>

The basis of property and equipment, net of accumulated depreciation, for
Federal income tax purposes was $13,504,827 and $18,192,768 at December 31, 1996
and 1995, respectively.

In the event CSLC is taxed as a corporation because it is "publicly traded"
under Section 7704 of the Internal Revenue Code of 1986, then CSLC would be
taxed at corporate rates on all of its taxable income and distributions to the
BUC holders would be treated as fully taxable dividends to the extent of current
and

F-28
<PAGE> 100

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

accumulated earnings and profits, while distributions in excess of current and
accumulated earnings and profits would be treated as the nontaxable return of
capital to the extent of each BUC holder's basis in the BUCs. The Company's
management does not believe CSLC will be taxed as "publicly traded" for fiscal
1996 based on its interpretation of Section 7704 and no provision for income
taxes has been reflected in the consolidated statements of income for CSLC. No
ruling has been requested from the Internal Revenue Service regarding this
matter and there can be no certainty as to the ultimate outcome of this matter
at this time.

HCP

The tax basis of the partners' capital accounts for HCP at December 31,
1996, was $28,516,874.

Because many types of transactions are susceptible to varying
interpretations under federal and state income tax laws and regulations, the
amounts reported above may be subject to change at a later date upon final
determination by the taxing authorities.

9. RELATED PARTY TRANSACTIONS

Certain administrative and occupancy costs were incurred by an affiliate on
behalf of the Company. Total costs allocated to the Company were $390,925,
$219,294, $552,586, $351,387, and $202,718 for the six months ended June 30,
1997 and 1996 and the years ended December 31, 1996, 1995, and 1994,
respectively.

The Company pays premiums to a related party for employee medical coverage.
The related party insures the Company for any claims exceeding the premiums
paid. Accordingly, no amounts have been accrued at December 31, 1996, for claims
incurred but unpaid.

Upon sale of the multi-family properties in November 1996, an affiliate
received a $79,883 brokerage fee.

The Company manages properties for a third party, in which an officer of
the Company is also an officer of the third party companies. Management fees
received for the six months ended June 30, 1997 and the year ended December 31,
1996 were $788,566 and $657,260, respectively.

In addition, one of the Stockholders is chairman of the board of a bank
where the Company holds the majority of its operating cash accounts.

10. COMMITMENTS AND CONTINGENCIES

The Company had $56,376 and $53,788 in certificates of deposit at December
31, 1996 and 1995, respectively, restricted for utility deposits. The
certificates of deposit mature one year from the original purchase date.

In conjunction with CSLC'S prior credit facility, a compensating balance of
$150,000 was established with the mortgage company.

The CSLC senior living communities have entered into various contracts for
services. The contracts are for a duration of 5 years or less and are on a fee
basis as services are rendered. Future commitments on fixed cost contracts and
leases total $49,000.

The Company has pending claims incurred in the normal course of business
which, in the opinion of management, based on the advice of legal counsel, will
not have a material effect on the financial statements.

F-29
<PAGE> 101

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of financial instruments at December
31, 1996 and 1995, are as follows:

<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents........... $10,818,512 $10,818,512 $10,016,702 $10,016,702
Cash, restricted.................... 206,376 206,376 203,788 203,788
Investments in limited partnerships,
net of related deferred income.... 4,875,236 6,348,776 896,405 887,228
Notes payable....................... -- -- 2,035,148 2,035,148
Notes payable to affiliates......... 666,481 666,481 652,073 652,073
</TABLE>

The following methods and assumptions were used in estimating its fair
value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate fair value.

Investment in limited partnerships: The fair values are based on the
most recent purchase price.

Notes payable and notes payable to affiliates: The fair value of notes
payable is estimated using discounted cash flow analysis, based on current
incremental borrowing rates for similar types of borrowing arrangements.

12. INVESTMENTS IN LIMITED PARTNERSHIPS

The investments in limited partnerships balance consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1997 1996 1995
----------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C>
HCP limited partnership interests (including
deferred income and equity in earnings)....... $ -- $7,487,818 $308,825
NHP pension notes............................... 9,620,048 786,738 587,580
NHP limited partnership interests............... 1,364 1,364 --
---------- ---------- --------
$9,621,412 $8,275,920 $896,405
========== ========== ========
</TABLE>

During 1996 and 1995, CSLC made various purchases of limited partnership
interests in HCP. During 1996 and 1995, CSLC paid $3,200,686 and $308,825,
respectively, for partnership interests in HCP and, as of December 31, 1996,
CSLC owned a 31% ownership in HCP. During 1997, CSLC made additional investments
in HCP limited partnership interests totaling $5,322,578 to bring CSLC'S
ownership of HCP limited partnership interests to 55% at June 30, 1997.

As a result, the Company changed its method of accounting for its
investment in HCP from the equity method to the consolidation of HCP in its
financial statements in 1997. Had HCP been consolidated in 1996, using its
weighted average ownership interest of 23%, the results of operations on a pro
forma basis for the year ended December 31, 1996 would have been:

<TABLE>
<S> <C>
Revenue........................................ $26,504,461
Income before extraordinary item and minority
interest..................................... 1,166,289
Net income..................................... 2,118,981
</TABLE>

Pro forma net income, assuming a tax rate of 39.5%, is $1,281,984.

F-30
<PAGE> 102

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

In the second quarter of 1996, CSLC purchased a 9.36% in limited
partnership interest in HCP from Housing. CSLC paid $1,269,077 to Housing, who
recognized a $878,592 gain on the transaction. As a result of this purchase, the
Company exceeded a 20% ownership in HCP and changed its method of accounting
from the cost method to the equity method. The change resulted in recognizing
$3,519,315 of deferred income for the difference between cost and the underlying
equity in HCP, which is being amortized over 20 years. At June 30, 1997, the
unamortized deferred income was eliminated as a result of applying the purchase
method of accounting for CSLC's acquisition of HCP limited partnership units. At
June 30, 1997, the allocation of purchase price to the assets and liabilities of
HCP is based on independent valuation information from third party valuation
firms and management's estimates and will be revised upon completion of the
valuations. The fair value of CSLC's investment in HCP limited partnership
interests is $5,171,626 at December 31, 1996, based on the most recent purchase
price.

Summary financial information regarding the financial position and results
of operations of HCP is summarized below.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash...................................................... $ 8,995,455 $ 7,606,857
Property and equipment, net............................... 22,112,619 25,251,255
Other assets.............................................. 1,379,473 954,174
----------- -----------
Total assets.................................... $32,487,547 $33,812,286
=========== ===========
Liabilities............................................... $ 1,215,508 $ 1,609,403
Mortgage loans............................................ 7,207,414 9,775,601
Partnership capital....................................... 24,064,625 22,427,282
----------- -----------
Total liabilities and partnership capital....... $32,487,547 $33,812,286
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net revenue............................................... $ 7,560,104 $ 8,419,024
=========== ===========
Net income................................................ $ 1,637,343 $ 1,250,333
=========== ===========
</TABLE>

During 1996 and 1995, CSLC made various purchases of outstanding pension
notes of NHP (the NHP Notes). During 1996 and 1995, CSLC paid $199,158 and
$587,580, respectively, for purchases of NHP Notes. As of December 31, 1996,
CSLC has cumulatively paid $786,738 for an ownership of 4.2% of the outstanding
NHP Notes. NHP owns a portfolio of five independent senior living communities.
The pension notes bear simple interest at 13% per annum. Interest of 7% is paid
quarterly, with the remaining 6% interest deferred. Deferred interest and
principal matures on December 31, 2001. CSLC accrued the interest income on the
pension notes at 7% through December 31, 1996 and at 10.5% from April 1, 1997
through June 30, 1997, due to uncertainties regarding the ultimate realization
of the accrued interest. The ultimate realization of the NHP Notes is expected
to be based primarily upon the value of the underlying properties, which have an
appraised value in excess of the NHP Notes as of June 30, 1997. During 1996,
CSLC paid $1,364 for a 3.1% ownership of limited partnership interests in NHP.
Subsequent to year end and through June 30, 1997, CSLC disbursed $8,833,310 for
an additional investment in NHP Notes. These purchases bring CSLC's ownership of
NHP notes to 27.9% at June 30, 1997.

CSLC accounts for investments in NHP at cost and classifies them as held to
maturity. The fair value of the investments in NHP is $1,177,150 at December 31,
1996, based on the most recent purchase price.

F-31
<PAGE> 103

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Summary financial information regarding financial position and results of
operations of NHP as of June 30, 1997 and for the six months then ended and as
of December 31 and for the years then ended is summarized below.

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash....................................... $ 3,964,224 $ 4,017,181 $ 3,478,604
Property and equipment, net................ 49,547,718 50,171,241 51,260,763
Other assets............................... 2,387,060 1,883,462 3,010,129
------------ ----------- -----------
Total assets..................... $ 55,899,002 $56,071,884 $57,749,496
============ =========== ===========
Pension notes.............................. $ 42,672,000 $42,672,000 $42,672,000
Interest payable........................... 22,210,056 20,681,172 17,901,461
Other liabilities.......................... 1,273,719 1,154,823 1,976,344
Partnership deficit........................ (10,256,773) (8,436,111) (4,800,309)
------------ ----------- -----------
Total liabilities and partnership
deficit........................ $ 55,899,002 $56,071,884 $57,749,496
============ =========== ===========
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net revenue................................. $ 7,617,713 $14,488,099 $14,020,626
=========== =========== ===========
Net loss.................................... $(1,790,269) $(3,574,668) $(3,690,549)
=========== =========== ===========
</TABLE>

13. ALLOWANCE FOR DOUBTFUL ACCOUNTS

The components of the allowance for doubtful accounts for the years ended
December 31, 1996, 1995, and 1994 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year....................... $141,452 $ 86,049 $158,464
Provision for bad debts.......................... 22,312 71,098 --
Recoveries and other............................. 1,058 (15,695) (72,415)
-------- -------- --------
Balance at end of year............................. $164,822 $141,452 $ 86,049
======== ======== ========
</TABLE>

14. LEASES

HCP leases its property and equipment to tenants under noncancelable
operating leases. The lease terms range from 9 to 12 years with options to renew
for additional five-year terms and options to purchase the leased property at
the current fair market value at the end of the initial lease term. The leases
generally provide for contingent rentals based on the performance of the
property. Contingent rentals aggregated $172,309 in 1997.

Minimum rentals for the next three years for leases are $3,971,328 per
year, subject to change based on changes in interest rates. Minimum rentals are
$3,761,262 and $2,858,619 for the years 2000 and 2001. There are no minimum
rentals thereafter. Property and equipment less accumulated depreciation
attributable to such rentals, amounted to $20,502,517 at January 1, 1997.

F-32
<PAGE> 104

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Four of HCP's properties are subject to a master lease with a single
operator, HealthSouth Rehabilitation Corp. (HealthSouth). This master lease, as
amended, contains a nine-year renewal option and provides for contingent rentals
equal to 4% of the revenue differential, as defined, effective January 30, 1997.

During 1994, HealthSouth closed HCP's Sandybrook facility. In February
1997, HealthSouth closed the Cedarbrook facility. Despite these closures,
HealthSouth has continued making its full lease payments under the terms of the
master lease.

15. OFFICER'S SALARIES AND BONUSES

General and administrative expense includes officers' salaries and bonuses
of $2,600,490, $1,658,300, $3,371,887, $2,976,302, and $3,443,034 for the six
months ended June 30, 1997 and 1996 and the years ended December 31, 1996,1995,
and 1994.

16. PRO FORMA INCOME TAXES (UNAUDITED)

The income taxes on earnings of the S corporations and partnerships are the
responsibility of the Stockholders and partners. The pro forma adjustments
reflected on the statements of income assume these S corporations and
partnerships were subject to income taxes. Pro forma income tax expense has been
calculated using statutory federal and state tax rates, estimated at 39.5%.

F-33
<PAGE> 105

INDEPENDENT AUDITORS' REPORT

The Partners
HealthCare Properties, L.P.:

We have audited the accompanying consolidated balance sheets of HealthCare
Properties, L.P. and subsidiaries (a Delaware limited partnership) as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, partnership equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HealthCare
Properties, L.P. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Dallas, Texas
February 7, 1997, except as to the fifth paragraph
of note 4, which is as of March 21, 1997

F-34
<PAGE> 106

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents............................... $ 9,548,043 $ 8,995,455 $ 7,606,857
Accounts receivable, less allowance for doubtful
accounts of $4,255,655 at June 30, 1997 (Unaudited),
$4,225,811 at December 31, 1996 and $3,489,937 at
December 31, 1995 (notes 6 and 9)..................... 947,337 794,234 210,409
Prepaid expenses........................................ 72,723 85,295 129,714
Property and improvements, net (notes 3, 4 and 5)....... 21,469,109 22,112,619 25,251,255
Deferred charges, less accumulated amortization of
$819,111 at June 30, 1997 (Unaudited), $765,409 at
December 31, 1996 and $734,146 at December 31, 1995... 446,242 499,944 614,051
----------- ----------- -----------
$32,483,454 $32,487,547 $33,812,286
=========== =========== ===========

LIABILITIES AND PARTNERSHIP EQUITY
Accounts payable and accrued expenses (note 4).......... $ 820,991 $ 1,004,204 $ 1,526,209
Operating facility accounts payable..................... 43,359 211,304 83,194
Mortgage loans payable -- in default (note 4)........... -- -- 2,068,539
Mortgage loans payable (note 4)......................... 6,946,423 7,207,414 7,707,062
----------- ----------- -----------
7,810,773 8,422,922 11,385,004
----------- ----------- -----------
Partnership equity (deficit):
Limited partners (4,172,457 units).................... 24,654,579 24,058,684 22,449,617
General partner....................................... 18,102 5,941 (22,335)
----------- ----------- -----------
24,672,681 24,064,625 22,427,282
Commitments and contingencies (note 4)
----------- ----------- -----------
$32,483,454 $32,487,547 $33,812,286
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-35
<PAGE> 107

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- --------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (notes 5, 6 and 9):
Net patient service.......... $2,495,295 $ 786,239 $2,969,991 $ 3,268,800 $ 6,698,751
Rental....................... 2,157,973 2,448,668 4,590,113 5,100,085 5,296,655
Other income................. -- -- -- 50,139 579,075
---------- ---------- ---------- ----------- -----------
4,653,268 3,234,907 7,560,104 8,419,024 12,574,481
---------- ---------- ---------- ----------- -----------
Expenses:
Facility operating
expenses.................. 2,256,544 736,957 2,727,909 3,238,004 6,597,068
Depreciation................. 681,920 733,908 1,418,293 1,721,605 1,911,876
Fees to affiliates (note
7)........................ 523,343 643,369 1,275,833 1,279,428 1,581,765
Bad debts.................... 28,061 415,509 875,143 1,585,555 919,737
Lease default expenses....... 14,687 58,215 114,523 286,108 453,140
Administrative and other..... 306,768 75,903 192,385 114,625 222,055
---------- ---------- ---------- ----------- -----------
3,811,323 2,663,861 6,604,086 8,225,325 11,685,641
---------- ---------- ---------- ----------- -----------
Income from operations.... 841,945 571,046 956,018 193,699 888,840
---------- ---------- ---------- ----------- -----------
Other income (expense):
Interest income.............. 163,635 114,541 239,215 185,650 102,511
Interest expense............. (343,823) (430,313) (784,092) (1,324,845) (1,645,647)
Amortization................. (53,701) (57,054) (114,107) (171,265) (195,782)
Gain (loss) on disposition of
operating properties, net
(note 3).................. -- 387,528 387,617 (1,237,420) --
Loss due to reduction of
carrying value of
operating properties (note
3)........................ -- -- -- -- (2,185,381)
---------- ---------- ---------- ----------- -----------
(233,889) 14,702 (271,367) (2,547,880) (3,924,299)
---------- ---------- ---------- ----------- -----------
Income (loss) before
extraordinary item........... 608,056 585,748 684,651 (2,354,181) (3,035,459)
---------- ---------- ---------- ----------- -----------
Extraordinary gain on
disposition of operating
properties
(note 3)..................... -- 952,692 952,692 3,604,514 --
---------- ---------- ---------- ----------- -----------
Net income (loss)......... $ 608,056 $1,538,440 $1,637,343 $ 1,250,333 $(3,035,459)
========== ========== ========== =========== ===========
Allocation of net income
(loss):
Limited partners............. $ 595,895 $1,512,141 $1,609,067 $ 960,336 $(2,974,750)
General partners............. 12,161 26,299 28,276 289,997 (60,709)
---------- ---------- ---------- ----------- -----------
$ 608,056 $1,538,440 $1,637,343 $ 1,250,333 $(3,035,459)
========== ========== ========== =========== ===========
Per unit:
Income (loss) before
extraordinary item........ .14 .13 .16 (.56) (.71)
Extraordinary gain........... -- .23 .23 .79 --
---------- ---------- ---------- ----------- -----------
Net income (loss)............ .14 .36 .39 .23 (.71)
========== ========== ========== =========== ===========
Distributions................ -- -- --
========== ========== ========== =========== ===========
Weighted average number of
units........................ 4,172,457 4,172,457 4,172,457 4,172,457 4,172,457
========== ========== ========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-36
<PAGE> 108

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF PARTNERSHIP EQUITY

<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNER TOTAL
----------- --------- -----------
<S> <C> <C> <C>
Equity at December 31, 1993.............................. $24,464,031 $(251,623) $24,212,408
Net loss............................................... (2,974,750) (60,709) (3,035,459)
----------- --------- -----------
Equity at December 31, 1994.............................. 21,489,281 (312,332) 21,176,949
Net income............................................. 960,336 289,997 1,250,333
----------- --------- -----------
Equity at December 31, 1995.............................. 22,449,617 (22,335) 22,427,282
Net income............................................. 1,609,067 28,276 1,637,343
----------- --------- -----------
Equity at December 31, 1996.............................. 24,058,684 5,941 24,064,625
Net income (Unaudited)................................. 595,895 12,161 608,056
----------- --------- -----------
Equity at June 30, 1997 (Unaudited)...................... $24,654,579 $ 18,102 $24,672,681
=========== ========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-37
<PAGE> 109

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- ---------------------------------------
1997 1996 1996 1995 1994
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $ 608,056 $ 1,538,440 $ 1,637,343 $ 1,250,333 $(3,035,459)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization...... 735,621 790,962 1,532,400 1,892,870 2,107,658
Bad debts.......................... 28,061 415,509 875,143 1,585,555 919,737
(Gain) loss on disposition of
operating properties, net........ -- (387,528) (387,617) 1,237,420 --
Extraordinary gain on disposition
of operating properties.......... -- (952,692) (952,692) (3,604,514) --
Loss due to reduction of carrying
value of operating properties.... -- -- -- -- 2,185,381
Changes in assets and liabilities,
net of effects of property
dispositions:
Accounts receivable.............. (181,164) (279,067) (1,458,968) (1,228,720) (850,301)
Prepaid expenses................. 12,572 34,118 43,647 39,406 (11,473)
Accounts payable and accrued
expenses...................... (351,158) 176,802 443,384 (89,940) 1,018,878
---------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities.................. 851,988 1,336,544 1,732,640 1,082,410 2,334,421
---------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and
improvements....................... (38,409) (10,655) (21,969) (760) (514,406)
Proceeds from sale of property....... -- 2,246,114 2,246,114 2,958,287 --
Cash forfeiture on disposition of
property held in receivership...... -- -- -- (67,969) --
Net cash provided by (used in)
investing activities........ (38,409) 2,235,459 2,224,145 2,889,558 (514,406)
---------- ----------- ----------- ----------- -----------
Cash flows from financing activities --
payments on mortgage loans payable... (260,991) (2,314,784) (2,568,187) (1,971,385) (444,352)
---------- ----------- ----------- ----------- -----------
Net increase in cash and cash
equivalents.......................... 552,588 1,257,219 1,388,598 2,000,583 1,375,663
Cash and cash equivalents at beginning
of year.............................. 8,995,455 7,606,857 7,606,857 5,606,274 4,230,611
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
year................................. $9,548,043 $ 8,864,076 $ 8,995,455 $ 7,606,857 $ 5,606,274
========== =========== =========== =========== ===========
Cash paid for interest................. $ 343,823 $ 363,132 $ 716,910 $ 850,747 $ 981,346
========== =========== =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-38
<PAGE> 110

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996, 1995 AND 1994

(1) GENERAL

HealthCare Properties, L.P., is a Delaware limited partnership established
for the purpose of acquiring, leasing and operating existing or newly
constructed long-term health care properties. These properties are operated by
the Partnership or are leased to qualified operators who provide specialized
health care services. Effective July 1, 1993, Capital Realty Group Senior
Housing, Inc. (CRG) became the sole general partner of the Partnership.
Effective February 1, 1995, Capital Senior Living, Inc., (CSL), an affiliate of
CRG became the managing agent for the Partnership replacing CRG, which had been
managing agent since July 1, 1992.

At December 31, 1995, CRG owned approximately 9% of the Partnership's
limited partner units. During 1996, Capital Senior Living Communities, L.P.
(CSLC), an affiliate of CRG, acquired CRG's 9% interest in the Partnership. In
addition, CSLC purchased approximately 24% and 16% of the limited partner units
from unaffiliated limited partners for the six months ended June 30, 1997
(Unaudited) and the year ended December 31, 1996, respectively. At June 30, 1997
(Unaudited) and December 31, 1996 and 1995, CSLC owned approximately 55%, 31%
and 6% of the Partnership's limited partner units, respectively.

The consolidated financial statements as of and for the years ended
December 31, 1995 and 1994 include the accounts of the Partnership and its
wholly owned subsidiaries, Danville Care, Inc., Foothills Care, Inc.,
Countryside Care, Inc. and Countryside Care, LP. In addition, the consolidated
financial statements as of and for the six months ended June 30, 1997
(Unaudited) and the year ended December 31, 1996 include the accounts of the
Partnership's wholly owned subsidiary, Cambridge Nursing Home Limited Liability
Company (Cambridge LLC), which began operating Cambridge Nursing Home effective
August 1, 1996 (see note 6). All significant intercompany accounts and
transactions have been eliminated in consolidation.

At June 30, 1997 (Unaudited) and December 31, 1996, 1995 and 1994, the
status of the Partnership's properties was as follows:

<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995 1994
----------- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Leased to unaffiliated operators on a triple net
basis............................................ 7 7 7 8
Operated by subsidiaries of the Partnership and
managed by CSL................................... 1 1 1 2
Operated under bankruptcy and managed by CSL....... -- -- 1 1
Operated and managed under receivership by an
unaffiliated operator............................ -- -- -- 1
-- -- -- --
8 8 9 12
== == == ==
</TABLE>

During 1996, one of the properties (Countryside) operated by a subsidiary
of the Partnership was sold to an unrelated third party. Additionally, during
1996, the operations of the property (Cambridge) previously operated under
bankruptcy and managed by CSL were transferred to Cambridge LLC. CSL continues
to manage this property (see note 6). During 1995, one of the Partnership's
leased properties was sold to an unrelated third party and the deeds for two of
the Partnership's operated properties were transferred to the noteholders in
lieu of foreclosure (see note 3).

In the opinion of management, the accompanying unaudited consolidated
financial statements as of June 30, 1997 and for the six months ended June 30,
1997 and 1996, reflect all adjustments (all of which were normal and recurring)
which, in the opinion of management, are necessary for a fair presentation of
the consolidated financial position and results of operations for the interim
periods presented. The consolidated

F-39
<PAGE> 111

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

results of operations for the six month period ended June 30, 1997 are not
indicative of the results to be expected for the full year.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Property and improvements are stated at cost. The Partnership adopted the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. The fair value is
based on either the expected future cash flows discounted at a rate which varies
based on associated risk or an independent third-party appraisal. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of this Statement did not have a material impact on the
Partnership's 1996 financial position or results of operations.

Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, using
declining-balance and straight-line methods, as follows: buildings and
improvements, 25 to 31 years; furniture, fixtures and equipment, 5 to 10 years.

The financial statements and federal income tax returns are prepared on the
accrual method of accounting and include only those assets and liabilities and
results of operations which relate to the business of the Partnership and its
wholly owned subsidiaries. No provision has been made for federal and state
income taxes since such taxes are the responsibility of the individual partners.
Although the Partnership's subsidiaries file federal corporate income tax
returns, none of the subsidiaries had significant net income for financial
reporting or income tax purposes for the six months ended June 30, 1997
(Unaudited) or the years ended December 31, 1996, 1995 or 1994. Accordingly, no
provision has been made for federal and state income taxes for these
subsidiaries for the six months ended June 30, 1997 (Unaudited) or the years
ended December 31, 1996, 1995 or 1994.

Net income (loss) of the Partnership and taxable income (loss) are
generally allocated 98% to the limited partners and 2% to the general partner.
The net income of the Partnership from the disposition of a property is
allocated (i) to partners with deficit capital accounts on a pro rata basis (ii)
to limited partners until they have been paid an amount equal to the amount of
their Adjusted Investment (iii) to the limited partners until they have been
allocated income equal to their 12% Liquidation Preference, and (iv) thereafter,
80% to the limited partners and 20% to the general partner. The net loss of the
Partnership from the disposition of a property is allocated (i) to partners with
positive capital accounts on a pro rata basis and (ii) thereafter, 98% to the
limited partners and 2% to the general partner. Distributions of available cash
flow are generally distributed 98% to the limited partners and 2% to the general
partner, until the limited partners have received an annual preferential
distribution, as defined. Thereafter, available cash flow is distributed 90% to
the limited partners and 10% to the general partner. No distributions were made
during the six months ended June 30, 1997 (Unaudited) or the years ended
December 31, 1996, 1995 or 1994.

Deferred charges primarily represent initial fees and other costs incurred
in negotiating leases and mortgage loans payable. These costs are being
amortized using the straight-line method over the lives of the related leases or
mortgage loans.

Net patient service revenue is reported at the estimated net realizable
amounts due from residents, third-party payors, and others for service rendered.
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

F-40
<PAGE> 112

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the related services are rendered. Differences between the estimated amounts
accrued and interim and final settlements are reported in operations in the year
of settlement.

The Partnership records accounts receivable for contingent rentals and past
due rents only when circumstances indicate a substantial probability of
collection. Existing receivables are reserved to the extent collection is deemed
doubtful by the Partnership's management. Deductions to the allowance for
doubtful accounts were $156, $45,682, $29,953 and $32,426 for the six months
ended June 30, 1997 (Unaudited) and the years ended December 31, 1996, 1995 and
1994, respectively.

The Partnership classifies all highly liquid investments with original
maturities of three months or less as cash equivalents.

Management of the Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities to prepare these
consolidated financial statements. Actual results could differ from those
estimates.

(3) PROPERTY AND IMPROVEMENTS

Property and improvements consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
JUNE 30, 1997 1996 1995
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land.......................................... $ 3,145,803 $ 3,145,803 $ 3,570,802
Buildings and improvements.................... 31,397,383 31,397,383 34,467,946
Furniture, fixtures and equipment............. 1,642,375 1,603,965 1,851,124
----------- ----------- -----------
36,185,561 36,147,151 39,889,872
Allowance for reduction in carrying value of
operating properties........................ (2,185,381) (2,185,381) (3,026,898)
----------- ----------- -----------
34,000,180 33,961,770 36,862,974
Less accumulated depreciation................. 12,531,071 11,849,151 11,611,719
----------- ----------- -----------
$21,469,109 $22,112,619 $25,251,255
=========== =========== ===========
</TABLE>

F-41
<PAGE> 113

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a summary of information for the individual Partnership
properties from inception of the Partnership through December 31, 1996. The
information presented includes furniture, fixtures and equipment which are
immaterial to the Partnership.
<TABLE>
<CAPTION>
COSTS
CAPITALIZED
INITIAL COST TO SUBSEQUENT TO
PARTNERSHIP ACQUISITION GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD
------------------------- ------------- -----------------------------------------------------
BUILDINGS BUILDINGS
AND AND VALUATION
DESCRIPTION LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS ALLOWANCE TOTAL
----------- ---------- ------------ ------------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cedarbrook.............. $ 807,861 $ 3,147,139 $ 783,608 $ 807,861 $ 3,930,747 $ -- $ 4,738,608
rehab facility
Nashville, TN
Cane Creek.............. 97,560 3,902,440 225,118 97,560 4,127,558 -- 4,225,118
rehab facility
Martin, TN
Crenshaw Creek.......... 123,801 3,776,199 102,732 123,801 3,878,931 -- 4,002,732
rehab facility
Lancaster, SC
Sandy Brook............. 563,072 3,636,928 128,434 563,072 3,765,362 -- 4,328,434
rehab facility
Mt. Dora, FL
Cambridge............... 497,470 4,602,530 101,771 497,470 4,704,301 (2,185,381) 3,016,390
nursing home
Cambridge, MA
Trinity Hills........... 300,000 2,400,000 26,152 300,000 2,426,152 -- 2,726,152
nursing home
Ft. Worth, TX
Hearthstone............. 756,039 2,868,961 116,365 756,039 2,985,326 -- 3,741,365
nursing home
Round Rock, TX
McCurdy................. -- 7,100,000 74,064 -- 7,174,064 -- 7,174,064
nursing home
Evansville, IN
Partnership assets...... -- -- 8,907 -- 8,907 -- 8,907
Dallas, TX
---------- ----------- ---------- ---------- ----------- ----------- -----------
Total................... $3,145,803 $31,434,197 $1,567,151 $3,145,803 $33,001,348 $(2,185,381) $33,961,770
========== =========== ========== ========== =========== =========== ===========

ACCUMULATED DATE OF DATE USEFUL
DESCRIPTION ENCUMBRANCES DEPRECIATION CONSTRUCTION ACQUIRED LIFE
----------- ------------ ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Cedarbrook.............. $ 899,029 $ 1,555,502 1985 1987 25-31 years
rehab facility
Nashville, TN
Cane Creek.............. 789,198 1,760,842 1985 1987 25-31 years
rehab facility
Martin, TN
Crenshaw Creek.......... -- 1,401,146 1988 1988 25-31 years
rehab facility
Lancaster, SC
Sandy Brook............. -- 1,323,065 1985 1988 25-31 years
rehab facility
Mt. Dora, FL
Cambridge............... -- 1,410,785 1967 1990 25-31 years
nursing home
Cambridge, MA
Trinity Hills........... -- 1,077,225 1971 1988 25-31 years
nursing home
Ft. Worth, TX
Hearthstone............. 1,341,859 1,094,160 1988 1988 25-31 years
nursing home
Round Rock, TX
McCurdy................. 4,177,328 2,222,015 1916 1989 25-31 years
nursing home
Evansville, IN
Partnership assets...... -- 4,411 n/a 1991-1993 10 years
Dallas, TX
---------- -----------
Total................... $7,207,414 $11,849,151
========== ===========
</TABLE>

F-42
<PAGE> 114

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following information is a summary of Partnership additions to and
deductions from property and improvements and accumulated depreciation for the
years ended December 31, 1996, 1995 and 1994. The information presented includes
furniture, fixtures and equipment which are immaterial to the Partnership.

<TABLE>
<CAPTION>
PROPERTY AND IMPROVEMENTS 1996 1995 1994
------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period.............. $36,862,974 $46,272,927 $47,943,902
Additions during period:
Acquisitions........................... -- -- 486,807
Improvements........................... 21,969 760 27,599
----------- ----------- -----------
21,969 760 514,406
Deductions during period:
Cost of property sold.................. 2,923,173 3,520,068 --
Cost of property transferred in lieu of
foreclosure.......................... -- 5,890,645 --
Write-down in value of property........ -- -- 2,185,381
----------- ----------- -----------
Total deductions.................. 2,923,173 9,410,713 2,185,381
----------- ----------- -----------
Balance at close of period.................. $33,961,770 $36,862,974 $46,272,927
=========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Accumulated Depreciation
Balance at beginning of period............ $11,611,719 $12,576,670 $10,664,794
Additions.............................. 1,418,293 1,721,605 1,911,876
Deductions during period:
Property sold........................ 1,180,861 989,422 --
Property transferred in lieu of
foreclosure....................... -- 1,697,134 --
----------- ----------- -----------
Total deductions.................. 1,180,861 2,686,556 --
----------- ----------- -----------
Balance at close of period................ $11,849,151 $11,611,719 $12,576,670
=========== =========== ===========
</TABLE>

The Federal income tax basis of the Partnership's property and improvements
at December 31, 1996 is $26,772,518.

The following property dispositions occurred during 1996 and 1995:

<TABLE>
<CAPTION>
NET PROPERTY MORTGAGE
AND LOANS NET NET GAIN ON
IMPROVEMENTS PAYABLE OTHER PROCEEDS DISPOSITION
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1996:
Sale of Countryside on May 1,
1996....................... $1,742,401 $(2,068,539) $ (987,804) $ (26,367) $1,340,309
========== =========== =========== =========== ==========
1995:
Sale of Heritage Manor on
July 5, 1995............... $2,530,645 $(1,500,000) $ 63,857 $(1,458,287) $ 363,785
Deed transferred to
noteholder in lieu of
foreclosure:
Foothills.................. 2,122,178 (2,360,895) (872,587) -- 1,111,304
Diablo/Tamarack............ 2,071,334 (2,160,787) (802,552) -- 892,005
---------- ----------- ----------- ----------- ----------
$6,724,157 $(6,021,682) $(1,611,282) $(1,458,287) $2,367,094
========== =========== =========== =========== ==========
</TABLE>

F-43
<PAGE> 115

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"Other" consists primarily of disposition costs, accrued interest payable
and deferred charges (prepaid loan fees).

The Countryside property was sold to an unrelated third-party investor on
May 1, 1996 for $2,246,114. The resulting net gain is comprised of (1) an
ordinary gain of $387,617 representing the difference between the carrying value
of the property and the sales proceeds and (2) an extraordinary gain of $952,692
representing the difference between the agreed-upon cash settlement with the
lender and the mortgage loan payable including accrued interest payable.

The Heritage Manor property was sold on July 5, 1995 to an unrelated
third-party investor for $3,075,000. With the proceeds, the Partnership paid the
$1,500,000 mortgage loan balance. The resulting net gain of $363,785 represents
the difference between the carrying value of the property and the sales
proceeds.

The deed to the Diablo/Tamarack property was transferred to the noteholder
in lieu of foreclosure on July 31, 1995. The resulting net gain is comprised of
(1) an ordinary loss of $686,770 representing the difference between the
carrying value and the fair value of the property and, (2) an extraordinary gain
of $1,578,775 representing the difference between the fair value of the
property, and the mortgage loan payable including accrued interest payable.

Effective December 1, 1994, the Foothills property was placed in
receivership. The deed to the property was subsequently transferred to the
noteholder in lieu of foreclosure on July 19, 1995. The resulting net gain is
comprised of (1) an ordinary loss of $914,435, representing the difference
between the carrying value and the fair value of the property and, (2) an
extraordinary gain of $2,025,739 representing the difference between the fair
value of the property, and the mortgage loan payable including accrued interest
payable.

In 1994, management concluded that the carrying value of its Cambridge
property exceeded its estimated fair value. As a result, in the fourth quarter
of 1994, this property, which had been carried at $4,185,381, was written down
to $2,000,000.

Combined operating results for Cambridge, Foothills, Countryside and
Diablo/Tamarack follows:

<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995 1994
----------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net patient service revenue..... $2,422,262 $2,969,991 $ 3,268,800 $ 6,698,751
---------- ---------- ----------- -----------
Facility operating expenses..... 2,219,577 2,727,909 3,238,004 6,597,068
Depreciation.................... 100,231 248,134 275,815 369,401
Fees to affiliates.............. 195,889 261,517 319,454 650,740
Bad debts....................... 29,844 79,682 325,921 52,263
Lease default expenses.......... 7,022 35,923 120,258 81,014
---------- ---------- ----------- -----------
2,552,563 3,353,165 4,279,452 7,750,486
---------- ---------- ----------- -----------
Loss from operations............ $ (130,301) $ (383,174) $(1,010,652) $(1,051,735)
========== ========== =========== ===========
Interest expense................ $ -- 67,181 457,691 664,306
========== ========== =========== ===========
</TABLE>

Operating results for the six months ended June 30, 1997 (Unaudited)
consist primarily of amounts at the Cambridge facility. 1996 operating results
consist of amounts at the Cambridge facility from August 1, 1996 through
December 31, 1996 and at the Countryside facility from January 1, 1996 through
April 30, 1996. Operating results consist of amounts at the Countryside facility
for the year ended December 31, 1995 and at the Diablo/Tamarack facility from
January 1, 1995 through July 31, 1995. 1994 operating results consist of

F-44
<PAGE> 116

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amounts at the Countryside and Diablo/Tamarack facilities for the year ended
December 31, 1994 and at the Foothills facility from January 1, 1994 through
November 30, 1994.

(4) MORTGAGE LOANS PAYABLE

Mortgage loans payable consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage loans payable -- in default (note
3)........................................... $ -- $ -- $2,068,539
Mortgage loans payable......................... 6,946,423 7,207,414 7,707,062
---------- ---------- ----------
Total mortgage loans payable......... $6,946,423 $7,207,414 $9,775,601
========== ========== ==========
</TABLE>

Mortgage loans payable (including $5,621,906, $5,865,555 and $6,333,183 due
to banks at June 30, 1997 (Unaudited), December 31, 1996 and 1995), bear
interest ranging from 6.8% to 10.75% at June 30, 1997 (Unaudited), 6.6% to
10.75% at December 31, 1996 and 6.8% to 10.75% at December 31, 1995. These notes
are payable in monthly installments of $100,732 at June 30, 1997 (Unaudited),
$101,092 at December 31, 1996 and $94,618 at December 31, 1995, including
interest. The notes are secured by properties with net book values aggregating
$12,870,731, $13,246,635 and $14,004,632 at June 30, 1997 (Unaudited), December
31, 1996 and 1995, respectively. The notes range in maturity from 1997 to 2012.

Mortgage loans payable -- in default, consisted of one loan at December 31,
1995, secured by the Countryside property. In 1996, the note secured by the
Countryside property was extinguished in connection with the disposition of the
property securing the note (see note 3). The note was secured by property with
net book value aggregating $1,779,852 at December 31, 1995. The note was in
default at December 31, 1995 because of the Partnership's failure to make
required debt service payments when due and because of the failure of the former
lessee to pay required property taxes to the taxing authorities.

The Partnership had one mortgage loan aggregating $1,062,237 at December
31, 1995 that was in default as a result of not meeting a debt coverage ratio,
as defined. Despite this default, the lender waived this ratio requirement
through January 1, 1997. At December 31, 1996, the Partnership met the debt
coverage ratio. Accordingly, this loan balance is classified as "mortgage loans
payable" in the accompanying consolidated balance sheets.

Accrued interest payable related to mortgage loans payable -- in default
aggregated $766,972 at December 31, 1995.

The Partnership leases four of its properties under a master lease (see
note 6). The rentals under the master lease provide additional security for two
notes payable used to finance two of the master lease properties. Both of these
notes were callable by the lenders at any time between January 1, 1993 and
November 30, 1995; however, the lenders agreed not to exercise their call rights
prior to maturity on January 31, 1996 as long as the Partnership remained in
compliance with the loan agreements. One of the lenders agreed to extend the
maturity date of its note to December 1, 2001, pending completion of final loan
documents. On March 21, 1997, the other lender agreed not to exercise its call
rights until June 30, 1997. The Partnership is currently negotiating the
extension of the note until December 1, 2001.

F-45
<PAGE> 117

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Presented below is a summary of required principal payments on mortgage
loans payable as of December 31, 1996. The note callable on June 30, 1997 is
included in amounts due currently.

<TABLE>
<S> <C>
1997..................................................... $2,568,389
1998..................................................... 355,176
1999..................................................... 385,309
2000..................................................... 273,807
2001..................................................... 178,193
2002 and thereafter...................................... 3,446,540
----------
$7,207,414
==========
</TABLE>

(5) LEASES

The Partnership leases its property and equipment to tenants under
noncancelable operating leases. The lease terms range from 9 to 12 years with
options to renew for additional five-year terms and options to purchase the
leased property at the current fair market value at the end of the initial lease
term. The leases generally provide for contingent rentals based on the
performance of the property. Contingent rentals aggregated $172,309 for the six
months ended June 30, 1997 (Unaudited), $192,325, $165,042 and $173,541 for the
years ended December 31, 1996, 1995 and 1994, respectively.

Minimum rentals for 1997, 1998 and 1999 for leases not in default are
$3,971,328 per year, subject to change based on changes in interest rates.
Minimum rentals are $3,761,262 and $2,858,619 for the years 2000 and 2001. There
are no minimum rentals thereafter. Property and improvements less accumulated
depreciation attributable to such rentals, amounted to $19,925,325, $20,502,517
and $21,671,891 at June 30, 1997 (Unaudited), December 31, 1996 and 1995,
respectively.

(6) LEASE DEFAULTS

NCA Cambridge, Inc., the lessee of the Partnership's Cambridge Nursing Home
(Cambridge) property, petitioned for Chapter 11 bankruptcy protection in 1992.
In May 1993, CRG began operating Cambridge under the control of the bankruptcy
court pursuant to a settlement agreement with the lessee; however, the results
of operations of this property have not been included in the Partnership's
consolidated statements of operations for the two years ended December 31, 1995
and from the period January 1, 1996 through July 31, 1996. On August 1, 1996, in
accordance with the approval of the bankruptcy court, the operations of
Cambridge were transferred to Cambridge LLC, a subsidiary of the Partnership,
effectively removing the operations of the property from the jurisdiction of the
bankruptcy court. Accordingly, the results of operations of Cambridge are
included in the 1996 consolidated statements of operations for the period August
1, 1996 through December 31, 1996, and for the six months ended June 30, 1997
(Unaudited).

In connection with this property, the lessee was overpaid for services to
Medicaid patients during the period the lessee operated the property. Based on
certain interpretations of state regulations, the Partnership could have been
liable for approximately $1,400,000 in connection with the recovery of these
Medicaid overpayments. During 1995, the Partnership entered into a settlement
agreement with the state of Massachusetts, approved by the bankruptcy court,
whereby the $1,400,000 became a general, unsecured claim of the bankruptcy
estate of NCA Cambridge, Inc., which will be settled through bankruptcy court
proceedings. Additionally, as part of the settlement agreement with the state,
the Partnership agreed to loan NCA Cambridge, Inc. $590,000 to pay outstanding
real property taxes due on the Cambridge property. The Partnership fully
reserved for this receivable in 1995.

F-46
<PAGE> 118

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Four of the Partnership's properties are subject to a master lease with a
single operator, HealthSouth Rehabilitation Corp. (HealthSouth). This master
lease, as amended, contains a nine-year renewal option and provides for
contingent rentals equal to 4% of the revenue differential, as defined,
effective January 30, 1997. As of June 30, 1997 (Unaudited), no contingent
rentals have been accrued on the master lease.

During 1994, HealthSouth closed the Partnership's Sandybrook facility. In
February 1997, HealthSouth closed the Cedarbrook facility. Despite these
closures, HealthSouth has continued making its full lease payments under the
terms of the master lease.

The following summary consolidated financial data was obtained from the
December 31, 1996 Form 10-K and the June 30, 1997 Form 10-Q of HealthSouth:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1997 1996 1995
----------- ---------- ----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
Cash $ 175,831 $ 148,028 $ 152,244
Accounts receivable, net....................... 622,142 510,567 409,150
Property and equipment, net.................... 1,627,443 1,390,873 1,283,560
Intangible assets, net......................... 1,150,734 1,049,658 873,911
Other assets................................... 102,419 272,826 212,630
---------- ---------- ----------
Total assets......................... $3,894,795 $3,371,952 $2,931,495
========== ========== ==========
Long-term debt................................. $1,635,697 $1,450,620 $1,356,489
Other liabilities.............................. 410,302 405,408 389,108
Stockholders' equity........................... 1,848,796 1,515,924 1,185,898
---------- ---------- ----------
Total liabilities & stockholders'
equity............................. $3,894,795 $3,371,952 $2,931,495
========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
SIX MONTHS
ENDED
JUNE 30,
1997 1996 1995 1994
----------- ---------- ---------- ----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue....................... $1,414,648 $2,436,537 $2,003,146 $1,649,199
========== ========== ========== ==========
Net income........................ $ 145,899 $ 220,818 $ 92,521 $ 88,083
========== ========== ========== ==========
</TABLE>

Delinquent rentals fully reserved by the Partnership as a result of lease
defaults approximated $393,000 in 1996 and $674,000 in 1995 and 1994.

Other income in 1994 primarily consists of $560,000 in recovered
administrative expenses owed the Partnership from the former operator of two of
the Partnership's properties.

F-47
<PAGE> 119

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) RELATED PARTY TRANSACTIONS

Approximate fees paid to the general partner and affiliates of the general
partner are as follows:

<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995 1994
----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Asset management fees................... $222,000 $ 740,000 $ 712,000 $ 731,000
Property management fees................ 170,000 208,000 252,000 472,000
Administrative and other expenses....... 86,000 256,000 235,000 266,000
General partner management fees......... 45,000 72,000 80,000 113,000
-------- ---------- ---------- ----------
$523,000 $1,276,000 $1,279,000 $1,582,000
======== ========== ========== ==========
</TABLE>

A 50% partner in CRG is chairman of the board of a bank where the
Partnership holds the majority of its operating cash accounts.

In connection with the sale of Countryside in 1996, the general partner was
paid fees aggregating $66,000. In connection with the sale of Heritage Manor in
1995, the general partner was paid fees aggregating $92,250.

(8) INCOME TAXES

Reconciliation of financial statement basis partners' equity to federal
income tax basis partners' equity is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Total partners' equity -- financial statement
basis......................................... $24,064,625 $22,427,282 $21,176,949
Current year tax basis net earnings over (under)
financial statement basis..................... (684,329) (2,942,675) 2,552,427
Cumulative tax basis net earnings over financial
statement basis............................... 5,136,578 8,079,253 5,526,826
----------- ----------- -----------
Total partners' equity -- federal income tax
basis......................................... $28,516,874 $27,563,860 $29,256,202
=========== =========== ===========
</TABLE>

(9) BUSINESS AND CREDIT CONCENTRATIONS

The Partnership's eight facilities are located in the southeastern United
States, Texas, Indiana and Massachusetts. The four facilities operated by
HealthSouth (note 6) are located in the southeastern United States and accounted
for approximately $1,183,500 (25%), $2,367,000 (31%), $2,367,000 (28%) and
$2,292,000 (18%) of Partnership revenues for six months ended June 30, 1997
(Unaudited) and the years ended December 31, 1996, 1995 and 1994, respectively.
One property leased to an unaffiliated operator accounted for approximately
$500,319 (11%), $1,023,716 (14%) and $977,000 (12%) of Partnership revenues for
six months ended June 30, 1997 (Unaudited) and the years ended December 31, 1996
and 1995, respectively.

The Partnership also derives revenue from Medicaid programs funded by the
states of Colorado, California, Michigan and Massachusetts. The Partnership
derived 14% of its revenues from the Colorado state program during 1994 and 15%
and 11% of its revenues from the Michigan state program in 1995 and 1994,

F-48
<PAGE> 120

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively. The Partnership derived 29% of its revenues from the state program
in Massachusetts for the six months ended June 30, 1997 (Unaudited), and 15% for
the year ended December 31, 1996.

Receivables due from state Medicaid programs aggregated $473,522 at June
30, 1997 (Unaudited) and $438,350 and $116,933 at December 31, 1996 and 1995,
respectively.

The Partnership does not require collateral or other security to support
financial instruments subject to credit risk.

(10) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments presented below.

(a) Cash and Cash Equivalents, Receivables and Payables

The carrying amount approximates fair value because of the short maturity
of these instruments.

(b) Mortgage Loans Payable

The fair value of the Partnership's mortgage loans payable is calculated by
discounting scheduled cash flows through maturity using discount rates that are
currently available to the Partnership on other borrowings with similar risk and
maturities. Issuance costs and other expenses that would be incurred in an
actual borrowing are not reflected in this amount.

<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- ----------
<S> <C> <C>
Mortgage loans payable at June 30, 1997 (Unaudited)........ $6,946,423 $7,222,306
========== ==========
Mortgage loans payable at December 31, 1996................ $7,207,414 $7,436,177
========== ==========
</TABLE>

F-49
<PAGE> 121

------------------------------------------------------
- ------------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
The Offering............................ 6
Summary Financial Data.................. 7
Risk Factors............................ 9
The Company............................. 17
Use of Proceeds......................... 22
Dividend Policy......................... 23
Capitalization.......................... 24
Dilution................................ 25
Selected Financial Data................. 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 28
Business................................ 36
Management.............................. 52
Certain Transactions.................... 59
Principal Stockholders.................. 63
Description of Capital Stock............ 64
Shares Eligible for Future Sale......... 67
Underwriting............................ 68
Legal Matters........................... 70
Experts................................. 70
Additional Information.................. 71
Index to Financial Statements........... F-1
</TABLE>

------------------
Until November 25, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligations of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
- ------------------------------------------------------
------------------------------------------------------

------------------------------------------------------
- ------------------------------------------------------

9,000,000 Shares

[CAPITAL SENIOR LIVING LOGO]

Capital Senior
Living Corporation

Common Stock

---------------------------

PROSPECTUS
October 30, 1997
---------------------------
LEHMAN BROTHERS

J.C. BRADFORD & CO.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

SMITH BARNEY INC.

- ------------------------------------------------------
------------------------------------------------------