CAPITAL SENIOR LIVING COMMUNITIES L P, 10KSB, 1998-03-31

CAPITAL SENIOR LIVING COMMUNITIES L P
10KSB, 1998-03-31
ASSET-BACKED SECURITIES

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SECURITIES AND EXCHANGE COMMISSION}
Washington, D.C. 20549

FORM 10-KSB

Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

(Mark One)

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (fee required) For the fiscal year ended December 31, 1997, or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
to -----------------------
-----------------------

Commission file number 0-14752.
-------

CAPITAL SENIOR LIVING COMMUNITIES, L.P.
(Exact name of registrant as specified in its charter)

DELAWARE 35-1665759
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

14160 Dallas Parkway, Suite 300, Dallas, Texas 75240
- --------------------------------------------------------------------------------
(Address of principal executive officers) (Zip Code)

Registrant's telephone number, including area code: (972) 770-5600
-------------------------

Securities registered pursuant to Section 12(b) of the Act: None
------

Securities registered pursuant to Section 12(g) of the Act:
Beneficial Unit Certificates
------------------------------
(Title of Class)

Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---

CORPDAL:101926.1 10861-00052

<PAGE>

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]

The registrant's revenues for its most recent fiscal year were: $21,123,078

As of December 31, 1997, there were 1,117,692 Beneficial Unit Certificates of
limited partnership interest of the Partnership ("BUCs") outstanding, of which
580,161 were held by affiliates of the registrant. The BUCs are not quoted on
the NASDAQ System.

Documents incorporated by reference. None.
-----

Transitional small business disclosure format (check one): Yes No X
--- ---

CORPDAL:101926.1 10861-00052

<PAGE>

PART I

Item 1. DESCRIPTION OF BUSINESS
-----------------------

General
- -------

Capital Senior Living Communities, L.P. (formerly known as Retirement Living
Tax-Exempt Mortgage Fund Limited Partnership) (the "Partnership") was formed on
December 17, 1985, under the Delaware Revised Uniform Limited Partnership Act,
and will continue until December 31, 2016, unless terminated earlier under
certain provisions of the partnership agreement. In 1986, the Partnership issued
to the public a total of 1,264,000 Beneficial Unit Certificates ("BUCs"),
representing assignments of limited partnership interest. This issuance
generated funds of $28,758,000, net of issuance costs, which were used
principally to acquire the Mortgage Loans (as defined below) on April 11, 1986.

The Partnership was originally formed to acquire a portfolio of five federally
tax exempt, participating, non-recourse first mortgage bonds issued by
governmental issuers (the "Bonds") to finance the construction and/or ownership
of real estate projects (the "Projects"). Each of the Bonds was secured by a
non-recourse note from the owner of a Project and a mortgage on such Project
(the "Mortgage Loans"). The Projects consisted of four retirement living centers
and one multi-family residential apartment complex. Each Project was owned by a
partnership (called herein a "Project Owner"). The partners of each Project
Owner ("Guarantors") guaranteed the Mortgage Loan on such Project until that
Project met a base interest target and also guaranteed all unpaid base interest
on such Mortgage Loan until the earlier of maturity or acceleration (the
"Guarantees"). The Project Owners defaulted under the Mortgage Loans, and
effective September 11, 1991, the Project Owners transferred to a 99%-owned
subsidiary of the Partnership ("Retirement Partnership, Ltd", the "Partnership
Subsidiary"), through a negotiated settlement (the "Negotiated Settlement"): (a)
the five Projects securing the Mortgage Loans; (b) an option to acquire an
additional 132-unit apartment project owned by an affiliate of the Project
Owners and Guarantors (the "Village Green I Apartments") (this acquisition was
effective December 6, 1991); and (c) an approximate 12% interest in Encore
Limited Partnership, a limited partnership which invests in retirement living
communities and is not affiliated with the Project Owners or Guarantors. The
Partnership's interest in Encore Limited Partnership was subsequently diluted to
a 3% interest after the reorganization of the Encore Limited Partnership in
December, 1995.

In exchange for the transfer of these properties to the Partnership, the
Partnership agreed to (i) forgive approximately $6,000,000 of the principal owed
under the Mortgage Loans; (ii) release the Project Owners from any liability
under the remaining balance of the Mortgage Loans; (iii) release the Guarantors
from any obligations under their personal guarantees of the Mortgage Loans; (iv)
purchase the Village Green I Apartments for $2,633,202, payable $430,000 in cash
and by taking the project subject to nonrecourse first lien mortgage payable to
Banc One Mortgage Corporation in the amount of approximately $2,203,202; and (v)
release the Project Owners and Guarantors from their obligation to reimburse the
Partnership for $203,500 in costs related to the Partnership's efforts to
collect unpaid base interest on the Mortgage Loans in 1989. Additionally, in
order to acquire the Projects, the Partnership surrendered the Bonds to the
government issuers for cancellation.

In addition, the Partnership invested in limited partnership interests in
HealthCare Properties, L.P. ("HCP") during 1996 and 1997. During 1997, the
Partnership's interest in the HCP was approximately 56%. The Partnership also
invested in Pension Notes of NHP Retirement Housing Partners I, L.P. ("NHP") and
acquired a 30.8% ownership of such Pension Notes.

<PAGE>

The Partnership operated the four retirement living centers through October 31,
1997 and operated them through management agreements with the general partner of
the Partnership and an affiliate of the general partner. The two multi-family
residential apartment complexes were sold on November 1, 1996 to an unaffiliated
third party purchaser. The four retirement living centers and Partnership
investments were sold on November 3, 1997 (with an effective date of November 1,
1997) to an affiliate of the general partner. At December 31, 1997, the
Partnership had no operations. See "Acquisition and Divestiture" and "Item 12.
Certain Relationships and Related Transactions."

General Partner
- ---------------

The general partner of the Partnership is Retirement Living Communities, L.P.
("RLC"), an Indiana limited partnership, whose sole general partner was Capital
Realty Group Senior Housing, Inc. ("Senior Housing"). Effective July 1, 1995,
Senior Housing assigned its general partnership interest to Capital Retirement
Group, Inc. ("Retirement Group"), a Texas corporation and an affiliate of Senior
Housing. The address of the principal executive offices of RLC and its general
partner is the same as the Partnership: 14160 Dallas Parkway, Suite 300, Dallas,
Texas 75240, and their telephone number at such address is the same as the
Partnership (972) 770-5600. The limited partner of the Partnership is Retirement
Living Fiduciary Corporation, an Indiana corporation ("RLFC").

Prior to March 23, 1990, the Project Owners were affiliates of RLC and RLFC.
However, on March 23, 1990, the general partners of RLC sold all of the general
partnership interests in RLC and all of the outstanding shares of RLFC to Senior
Housing, which is not an affiliate of the Project Owners, and the limited
partners of RLC sold all of the limited partnership interests in RLC to Capital
Realty Group Properties, Inc. ("CRGP"), a Texas corporation and an affiliate of
Senior Housing and Retirement Group. Effective January 1, 1991, CRGP transferred
its limited partnership interest in RLC to two individuals affiliated with
Senior Housing and Retirement Group. See "Item 9. Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act." Accordingly, Retirement Group has sole management authority and control
over the affairs of RLC. On September 12, 1990, RLC completed a tender offer
solicitation of BUC holders in order to acquire BUCs, resulting in the
acquisition of 561,336 BUCs by RLC, representing approximately 44% of the total
BUCs outstanding. As of December 31, 1997, RLC owns 580,161 BUCs, representing
51.9% of the total BUCs outstanding. See "Item 11. Security Ownership of Certain
Beneficial Owners and Management" for further disclosure of affiliated
ownership.

Status for Federal Income Taxes
- -------------------------------

The Partnership's operations are fully taxable for federal income tax purposes
and the individual BUC holders are required to report their respective shares of
any taxable income of the Partnership. Moreover, as a result of federal tax law
changes in 1986, BUC holders are not able to use losses from any other source
other than "passive activity" losses, to offset their share of the Partnership
taxable income.

<PAGE>

in excess of current and accumulated earnings and profits would be treated as
the non-taxable return of capital to the extent of each BUC holder's basis in
the BUCs. RLC does not believe the Partnership will be taxed as "publicly
traded" for fiscal 1997 based on its interpretation of Section 7704 and no
provision for income taxes has been reflected in the accompanying statements of
income.

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.

Employees
- ---------

The Partnership has no employees. Certain services were provided to the
Partnership by employees or affiliates of RLC and Retirement Group during 1997,
and the Partnership reimburses the affiliates for such services at cost. The
Partnership is not charged and does not pay for salaries or fringe benefits of
any principals of Retirement Group.

Government Regulations and Reimbursement
- ----------------------------------------

Two of the Partnership's properties, Towne Centre and Canton Regency,
participate in the Medicaid and Medicare programs. Medicaid is a medical
assistance program for the indigent, operated by individual states with the
financial participation of the federal government. Medicare is a health
insurance program for the aged and certain other chronically disabled
individuals, operated by the federal government. The Towne Centre project is a
provider of services under the Indiana Medicaid program. Accordingly, Towne
Centre is entitled to reimbursement under the foregoing program at established
rates which are lower than private pay rates. Payments from the Medicaid program
are adjusted prospectively, based on the filing of an annual cost report. The
Towne Centre and Canton Regency projects are also providers of services under
the Medicare program. These Projects are entitled to reimbursement under the
foregoing program 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 adjustment in future periods. Under Federal
regulations, Medicare reimbursements to these projects are limited to routine
cost limits determined on a geographical region. The Partnership has filed
exception reports to request reimbursement in excess of its routine cost limits
for the years of 1992 through 1996. There can be no assurance that an exception
to the properties routine cost limit will be granted. These Projects receive
payments from this program based on established rates and are adjusted for
differences between such rates and estimated amounts reimbursable from the
program. During fiscal 1997, the Medicaid and Medicare programs accounted for
approximately 28% of the Partnership's revenues.

Acquisition and Divestiture
- ---------------------------

On July 8, 1997, the Partnership entered into an asset purchase agreement with
an affiliate of RLC, Capital Senior Living Properties, Inc. ("CSLP"), a
wholly-owned subsidiary of Capital Senior Living Corporation, pursuant to which
the Partnership agreed to sell substantially all of its assets, other than
working capital, to CSLP conditioned upon, among other things, the funding of
the parent company of CSLP's initial public offering. In conjunction with the
asset purchase agreement, on June 30, 1997, th Partnership entered into a
$77,000,000 mortgage loan agreement with Lehman Brothers and pledged the
Cottonwood, Harrison, Towne Centre, and Canton Regency retirement communities
and its investment in HCP and NHP as collateral. The loan agreement would have

<PAGE>

matured December 31, 1997. On July 1, 1997, approximately $70,000,000 became
outstanding under this loan agreement; $5,500,000 was used to repay an
outstanding mortgage loan commitment 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. Interest costs are
based on 30-day LIBOR plus 50 basis points. On November 3, 1997, the Partnership
sold its four retirement projects, its interest in Encore Limited Partnership,
its interest in HCP and its interest in the NHP Pension Notes and limited
partnership interests of NHP to CSLP for $76,617,993. The Partnership obtained
independent valuations of properties from third party valuation firms, which
were utilized in determining the sales price. Sales proceeds were paid by the
assumption of the Lehman Brothers loan of $70,833,798 and by delivery of a short
term note of $5,784,195. The short term note was subsequently paid in full on
November 6, 1997. After payment of closing costs and broker fees, net cash
proceeds to the Partnership were $336,736. The sale resulted in a gain of
$36,795,949 to the Partnership. Effective November 6, 1997, the restrictions on
the U.S. Treasury bills were released and such U.S. Treasury bills in the
principal amount of $64,202,685 became an unrestricted asset of the Partnership.
In conjunction with the sale of the Partnership's investment in HCP, and in
compliance with Section 16b of the Securities and Exchange Act of 1934, the
Partnership paid to HCP $440,007 in short swing profits made on purchases of HCP
within a six month period prior to the sale.

During 1997 and 1996 the Partnership made various purchases of limited
partnership interests in HCP. During 1997 and 1996, the Partnership paid
$5,604,945 and $3,200,685, respectively, for partnership interests in HCP. Prior
to the sale on November 3, 1997, the Partnership had cumulatively paid
$9,114,455 for a 56% ownership in HCP. HCP owns a portfolio of 8 nursing home or
rehabilitation facilities.

In the second quarter of 1996, 9.36% in limited partnership interests in HCP was
purchased from Senior Housing, an affiliate of RLC, who had acquired the
interests in 1993. The Partnership paid $1,269,077 to such affiliate, who
recognized a $878,592 gain on the transaction. Because of this purchase, the
Partnership changed its method of accounting for its investment in HealthCare
Properties, L.P. from the cost method to the equity method of accounting. During
1997, the Partnership continued purchasing limited partnership interests in HCP
from individual limited partners in HCP in privately negotiated transactions. In
June 1997, the Partnership exceeded 50% ownership of HCP and changed its method
of accounting from the equity method to a consolidated basis, effective January
1, 1997. Prior to the sale of HCP interests on November 3, 1997, operations of
HCP were consolidated with the Partnership from January 1, 1997 to October 31,
1997.

During 1997, and 1996 the Partnership made various purchases of outstanding
Pension Notes of NHP. During 1997 and 1996, the Partnership paid $10,004,090 and
$199,158, respectively, for purchases of Pension Notes. Prior to the sale on
November 3, 1997, the Partnership had cumulatively paid $10,790,828 for a 30.8%
ownership of outstanding Pension Notes of NHP. NHP owns a portfolio of 5
independent living retirement facilities. 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.
During 1996, the Partnership paid $1,364 for a 3.1% ownership of limited
partnership interests in NHP.

The general partner and managing agent of HCP and NHP is an affiliate of RLC.
Capital Senior Living Corporation, HCP, and NHP are also subject to the
reporting requirements of the Securities and Exchange Commission.

<PAGE>

On November 1, 1996, the Partnership sold its two multifamily apartment
projects, Silver Lakes and Lakeridge Apartments, to a non-related third party
for a combined sales price of $4,793,000. The transaction resulted in the
recognition of a $437,819 gain and net cash proceeds of $2,549,352, after
closing costs and payment of the mortgage.

The Partnership's Properties
- ----------------------------

The following table sets forth summary information concerning the four
income-producing real properties owned by the Partnership prior to the sale of
the properties:

Occupancy
Project Name/Location No. of Units 10/31/97 12/31/96
--------------------- ------------ -------- --------
<S> <C> <C> <C>

Cottonwood Retirement Community
Cottonwood, Arizona 65- residential 97% 95%

The Harrison Retirement Community
Indianapolis, Indiana 124- residential 95% 83%

Towne Centre Retirement Community 148- residential
Merrillville, Indiana 34- assisted living
64- nursing 95% 92%

Canton Regency Retirement Community 147- residential
Canton, Ohio 34- assisted living
50 - nursing 93% 94%

</TABLE>

The Partnership had a $17,500,000 open end mortgage loan commitment for future
acquisition and development of properties from a non-affiliated mortgage
company, and pledged the Cottonwood Retirement Community, The Harrison
Retirement Community, Towne Centre Retirement Community and Canton Regency
Retirement Community as collateral. The Partnership borrowed $5,500,000 under
this loan commitment in the second quarter of 1997, which was repaid July 1,
1997 with proceeds from the Lehman Brothers loan.

Cottonwood Retirement Community - Cottonwood, Arizona
- -----------------------------------------------------

The Cottonwood Retirement Community is located on a two-acre site in Cottonwood
about 100 miles north of Phoenix and 65 miles south of Flagstaff. The community
consists of a three-story building with 65 residential units. The services
provided under a special assistance program to residents needing assistance
include: medication reminders, dietary monitoring, and activities of daily
living (e.g., bathing, dressing, grooming). No nursing care is available on
site, although a nonaffiliated nursing home is nearby.

<PAGE>

On December 10, 1996, the Partnership entered into contract with Capital Senior
Development, Inc., an affiliate of RLC, to construct a 97 unit expansion of The
Cottonwood facility, consisting of 49 units for independent living and 48 units
for assisted living. The budgeted cost for the expansion is approximately
$6,756,000 and includes funding for kitchen and dining room renovation. As of
October 31, 1997, prior to its sale, expenditures for construction in process
were $990,752.

The Harrison Retirement Community - Indianapolis, Indiana
- ---------------------------------------------------------

The Harrison Retirement Community ("Harrison") is a 124-unit residential
community located on the west side of Indianapolis in the Eagle Valley area. The
Harrison consists of a two-story atrium building located on a four and one-half
acre site. The Harrison has a special assistance program but no nursing care
units, although a nonaffiliated 120-bed nursing home is located on adjacent
property. The services provided to residents needing assistance include:
medication reminders, dietary monitoring, and activities of daily living.

Towne Centre Retirement Community - Merrillville, Indiana
- ---------------------------------------------------------

The Towne Centre Retirement Community is located in Merrillville adjacent to a
nonaffiliated 182-unit adult rental community. It consists of a mid-rise atrium
building with 148 residential units, 34 assisted living units and 64 nursing
care beds. The assisted living and nursing care facilities are located in a
separate, adjoining wing. The nursing facility has eleven (11) beds certified
for Medicare reimbursement. Towne Centre is located on a 15-acre site,
approximately 50 miles southeast of Chicago, Illinois, and south of Gary,
Indiana.

Canton Regency Retirement Community - Canton, Ohio
- --------------------------------------------------

The Canton Regency Retirement Community consists of an atrium building located
on a 10-acre site in the northwest suburbs of Canton. The building contains 147
residential units, 34 assisted living units and 50 nursing care beds. Canton's
assisted living and nursing care facilities are located in a separate adjoining
wing. Canton's nursing facility has twelve (12) beds certified for Medicare
reimbursement.

Item 2. DESCRIPTION OF PROPERTY
-----------------------

At December 31, 1997, the Partnership does not own or lease any significant
physical properties. The Partnership operates out of, and uses the premises of,
Retirement Group at no direct cost to the Partnership.

Item 3. LEGAL PROCEEDINGS
-----------------

There are no material pending legal proceedings to which the Partnership is a
party.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------

On or about September 19, 1997, an Information Statement was submitted to the
holders of Beneficial Unit Certificates ("BUCs"). The Information Statement
provided information to BUC Holders concerning the intention of the general
partner of the Partnership and its affiliates, who own approximately 66.46% of

<PAGE>

the outstanding BUCs, to approve an amendment to the partnership agreement which
would allow sale of all or substantially all of the assets of the Partnership
without effecting the dissolution of the Partnership and to approve the sale of
the assets of the Partnership as described herein under Acquisition and
Divestiture. The general partner and its affiliates subsequently approved the
amendment and the sale.

PART II

Item 5. MARKET FOR REGISTRANT'S PARTNERSHIP INTERESTS AND RELATED PARTNERSHIP
MATTERS
-------

Until July 18, 1989, the BUCs were quoted on the NASDAQ System under the symbol
RLIVZ. The BUCs are not presently listed or traded on any exchange or quoted on
the NASDAQ System. Bid and asked prices were reported in the "pink sheets"
during the second and third quarters of 1989. However, no bid or asked prices
have been reported since the third quarter of 1989. There is presently no
established trading market for the BUCs.

The number of BUC holders of record as of December 31, 1997 was 640.

The Partnership has not declared or paid any cash distributions or dividends
during the last two fiscal years. Due to the sale of the Partnership's assets on
November 3, 1997, it is the general partner's intention to substantially
distribute the Partnership's cash holding, leaving a small working capital
reserve available for obligations that may result from future contingencies.

On March 12, 1998, a distribution of $61,000,000 was made available, of which
$40,540,478 was disbursed to the current BUC Holders, and a $1,802,800
distribution was disbursed to the general partner. Approximately $4,400,000 has
been retained as a working capital reserve.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------

This discussion should be read in conjunction with the consolidated financial
statements of the Partnership included in this Report.

Prior to the sale of Partnership assets on November 3, 1997, the Partnership's
assets included four retirement projects (Harrison, Cottonwood Village, Canton
Regency, and Towne Centre), a 3% limited partnership interest in Encore Limited
Partnership, (diluted from 12% on December 15, 1995), a 56% ownership of limited
partnership interests in HCP, a 30.8% ownership of outstanding Pension Notes of
NHP, and a 3.1% ownership of limited partnership interests in NHP. See "Item 1.
Description of Business Acquisition and Divestiture".

Results of Operations
- ---------------------

1997 Compared with 1996
- -----------------------

Rental and other income for fiscal 1997 and 1996 was $21,123,078 and
$15,475,622, respectively, representing an increase of $5,647,456, or 36.5%. The
inclusion of HCP revenues for the 10 months ending October 31, 1997, contributed
$7,654,484 of the increase, as HCP was not consolidated in 1996. This was

<PAGE>

further offset by a decrease of $2,007,028 in Partnership revenues since the
properties were operated for 10 months in 1997 as compared to one year in 1996.
Multi-family income decreased $1,101,317 from 1996 to 1997 due to the sale of
the Silver Lakes and Lakeridge Apartments on November 1, 1996. Independent and
assisted living income decreased $949,908 and $167,881 from 1996 to 1997,
respectively, due to the short period of Partnership operations in 1997. Nursing
income increased $4,062,851 from 1996 to 1997, of which $3,705,491 was
contributed by HCP operations and $357,360 in Partnership operations. The
Partnership increase of $357,360 from 1996 to 1997 was primarily due to $859,982
in Medicare and Medicaid credits from prior year adjustments. Facility lease
income increased $3,580,780 from 1996 to 1997, and was due to the consolidation
of HCP operations. Other income increased $222,931 from 1996 to 1997, of which
$368,213 was contributed by HCP operations and was offset by a decrease of
$145,282 in Partnership operations, due to its short period of operations in
1997. Operating expenses are maintained by property and by natural expense
classification, but are not allocated by revenue type. Operating and general and
administrative salaries, wages and benefits of $7,716,090 were expensed by the
Partnership for fiscal 1997. Salaries, wages and benefits increased $1,898,801
from 1996 to 1997 of which $2,820,202 was contributed by HCP operations and was
offset by a decrease of $921,400 in Partnership operations, due to its short
period of operations in 1997. Approximately $6,931,637 of such amount was paid
to Capital Senior Living, Inc. ("CSL"), an affiliate of RLC and HCP, as
reimbursement fo their direct out-of-pocket costs under the property management
agreements for salaries, wages and benefits of on-site employees employed at the
properties, and $358,194 as reimbursement to CSL for an allocable portion of its
home office employees' salaries and wages for time expended on matters
attributable to the properties. Corresponding payments of salaries and wages for
fiscal 1996 was $5,817,289. Approximately $5,254,495 of such amount was paid to
CSL for on-site employee payroll reimbursement and $273,936 as reimbursement to
CSL for home office employee payroll. Operating and other administrative
expenses (other than salaries, wages and benefits) for fiscal 1997 and 1996 was
$9,738,522 and $7,850,498, respectively, representing an increase of $1,888,024,
or 24.1%. The inclusion of HCP expenses contributed $3,543,329 of the increase,
which was further offset by a decrease of $1,655,305 in Partnership operations,
due to its shorter period of operations in 1997. Interest income increased
$2,519,23 from 1996 to 1997, of which $288,282 was contributed by HCP and
$2,230,954 from operations of the Partnership. Interest expense increased
$1,669,375, of which $568,520 was contributed by HCP and $1,100,855 from
operations of the Partnership. The $36,795,949 gain on sale of properties in
1997 resulted from the sale of Partnership assets on November 3, 1997. The
$437,819 gain on sale of properties in 1996 resulted from the sale of the Silver
Lakes and Lakeridge Apartments. Minority interest expense of $572,994 resulted
from consolidation of HCP in 1997, and $603,147 of income resulted from
accounting for HCP under the equity method in 1996. Other income increased
$21,060 from 1996 to 1997 and was due to an increase in a Partnership casualty
gain.

Liquidity and Capital Resources
- -------------------------------

As of December 31, 1997, the Partnership had cash and cash equivalents of
$66,818,286. It is the intention of the general partner to wind down the
business affairs of the Partnership and to substantially distribute its cash
holdings, leaving a small working capital reserve available for obligations that
may result from future contingencies. On March 12, 1998, a distribution of
$61,000,000 was made available, of which $40,540,478 was disbursed to the BUC
Holders and a $1,802,800 distribution was disbursed to the general partner.
Approximately $4,400,000 has been retained as a working capital reserve.

<PAGE>

Cash and cash equivalents increased in the amount of $56,354,399 from the end of
fiscal year 1996 to the end of fiscal year 1997. Cash sources consisted of
$4,874,406 from operating activities, $76,833,798 from proceeds on notes and
$336,736 from the proceeds on sale of properties. Cash uses during fiscal year
1997 were primarily for additions to property and equipment of $1,358,203,
investments in limited partnerships of $15,609,035, repurchase of beneficial
unit certificates of $960,751, payment of loan charges of $99,834, payments on
notes payable of $6,439,404, a net decrease of $998,519 from cash due to
consolidation of HCP, and distributions of $224,795.

As a result of the Negotiated Settlement (see "Item 1. Description of
Business-General"), the Partnership no longer owns Tax-Exempt bonds. Instead,
the Partnership held and operated the properties. This has adversely impacted
the Tax-Exempt nature of the Partnership's operations in that it causes the
operations of the Partnership to be fully taxable for federal income tax
purposes and requires the individual BUC Holders to report their respective
shares of any taxable income of the Partnership, without any cash being
distributed by the Partnership to pay any tax due by a BUC Holder on such BUC
Holder's share of Partnership taxable income. For 1997, the Partnership's
taxable income was $39,049,204, which is approximately $35 for each outstanding
BUC. Moreover, as a result of federal tax law changes in 1986, BUC Holders will
not be able to use losses from any other source, other than "passive activity"
losses, to offset their share of the Partnership's taxable income. However, the
approximate $6,000,000 of mortgage loan indebtedness forgiven by the Partnership
in connection with the Negotiated Settlement resulted in a taxable loss to the
Partnership for federal income tax purposes which was reported by BUC Holders on
September 11, 1991, in proportion to the number of BUCs owned and to the extent
of each BUC holder's basis in the BUCs. BUC Holders acquiring BUCs after
September 11, 1991, are not entitled to report any portion of such loss.

In the event the Partnership is taxed as a corporation because it is "publicly
traded" under Section 7704 of the Internal Revenue Code of 1986, then the
Partnership 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 accumulated earnings and profits, while distributions
in excess of current and accumulated earnings and profits would be treated as
the non-taxable return of capital to the extent of each BUC Holder's basis in
the BUCs. RLC does not believe the Partnership will be taxed as "publicly
traded" for fiscal 1997 based on its interpretation of Section 7704 and no
provision for income taxes has been reflected in the accompanying consolidated
statements of income. 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.

To the extent the Partnership is taxed as a corporation because it is "publicly
traded" under Section 7704, payments of federal income tax by the Partnership
will reduce the liquidity and net cash flow of the Partnership. On the other
hand, in such event, the BUC Holders would not be required to report any income
of the Partnership in their personal federal income tax returns absent any cash
distributions to them.

Year 2000 Issue
- ---------------

The Partnership has developed a plan to modify its information technology to be
ready for the year 2000. The Partnership relies upon PC-based systems and does
not expect to incur material costs to transition to Year 2000 compliant systems

<PAGE>

in its internal operations. The Partnership does not expect this project to have
a significant effect on operations. The Partnership will continue to implement
systems and all new investments are expected to be with Year 2000 compliant
software.

Item 7.FINANCIAL STATEMENTS
--------------------

The financial statements of the Partnership are listed in Item 13 of this report
and are contained at pages 16 through 31 of this Report.

Item 8.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
----------

None.

PART III

Item 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
--------------------------------------

The Partnership has no directors or officers. RLC is the sole general partner of
the Partnership, and accordingly, manages and controls the affairs of the
Partnership. Retirement Group is the sole general partner of RLC.

Retirement Group is a privately owned corporation initially organized on August
23, 1995. Its principal business activity has been the ownership and management
of real property for its own account and for the account of various limited
partnerships of which it is the general partner. Retirement Group is a wholly
owned subsidiary of Capital Realty Group Corporation, a Texas corporation
("Capital"), with its corporate headquarters in Dallas, Texas. Capital is owned
50% by James A. Stroud (through a trust) and 50% by Jeffrey L. Beck.

The Partnership properties until February 1, 1995, were managed by Senior
Housing. On February 1, 1995, Senior Housing assigned its contract rights to
manage the Partnership properties to Capital Senior Living, Inc. ("CSL"), a
subsidiary of Capital Senior Living Corporation ("CSLC").

The following are the directors and executive officers of Retirement Group and
CSLC.

Name Position
------------------------------------------------------------------------
James A. Stroud Chief Operating Officer, Secretary and Director
Jeffrey L. Beck Chief Executive Officer and Director
Keith N. Johannessen President
David Beathard Vice President
Rob L. Goodpaster Vice President, National Director of Marketing
David Brickman Vice President
Robert F. Hollister Property Controller

James A. Stroud, age 47. Mr. Stroud has served as a director and Chief
Operating Officer of CSL, CSLC and its predecessors since January 1986. He is
also Co-Chairman of CSLC. Mr. Stroud also serves on the boards of various

<PAGE>

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.

Jeffrey L. Beck, age 53. Mr. Beck has served as a director and Chief
Executive Officer of CSL, CSLC and its predecessors since January 1986. He is
also Co-Chairman of CSLC. 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.

Keith N. Johannessen, age 41. Mr. Johannessen has served as President of
CSL, CSLC 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.

David W. Beathard, age 50. Mr. Beathard has served as Vice President -
Operations of CSL, CSLC 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.

Rob L. Goodpaster, age 45. Mr. Goodpaster has served as Vice President -
National Marketing of CSL, CSLC 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 Brickman, age 39. Mr. Brickman has served as Vice President and
General Counsel of CSL, CSLC 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.

Robert F. Hollister, age 42. Mr. Hollister, a Certified Public Accountant,
has served as Property Controller for CSL, CSLC and its predecessors since April

<PAGE>

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.

The executive officers of CSL and Retirement Group are required to spend only
such time on the Partnership's affairs as is deemed necessary in the sole
judgment of CSL and Retirement Group. A significant amount of these officers'
time is expected to be spent on matters unrelated to the Partnership.

Based solely upon a review of Forms 3, 4 and 5 furnished to the Partnership
pursuant to Rule 16a-3(e) promulgated under the Securities Exchange Act of 1934
(the "Exchange Act"), or upon written representations received by the
Partnership, the Partnership is not aware of any failure by any officer or
director of Retirement Group or beneficial owner of more than 10% of the BUCs to
timely file with the Securities and Exchange Commission any Form 3, 4 or 5
relating to 1997 except the following persons failed to file in a timely basis
the following reports: (1) James A. Stroud filed five late reports on Form 4,
reporting indirect ownership of Capital Trust's 15,028 BUCs, and (2) Jeffrey L.
Beck filed five late reports on Form 4, reporting indirect ownership of his
wife's 15,028 BUCs, for which he disclaims beneficial ownership.

Item 10. EXECUTIVE COMPENSATION
----------------------

RLC does not receive a fee for serving as general partner of the Partnership.
None of the executive officers or directors of Retirement Group receive a fee
from the Partnership for serving in such capacity. As discussed under "Item 12.
Certain Relationships and Related Transactions", Retirement Group and its
affiliates receive fees and expense reimbursements from the Partnership for
other services rendered.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------

As of December 31, 1997, RLC owned 580,161 BUCs (approximately 51.9% of the
total outstanding), Jeffrey L. Beck owned 10,482 BUCs individually, Janet Sue
Beck owned 70,846 BUCs individually, Capital Trust, a trust for which James A.
Stroud is the beneficiary, owned 16,943 BUCs, James A. Stroud owned 39,404 BUCs
individually and Stroud Children's Trust II owned 24,980 BUCs. Jeffrey L. Beck
and James A. Stroud may each be deemed to beneficially own the BUCs owned by
RLC. Jeffrey L. Beck disclaims beneficial ownership of the BUCs owned by Janet
Sue Beck, and Janet Sue Beck disclaims beneficial ownership of the BUCs owned by
Jeffrey L. Beck. No other person is known by the Partnership to own more than 5%
of the BUCs.

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------

Prior to February 1, 1995, Senior Housing managed the Projects. Effective
February 1, 1995, CSL manages the retirement living Projects pursuant to
separate asset management agreements between the Partnership and CSL, which can
be terminated with 45 days notice. The management agreements provide for
reimbursement of all expenses of managing the properties, 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

<PAGE>

Project. For the periods ended December 31, 1997 and 1996, the Partnership paid
CSL $851,577 and $987,104, respectively, in property management fees for
managing the Projects and paid $297,925 in 1997 and $332,438 in 1996, for
reimbursable expenses under the management agreements. In accordance with the
partnership agreement, RLC does not receive any fees from the Partnership but it
and affiliates may be reimbursed by the Partnership for any actual costs and
expenses incurred in connection with the operations of the Partnership.

All property employees are paid by an affiliate of RLC. Reimbursed gross payroll
and health insurance premiums, which were expensed by the Partnership in 1997
and 1997, were $4,429,839 and $5,254,495, respectively.

For the ten months ended October 31, 1997, certain salary and benefit
reimbursements, administrative expenses and fees related to the operations of
HCP are paid to affiliates of RLC. These amounts are as follows:

Salary and benefits $ 2,501,798
Asset management fees 450,821
Property management fees 280,047
Administrative and other expenses 136,471
General partner management fees 75,815
----------------

$ 3,444,952
================

In connection with the extension of the Silver Lakes mortgage, an affiliate of
RLC received $40,453 in 1996 as a financing fee.

In May 1995, the Partnership contracted with Quality Home Care, Inc., an
affiliate of RLC, to provide nursing services to the assisted living residents
at the Harrison facility. The contract was executed to comply with certain state
regulations. As part of the contract, the Partnership has transferred its share
of assisted living revenues and expenses for the Harrison to Quality Home Care,
Inc. resulting in an approximate decrease of $22,000 in net annualized profits.

In April 1996, an affiliate of RLC recognized a $878,592 gain on the
Partnership's purchase of HealthCare Properties, L.P. limited partnership
interests.

In the second quarter of 1997, the Partnership received a loan from two
affiliates of the general partner totaling $500,000. The loan was repaid in the
second quarter of 1997 and paid interest at 10%, totaling $2,740.

Upon sale of the Silver Lakes and Lakeridge Apartments in November, 1996, an
affiliate of RLC received a $79,883 brokerage fee. Upon sale of the Partnership
assets on November 3, 1997, an affiliate of RLC received a $4,597,080 broker
fee.

Jeffrey L. Beck is an approximate 50% partner in RLC and is chairman of the
board of a bank where the Partnership holds the majority of its operating cash
accounts.

On December 10, 1996, The Partnership entered into contract with Capital Senior
Development, Inc., an affiliate of RLC, to construct a 97 unit expansion of The
Cottonwood facility, consisting of 49 units for independent living and 48 units
for assisted living. The budgeted cost for the expansion is approximately
$6,756,000 and includes funding for kitchen and dining room renovation. As of
October 31, 1997, prior to its sale, expenditures for construction in process
were $990,752.

<PAGE>

The general partner and managing agent of HCP and NHP is an affiliate of RLC.

Item 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------

Financial Statements.
- ---------------------

The following financial statements of the Partnership are filed as part of this
report on pages 15 through 30 hereof:

Report of Ernst & Young LLP, Independent Auditors

Report of KPMG Peat Marwick LLP, Independent Auditors

Consolidated Balance Sheets as of December 31, 1997 and 1996

Consolidated Statements of Income for the years ended December 31,
1997 and 1996

Consolidated Statements of Partners' Capital for the years ended
December 31, 1997 and 1996

Consolidated Statements of Cash Flows for the years ended December
31, 1997 and 1996

Notes to Consolidated Financial Statements

Exhibits
- --------

The list of exhibits is incorporated herein by reference to the exhibit index on
pages 32 through 38 of this report.

Reports on Form 8-K
- -------------------

No reports on Form 8-K were filed during the last quarter of fiscal 1997.

<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Partners and Beneficial Unit Certificate Holders of
Capital Senior Living Communities, L.P.

We have audited the accompanying consolidated balance sheets of Capital Senior
Living Communities, L.P. and subsidiary as of December 31, 1997 and 1996 and the
related consolidated statements of income, partners' capital, and cash flows for
each of the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the consolidated financial statements of HealthCare
Properties, L.P. and subsidiaries, a 56% owned subsidiary through November 3,
1997, which statements reflect total revenues of $8,977,628 for the year ended
December 31, 1997. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to data
included for HealthCare Properties, L.P., is based solely on the report of other
auditors.

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

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Capital Senior Living
Communities, L.P. and subsidiary at December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

Ernst & Young LLP
Dallas, Texas
February 6, 1998
except for Note 7, as to which the date is
March 12, 1998

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Partners
HealthCare Properties, L.P.

We have audited the accompanying consolidated balance sheet of HealthCare
Properties, L.P. and subsidiaries (a Delaware limited partnership) as of
December 31, 1997, and the related consolidated statements of income,
partnership equity, and cash flows for the year ended December 31, 1997. These
consolidated financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HealthCare
Properties, L.P. and subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Dallas, Texas
February 4, 1998

<PAGE>

CAPITAL SENIOR LIVING COMMUNITIES, L.P.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1997 and 1996
--------------------------

ASSETS 1997 1996
- ------ ---- ----

PROPERTY AND EQUIPMENT, net (Notes 1 and 3) $ 0 $ 12,576,523

OTHER ASSETS:
Cash and cash equivalents (Note 10) 66,818,286 10,463,887
Cash, restricted (Note 6) 19,960 206,376
Accounts receivable, net of allowance for doubtful accounts of
$145,602 in 1997 and $164,822 in 1996 (Note 3) 599,824 373,163
Prepaid expenses and other 4,889 92,302
Deferred financing charges, less accumulated amortization of
$0 in 1997 and $311,938 in 1996 (Note 5) 0 201,440
Investments in limited partnerships (Notes 1 and 10) 0 8,275,920
------------- -------------

Total assets $ 67,4$2,959 $ 32,189,611
============= =============

LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------

LIABILITIES:
Accrued expenses and other liabilities (Notes 3 and 9) $ 147,$30 $ 1,303,833
Note payable (Notes 1 and 5) 0 0
Customer deposits 0 248,458
------------- -------------
Total liabilities 147,830 1,552,291
------------- -------------

Deferred income (Note 10) 0 3,400,684

Commitments and contingencies (Notes 6 and 8)

PARTNERS' CAPITAL (Notes 7 and 11):
General partner 482,718 72,526
Limited partner 1 1
Beneficial unit certificates, 1,264,000 issued and 1,117,692 and
1,172,146 outstanding in 1997 and 1996 respectively 69,035,516 28,426,464
Repurchased beneficial unit certificates (2,223,106) (1,262,355)
------------- -------------

Total partners' capital 67,295,129 27,236,636
------------- -------------

Total liabilities and partners' capital $ 67,4$2,959 $ 32,189,611
============= =============

The accompanying notes are an integral part of these consolidated
statements.
</TABLE>

CAPITAL SENIOR LIVING COMMUNITIES, L.P.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------
<S> <C> <C>

1997 1996
---- ----
RENTAL AND OTHER INCOME:
Independent $ 6,333,723 $ 7,283,631
Assisted living 1,435,193 1,603,074
Nursing 8,626,751 4,563,900
Facility lease income 3,580,780 0
Multi-family 0 1,101,317
Other 1,146,631 923,700
--------------- ---------------

Total Rental and Other Income 21,123,078 15,475,622
--------------- ---------------

EXPENSES (Note 9)
Operating Expenses:
Salaries, wages, and benefits 7,357,896 5,543,353
Property taxes 539,763 565,415
Management fees 1,604,227 987,104
Utilities 744,827 940,070
Cost of meals provided 1,086,842 1,037,404
Ancillary services 1,138,348 792,713
Repairs and maintenance 268,349 246,859
Service contracts 110,475 152,532
Insurance 177,174 213,137
Bad debt expense 48,254 22,312
Other 973,796 879,896
Amortization of deferred charges 377,263 170,178
Depreciation 1,446,683 1,385,127
--------------- ---------------

Total Operating Expenses 15,873,897 12,936,100
--------------- ---------------
General and Administrative Expenses:
Salaries, wages and benefits 358,194 273,936
Professional fees 584,428 168,528
Office supplies, communications, and reproduction 381,016 116,132
Other 257,077 173,091
--------------- ---------------

Total General and Administrative Expenses 1,580,715 731,687
--------------- ---------------

Total Expenses 17,454,612 13,667,787
--------------- ---------------

Income from Operations 3,668,466 1,807,835

Other Income (Expenses):
Interest income 2,944,933 425,697
Interest expense (1,854,689) (185,314)
Gain on sale of properties (Note 1) 36,795,949 437,819
Equity earnings on investments (Note 10) 0 458,992
Amortization of deferred income (Note 10) 0 118,632
Income on investments 0 25,523
Minority interest (572,994) 0
Other 37,579 16,519
--------------- ---------------

Total Other Income (Expense) 37,350,778 1,297,868
--------------- ---------------

NET INCOME $ 41,019,244 $ 3,105,703
=============== ===============

NET INCOME ALLOCATION:
General partner $ 410,192 $ 31,057
Beneficial unit certificate holders 40,609,052 3,074,646
--------------- ---------------

Total $ 41,019,244 $ 3,105,703
=============== ===============

NET INCOME PER BENEFICIAL UNIT CERTIFICATE $ 36.26 $ 2.53
=============== ===============

BENEFICIAL UNIT CERTIFICATES OUTSTANDING 1,117,692 1,172,146
============== ===============

The accompanying notes are an integral part of these consolidated statements.

</TABLE>

CAPITAL SENIOR LIVING COMMUNITIES, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------

Repurchased
Beneficial Beneficial
Unit Unit Certificates Limited General
Certificates (Note 11) Partner Partner Total
--------------------- --------------------- --------------- ----------------- --------------

BALANCE, December 31, 1995 $ 25,351,818 $ 0 $ 1 $ 41,469 $ 25,393,288

Net income 3,074,646 - - 31,057 3,105,703

Repurchased 91,854
Beneficial Unit Certificates - (1,262,355) - - (1,262,355)
------------- ------------- ---------- ------------- ------------

BALANCE, December 31, 1996 28,426,464 (1,262,355) 1 72,526 27,236,636

Net income 40,609,052 - - 410,192 41,019,244

Repurchased 54,454
Beneficial Unit Certificates - (960,751) - - 960,751)
------------- --------------- ---------- ------------- ------------

BALANCE, December 31, 1997 $ 69,035,516 $ (2,223,106) $ 1 $ 482,718 $ 67,295,129
============= =============== ========== ============= ============

The accompanying notes are an integral part of these consolidated statements.

</TABLE>

CAPITAL SENIOR LIVING COMMUNITIES, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------

1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 41,019,244 $ 3,105,703
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 1,446,683 1,385,127
Amortization of deferred financing charges 377,263 170,178
Provision for bad debts 48,254 22,312
Gain on sale of properties (36,795,949) (437,819)
Amortization of deferred income 0 (118,632)
Equity earnings on investment 0 (458,992)
Minority interest 572,994 0
Changes in operating assets and liabilities:
Cash, restricted 186,416 (2,588)
Accounts receivable (292,879) 14,011
Prepaid expenses and other 95,158 36,426
Accrued expenses and other liabilities (1,731,570) 37,022
Customer deposits (51,208) 32,295
-------------- -------------

NET CASH PROVIDED BY OPERATING ACTIVITIES
4,874,406 3,785,043
-------------- -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in limited partnerships (15,609,035) (3,401,207)
Proceeds from sale of properties 336,736 2,549,352
Additions to property and equipment (1,358,203) (762,004)
Cash acquired upon consolidation of HCP 8,995,455 0
Cash disposed upon sale of HCP (9,993,974) 0
-------------- -------------

NET CASH USED IN INVESTING ACTIVITIES (17,629,021) (1,613,859)
-------------- --------------

CASH FLOWS FROM FINANCING ACTIVITIES
Deferred loan charges paid (99,834) (42,953)
Proceeds from notes payable 76,833,798 0
Payments on notes payable (6,439,404) (145,319)
Repurchase of beneficial unit certificates (960,751) (1,262,355)
Distributions (224,795) 0
-------------- -------------

NET CASH PROVIDED (USED) IN
FINANCING ACTIVITIES 69,109,014 (1,405,627)
-------------- --------------

NET INCREASE IN CASH AND CASH EQUIVALENTS 56,354,399 720,557

CASH AND CASH EQUIVALENTS, Beginning of Year 10,463,887 9,743,330
-------------- -------------

CASH AND CASH EQUIVALENTS, End of Year $ 66,818,286 $ 10,463,887
============== =============

SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 1,854,689 $ 185,314
============== =============

The accompanying notes are an integral part of these consolidated statements.

</TABLE>

<PAGE>

CAPITAL SENIOR LIVING COMMUNITIES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND 1996
--------------------------

1. ORGANIZATION AND SALE OF PARTNERSHIP ASSETS:
--------------------------------------------

Capital Senior Living Communities, L.P. (formerly known as Retirement Living
Tax-Exempt Mortgage Fund Limited Partnership) (the "Partnership") was formed on
December 17, 1985, under the Delaware Revised Uniform Limited Partnership Act.
The Partnership was formed to acquire a portfolio of federally Tax-Exempt
nonrecourse participating first mortgage loans secured by income-producing real
estate consisting of four retirement living centers and one multifamily
residential apartment project (the "Projects"). The mortgage loans were acquired
on April 11, 1986. The Partnership will continue until December 31, 2016, unless
terminated earlier under certain provisions of the partnership agreement.

On April 10, 1986, the Partnership issued 1,264,000 Beneficial Unit Certificates
("BUCs") at $25 per BUC. The issuance generated funds of $28,758,000, net of
issuance costs, for the Partnership. These funds were used principally to
acquire the portfolio of mortgage loans previously discussed.

The general partner of the Partnership is Retirement Living Communities, L.P.,
an Indiana limited partnership ("RLC"). The limited partner is Retirement Living
Fiduciary Corporation, an Indiana corporation ("RLFC").

As of July 8, 1997, the Partnership entered into an asset purchase agreement
with an affiliate of RLC, Capital Senior Living Properties, Inc. ("CSLP"),
pursuant to which the Partnership had agreed to sell substantially all of its
assets, other than working capital, to CSLP conditioned upon, among other
things, the funding of the parent company of CSLP's initial public offering. On
November 3, 1997, the Partnership sold its four retirement projects, its
interest in Encore Limited Partnership, its interest in HealthCare Properties,
L.P. ("HCP") and its interest in the Pension Notes and limited partnership
interests of NHP Retirement Housing Partners I, Limited Partnership ("NHP") to
CSLP for $76,617,993. The Partnership obtained independent valuations of
properties from third party valuation firms, which were utilized in determining
the sales price. Sales proceeds were paid by the assumption of the Lehman loan
of $70,833,798 and by delivery of short term note of $5,784,195. The short term
note was subsequently paid in full on November 6, 1997. After payment of closing
costs and broker fees, net cash proceeds to the Partnership were $336,736.
Effective November 6, 1997, the restrictions on the U.S. Treasury bills were
released and such U.S. Treasury bills in the principal amount of $64,202,685
became an unrestricted asset of the Partnership. In conjunction with the sale of
the Partnership's investment in HCP, and in compliance with Section 16b of the
Securities and Exchange Act, the Partnership paid to HCP $440,007 in short swing
profits made on purchases of interests in HCP within a six month period prior to
the sale. This sale resulted in the recognition of a $36,795,949 gain.

A description of the Projects operated during 1997 by the Partnership 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 retirement
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.

<PAGE>

Canton Regency Retirement Community ("Canton Regency") -This project is located
on a 10-acre site in Canton, Ohio, and includes a 147-unit retirement living
community, a 34-bed assisted living unit, and a 50-bed intermediate and skilled
healthcare unit licensed by the Ohio Department of Health.

Cottonwood Village Retirement Community ("Cottonwood Village") -This project is
a 65-unit retirement living center located on a 2-acre site in Cottonwood,
Arizona.

On December 10, 1996, the Partnership entered into a contract with Capital
Senior Development, Inc., an affiliate of RLC, to construct 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
$6,756,000 and includes funding for kitchen and dining room renovation. As of
October 31, 1997, prior to its sale to CSLP, expenditures for construction in
process were $990,752.

Harrison Retirement Community ("Harrison") -This project is a 124-unit
retirement living center located on a 4 1/2-acre site in Indianapolis, Indiana.

On November 1, 1996, the Partnership 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 to the Partnership, after repayment of the related mortgage payable
of $1,889,829. A description of these properties is as follows:

Village Green II Apartments (subsequently renamed "Lakeridge") -This project is
a 136-unit multifamily apartment complex located in Kissimmee, Florida.

Village Green I Apartments (subsequently renamed "Silver Lakes") -This project
is a 132-unit multifamily apartment complex located in Kissimmee, Florida.

It is the intention of the general partner to wind down the business affairs of
the Partnership and to substantially distribute its cash holdings, leaving a
small working capital reserve available for obligations that may result from
future contingencies. (See Note 7.)

2. OWNERSHIP BY RLC:
-----------------

On September 12, 1990, RLC completed a solicitation of BUC holders in order to
acquire BUC interests, resulting in the acquisition of 561,336 BUCs by RLC,
representing approximately 44% of the total BUCs outstanding. As of December 31,
1997, RLC owns 580,161 BUCs, representing 51.9% of the total BUCs outstanding.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------

Principles of Consolidation
- ---------------------------

The accompanying consolidated financial statements include the accounts of the
Partnership, its 99%-owned subsidiary, Retirement Partnership, Ltd., and HCP.
HCP includes the accounts of HCP and its wholly owned subsidiaries, Danville
Care, Inc., Foothills Care, Inc., Countryside Care, Inc., Countryside Care,

<PAGE>

L.P., and Cambridge Nursing Home Limited Liability Company ("Cambridge"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. The 1% minority interest in Retirement Partnership, Ltd. is not
presented separately due to its immateriality.

By June 30, 1997, the Partnership had increased its ownership in HCP to
approximately 56% and changed its accounting for its investment in HCP from the
equity method to the consolidation method. In the accompanying consolidated
financial statements, HCP is consolidated as though a controlling financial
interest in HCP had been acquired by the partnership at January 1, 1997. HCP is
consolidated through October 31, 1997, prior to the Partnership's sale of its
HCP limited partnership interests on November 3, 1997. At December 31, 1996, the
Partnership owned approximately 31% of HCP's limited partner units and accounted
for its investment in HCP on the equity method. 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 wh
provide specialized health care services. Capital Realty Group Senior Housing,
Inc. ("Senior Housing") is the general partner. Senior Housing is an affiliate
of the general partner of the Partnership.

Property and Equipment
- ----------------------

The Partnership provides for depreciation on property and equipment using the
straight-line method over their estimated useful lives ranging from 5 to 27.5
years. The cost of property and equipment and their useful lives are summarized
as follows:

Useful Life 1996
----------- ----
<S> <C> <C>

Land $ 879,723
Land improvements 27.5 years 127,481
Buildings and building improvements 27.5 years 13,562,383
Furniture and equipment 5 years 4,499,330
Construction in process 280,946
---------------

19,349,863

Less-accumulated depreciation (6,773,340)
---------------

$ 12,576,523
===============

</TABLE>

At each balance sheet date, the Partnership reviews the carrying value of the
property and equipment to determine if facts and circumstances suggest that they
may be impaired or that the depreciation period may need to be changed. The
Partnership considers external factors, including local market developments,
national trends, and other publicly available information. If these external
factors indicated the property and equipment will not be recoverable, as
determined based upon undiscounted cash flows of the business, the carrying
value of the asset will be reduced by the estimated shortfall of discounted cash
flows. The Partnership does not believe there currently are any indicators that
required an adjustment to the carrying value of the property and equipment or
their respective remaining useful lives as of December 31, 1996 and prior to its
sale of property on November 3, 1997.

<PAGE>

Cash Equivalents
- ----------------

The Partnership considers investments with original maturities of three months
or less to be cash equivalents.

Revenue Recognition
- -------------------

Revenue from the four retirement living communities and the two multifamily
apartment complexes is recognized in the period in which the unit rental and/or
food services relate.

Revenue from two of the Projects (Towne Centre and Canton Regency) which offer
assisted living, intermediate, and skilled healthcare (in addition to retirement
living), is recognized as services are performed. The Towne Center healthcare
center (the Center) is a provider of services under the Indiana Medicaid
program. Accordingly, the Center 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. The Towne Centre and Canton Regency healthcare centers (the
Centers) are also providers of services under the Medicare program. The Centers
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 i
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. Prior year
adjustments for the centers in 1997 and 1996 totaled $859,982 and $73,366 in
credits, respectively. Included in accounts receivable at December 31, 1997 and
1996, is $415,249 and $0, respectively, for settlements due from the Medicare
program. Included in accrued expenses and other liabilities at December 31, 1997
and 1996 is $134,546 and $0, respectively, for amounts due to the Medicare
program. Under Federal regulations, Medicare reimbursements to these facilities
are limited to routine cost limits determined on a geographical region. The
Partnership has filed exception reports to request reimbursement in excess of
its routine cost limit for the years 1992 to 1996. There can be no assurance
that an exception to the properties routine cost limits will be granted.

Partnership revenues in 1997 include ten months of operations of the Cambridge
facility due to the consolidation of HCP. The Cambridge facility provides
skilled healthcare and is a provider of services under the Medicare program and
the Massachusetts state Medicaid program. Prior year adjustments for the
Cambridge facility in 1997 totaled $12,246.

Revenues from the Medicare and Medicaid programs accounted for approximately
13.6% and 14.4%, respectively, of the Partnership's net revenues for the year
ended December 31, 1997. Laws and regulations governing the Medicare and
Medicaid programs are complex and subject to interpretation. The Partnership
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.

<PAGE>

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.

4. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------

The carrying amounts and fair values of financial instruments at December 31,
1997 and 1996 are as follows:

1997 1996
---- ----

Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- ------
Cash and cash equivalents $ 66,818,286 $ 66,818,286 $ 10,463,887 $ 10,463,887
Cash, restricted 19,960 19,960 206,376 206,376
Investments in
limited partnerships 0 0 8,275,920 6,348,776

</TABLE>

The following methods and assumptions were used by the General Partner 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.

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

5. NOTE PAYABLE:
-------------

Note payable at December 31, 1997 and 1996 is $0.

On November 1, 1996, a mortgage loan bearing interest at 11%, and having an
outstanding balance of $1,994,445 on November 1, 1996 was paid upon sale of the
Silver Lakes Apartments.

On July 29, 1994, the Partnership obtained a $12,000,000 open-end mortgage loan
commitment from a non-affiliated mortgage company, and pledged the Cottonwood,
Harrison, Towne Centre and Canton Regency retirement communities as collateral.
On June 30, 1995, the Partnership increased its mortgage loan commitment from
$12,000,000 to $17,500,000. The Partnership borrowed $5,500,000 under this loan
commitment in the second quarter of 1997, which was repaid on July 1, 1997 with
proceeds from the Lehman Brothers loan.

In connection with obtaining the open end mortgage loan commitment in 1994, the
Partnership incurred $449,596 in deferred financing charges, which are being
amortized over the life of the loan commitment using the straight line method,
and were fully amortized when the mortgage commitment was retired on July 1,
1997.

<PAGE>

On June 30, 1997, the Partnership entered into a $77,000,000 mortgage loan
agreement with Lehman Brothers and pledged the Cottonwood, Harrison, Towne
Centre, and Canton Regency retirement communities and its investment in HCP and
NHP as collateral. The loan agreement would have matured on December 31, 1997.
On July 1, 1997, approximately $70,000,000 became outstanding under this loan
agreement; $5,500,000 was used to repay an outstanding mortgage loan commitment
and approximately $64,500,000 was used t 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. Interest costs are based on 30-day LIBOR plus 50 basis points.
On November 3, 1997, the Partnership sold substantially all its assets to CSLP,
resulting in the transfer of the Lehman Brothers' loan to CSLP and the release
of the liquidity requirement on the U.S. Treasury bills on November 6, 1997.

In connection with obtaining the Lehman Brothers loan, the Partnership incurred
$85,355 in deferred financing charges, which were being amortized over the life
of the loan commitment using the straight line method and were fully amortized
when the loan was transferred on November 3, 1997.

During the second quarter of 1997, a $500,000 loan was obtained and repaid to an
affiliate of RLC. Stated interest was at 10%.

Due to the consolidation of HCP, outstanding mortgage loans for HCP at October
31, 1997 amounted to $6,768,010. These mortgage loans bear interest ranging from
6.8% to 10.75% and mature from 2001 to 2012. During the 10 months ending October
31, 1997, $439,404 of note payments were made.

6. COMMITMENTS:
------------

The Partnership had $19,960 in certificates of deposit at December 31, 1997 and
$56,376 in certificates of deposit at December 31, 1996, restricted for utility
deposits. The certificates of deposit mature one year from the original purchase
date.

In conjunction with the Partnership's mortgage loan commitment, a compensating
balance of $150,000 was established with the mortgage company. The compensating
balance at December 31, 1997 and 1996 is $0 and $150,000, respectively.

7. CASH DISTRIBUTIONS:
-------------------

Net operating income, if distributed as determined by the General Partner at 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 second amended Partnership Agreement allows the general partner sole
discretion in determining cash distributions. Prior to this amendment, cash
distributions were to be paid within 45 days of each calendar quarter. There
were no distributions for 1997 and 1996. Due to the sale of the Partnership's
assets on November 3, 1997, it is the general partner's intention to
substantially distribute the Partnership's cash holdings, leaving a small
working capital reserve available for obligations that may result from future
contingencies.

<PAGE>

Proceeds from the refinancing, sale, or other dispositions of Partnership
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.

On March 12, 1998, a distribution of $61,000,000 was made available, of which
$40,540,478 was disbursed to the current BUC holders, and a $1,802,800
distribution was disbursed to the general partner. Approximately $4,400,000 has
been retained as working capital reserve.

8. INCOME TAXES:
------------

No provision has been made in the financial statements for Federal income taxes
because, under current law, no Federal income taxes are paid directly by the
Partnership. The partners are responsible for their respective shares of
Partnership net income or loss. The Partnership 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:

<S> <C> <C>
For the Year Ended December 31,
-------------------------------

1997 1996
---- ----
Net income per
Statement of income $ 41,019,244 $ 3,105,703

Decrease in vacation expense accrual (70,823) (715)
Non-deductible bad debt expense (19,220) 23,370
Other non-deductible expenses 1,041 1,250
(Decrease) increase in workers
compensation accrual (48,420) 120
Excess of book over tax depreciation - 101,069
Excess of tax over book depreciation (472,582) -
Investment income accounted for under
the equity method for book and not tax
572,994 (603,147)
Tax adjustment on sale of properties (1,380,810) 268,068
Income from joint ventures (552,220) 181,660
------------------ -----------------

Taxable income $ 39,049,204 $ 3,077,378
================== =================

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

For the Year Ended December 31

1997 1996
---- ----

General Partner $ 1,858,164 $ 19,024
BUC Holders 59,495,678 22,285,615
------------------- ----------------
$ 61,353,842 $ 22,304,639
=================== ================

</TABLE>

The basis of property and equipment, net of accumulated depreciation, for
Federal income tax purposes was $0 and $13,504,827 at December 31, 1997 and
1996, respectively.

In the event the Partnership is taxed as a corporation because it is "publicly
traded" under Section 7704 of the Internal Revenue Code of 1986, then the
Partnership 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 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. Partnership management does not believe the Partnership will be taxed as
"publicly traded" for fiscal 1997 based on its interpretation of Section 7704
and no provision for income taxes has been reflected in the accompanying
consolidated statements of income. 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.

9. TRANSACTIONS WITH RELATED PARTIES:
----------------------------------

In accordance with the partnership agreement, the general partner, RLC does not
receive any fees from the Partnership but may be reimbursed by the Partnership
for any actual costs and expenses incurred in connection with the operations of
the Partnership. All projects are managed by affiliates of RLC. Partnership
expenses incurred by RLC and affiliates, which were reimbursed and expensed by
the Partnership for the years ended December 31, 1997 and 1996, were $297,925
and $332,438, respectively. Management fees reimbursed and expensed by the
Partnership to an affiliate of RLC for the years ended December 31, 1997 and
1996 were $851,577 and $987,104, respectively.

All property employees are paid by an affiliate of RLC. Reimbursed gross payroll
and health insurance premiums, which were expensed by the Partnership in 1997
and 1996, were $4,429,839 and $5,254,495, respectively.

Amounts due RLC and affiliates at December 31 are as follows:

1997 1996
---- ----

Payroll and health insurance $ 0 $ 218,905
Overhead reimbursement 9,263 29,781
Management fees 0 3,494
---------------- ----------------
$ 9,263 $ 252,180
================ ================
</TABLE>

Salary and benefits $ 2,501,798
Asset management fees 450,821
Property management fees 280,047
Administrative and other expenses 136,471
General partner management fees 75,815
---------------
$ 3,444,952
===============

In connection with the extension of the Silver Lakes mortgage, an affiliate of
RLC received $40,453 in 1996 as a financing fee.

<PAGE>

In April 1996, an affiliate of RLC recognized a $878,592 gain on the
Partnership's purchase of HCP limited partnership interests. (See Note 10.)

Upon sale of The Silver Lakes and Lakeridge Apartments in November, 1996 an
affiliate of RLC received a $79,883 brokerage fee. Upon sale of the Partnership
properties on November 3, 1997, an affiliate of RLC received a $4,597,080 broker
fee.

In addition, a 50% partner in RLC is chairman of the board of a bank where the
Partnership holds the majority of its operating cash accounts.

The general partner and managing agent of HCP and NHP is an affiliate of RLC.
(See Note 10.)

10. ACQUISITION OF INVESTMENTS:
---------------------------

During 1997 and 1996, the Partnership made various purchases of limited
partnership interests in HCP. During 1997 and 1996, the Partnership paid
$5,604,945 and $3,200,685, respectively, for partnership interests in HCP. Prior
to the sale on November 3, 1997, the Partnership had cumulatively paid
$9,114,455 for a 56% ownership in HCP, which owns a portfolio of 8 nursing home
and rehabilitation facilities. (See Note 11.)

In the second quarter of 1996, 9.36% in limited partnership interests in HCP was
purchased from Senior Housing who had acquired the interests in 1993. The
Partnership paid $1,269,077 to such affiliate, who recognized a $878,592 gain on
the transaction. Because of this purchase, the Partnership exceeded 20%
ownership and changed its method of accounting from the cost method to the
equity method. The change resulted in recording $3,519,315 of deferred income
for the difference between cost and the underlying equity in HCP, and was being
amortized over 20 years prior to the sale of the investment in HCP. During 1997,
the Partnership continued purchasing limited partnership interests in HCP from
individual limited partners in HCP in privately negotiated transactions. In June
1997, the Partnership exceeded 50% ownership of HCP and changed its method of
accounting from the equity method to a consolidated basis, effective January 1,
1997.

<PAGE>

Summary financial information regarding consolidated financial position and
results of operations of HCP as of and for the ten month ended October 31, 1997
and as of and for the year ended December 31, 1996 is summarized below.

1997 1996
---- ----

Cash $ 9,993,974 $ 8,995,455
Property and equipment, net 21,047,864 22,112,619
Other assets 1,313,703 1,379,473
---------------- ----------------
Total assets $ 32,355,541 $ 32,487,547
================ ================

Liabilities $ 837,191 $ 1,215,508
Mortgage loans 6,768,010 7,207,414
Equity 24,750,340 24,064,625
---------------- ----------------
Total liabilities and equity $ 32,355,541 $ 32,487,547
================ ================

Net revenue $ 7,654,484 $ 7,560,104
================ ================
Net income $ 1,010,715 $ 1,637,343
================ ================

</TABLE>

During 1997 and 1996, the Partnership made various purchases of outstanding
Pension Notes of NHP. During 1997 and 1996, the Partnership paid $10,004,090 and
$199,158, respectively, for purchases of Pension Notes. Prior to the sale on
November 3, 1997, the Partnership had cumulatively paid $10,790,828 for a 30.8%
ownership of outstanding Pension Notes of NHP. NHP owns a portfolio of 5
independent living retirement facilities. 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.
During 1996, the Partnership paid $1,364 for a 3.1% ownership of limited
partnership interests in NHP.

The Partnership accounted for the investments in NHP at cost and classified them
as held to maturity at December 31, 1996.

11. REPURCHASE OF BENEFICIAL UNIT CERTIFICATES
------------------------------------------

The Partnership purchased 54,454 beneficial unit certificates for $960,751
during 1997, at an average cost of $17.64 per unit. As of December 31, 1997, the
Partnership has repurchased 146,308 beneficial unit certificates for a cost of
$2,223,106.

<PAGE>

SIGNATURES
----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

CAPITAL SENIOR LIVING COMMUNITIES, L.P.

By: RETIREMENT LIVING COMMUNITIES
General Partner

By: CAPITAL RETIREMENT GROUP, INC.
General Partner

By:/s/ James A. Stroud
----------------------------------------
James A. Stroud, Chief Operating Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

/s/ James A. Stroud Chief Operating Officer March 30, 1998
- ------------------- and Director (Chief financial
James A. Stroud and accounting officer)

/s/ Jeffrey L. Beck Chief Executive Officer March 30, 1998
- ------------------- and Director
Jeffrey L. Beck

<PAGE>

EXHIBIT LIST
<S> <C> <C>

Page Nos.
In This
Exhibit Description Filing
- ------- ------------------------------------ ---------

3-A Articles of Incorporation of Retirement Living Fiduciary Corporation,
filed as Exhibit 3-A to Amendment No. 3 to the Partnership's
Registration Statement on Form S-11 under Registration No. 33-3157
filed with the Commission on March 31, 1986, and incorporated herein
by reference.

3-B By-Laws of Retirement Living Fiduciary Corporation filed as Exhibit
3-B to Amendment No. 3 to the Partnership's 1933 Act Registration
Statement on Form S-11 under Registration No. 33-3157 filed with the
Commission on March 31, 1986, and incorporated herein by reference.

4-A Agreement of Limited Partnership and Certificate of Retirement Living
Tax-Exempt Mortgage Fund Limited Partnership filed as Exhibit 4-A to
Amendment No. 3 to the Partnership's 1933 Act Registration Statement
on Form S-11 under Registration No. 33-3157 filed with the Commission
on March 31, 1986, and incorporated herein by reference.

4-B Amended and Restated Agreement of Limited Partnership of Retirement
Living Tax-Exempt Mortgage Fund Limited Partnership filed as Exhibit
4-B to the Partnership's 1986 Form 10-K Annual Report filed with the
Commission on March 31, 1987, and incorporated herein by reference.

4-C Form of Beneficial Unit Certificates, filed as Exhibit 4-C to
Amendment No. 3 to the Partnership's 1933 Act Registration Statement
on Form S-11 under Registration No. 33-3157 filed with the Commission
on March 31, 1986, and incorporated herein by reference.

4-D Amendment Number 1 to amended and restated agreement of Limited
Partnership dated March 6, 1991, filed as Exhibit 4-D to the
Partnership's 1990 Form 10-K Annual Report filed with the Commission
on April 12, 1991, and incorporated herein by reference.

4-E Certificates of Limited Partnership and Limited Partnership Agreements
of Retirement Partnership, Ltd. and Valley View Partnership, L.P.,
filed as Exhibit 4-E to the Partnership's 1990 Form 10-K Annual Report
filed with the Commission on April 12, 1991, and incorporated herein
by reference.

4-F Amended and Restated Certificate of Limited Partnership of the
Partnership dated effective January 11, 1993 filed as Exhibit 4-F to
the Partnership's 1992 Form 10-K Annual Report filed with the
Commission and incorporated herein by reference.

4-G Second Amended and Restated Agreement of Limited Partnership of the
Partnership dated as of December 24, 1992 filed as Exhibit 4-G to the
Partnership's 1992 Form 10-K Annual Report filed with the Commission
and incorporated herein by reference.

<PAGE>
10-A Asset Purchase Agreement between Congregate Housing Partnership of
Canton, in Indiana general partnership, Congregate Housing Partnership
of Cottonwood, an Indiana general partnership, Congregate Housing
Partnership of Indianapolis, an Indiana general partnership, Sanibel
Investment Co., an Indiana general partnership, Congregate Housing
Partnership of Merrillville, an Indiana general partnership, and
Congregate Housing Partnership, an Indiana general partnership,
Retirement Living Partnership, Ltd., a Texas limited partnership, and
Valley View Partnership, a Texas limited partnership and Retirement
Living Tax-Exempt Mortgage Fund Limited Partnership, a Delaware
limited partnership filed as Exhibit 2-A to the Partnership's 1990
Form 10-K Annual Report filed with the Commission on April 12, 1991,
and incorporated herein by reference.

10-B First Amendment of Asset Purchase Agreement (filed as Exhibit 10-A)
dated effective September 11, 1991, filed as Exhibit 2 to the
Partnership's Current Report on Form 8-K dated September 25, 1991, and
incorporated herein by reference.

10-C Real Estate Sales Contract dated effective September 11, 1991,
relating to acquisition of the Village Green I Apartments, filed as
Exhibit 3 to the Partnership's Current Report on Form 8-K dated
September 25, 1991, and incorporated herein by reference.

10-D Banc One Mortgage Corporation letter dated September 11, 1991
regarding Village Green I Apartments, filed as Exhibit 4 to the
Partnership's Current Report on Form 8-K dated September 25, 1991, and
incorporated herein by reference.

10-E Modification, Consolidation and Extension Mortgage Note between EFB
Development Company and Retirement Partnership, Ltd. and Banc One
Mortgage Corporation, dated December 6, 1991, filed as Exhibit 10-E to
the Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, and incorporated herein by reference.

10-F Management Agreement dated effective August 28, 1991 relating to
Village Green I Apartments, filed as Exhibit 5 to the Partnership's
Current Report on Form 8-K dated September 25, 1991, and incorporated
herein by reference.

10-G Warranty Deed executed by Retirement Partnership, Ltd. which conveys
to the Partnership the real estate known as Canton Regency Retirement
Community, filed as Exhibit 10-G to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

10-H Warranty Deed executed by Retirement Partnership, Ltd. which conveys
to the Partnership the real estate known as Towne Centre Retirement
Community, filed as Exhibit 10-H to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

10-I Warranty Deed executed by Retirement Partnership, Ltd. which conveys
to the Partnership the real estate known as The Harrison Retirement
Community, filed as Exhibit 10-I to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

<PAGE>

10-J Warranty Deed executed by Retirement Partnership, Ltd. which conveys
the Partnership the real estate known as Cottonwood Village Retirement
Community, filed as Exhibit 10-J to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

10-K Warranty Deed executed by Retirement Partnership, Ltd. which conveys
to the Partnership the real estate known as Village Green Apartments
Phase II, filed as Exhibit 10-K to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

10-L Management Agreement Dated September 11, 1991, between Capital Realty
Group Senior Housing, Inc. and Retirement Partnership, Ltd. for the
property management services relating to the Canton Regency Retirement
Community, filed as Exhibit 10-L to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

10-M Management Agreement Dated September 11, 1991, between Capital Realty
Group Senior Housing, Inc. and Retirement Partnership, Ltd. for the
property management services relating to the Towne Centre Retirement
Community, filed as Exhibit 10-M to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

10-N Management Agreement Dated September 11, 1991, between Capital Realty
Group Senior Housing, Inc. and Retirement Partnership, Ltd. for the
property management services relating to The Harrison Retirement
Community, filed as Exhibit 10-N to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

10-O Management Agreement Dated September 11, 1991, between Capital Realty
Group Senior Housing, Inc. and Retirement Partnership, Ltd. for the
property management services relating to the Cottonwood Village
Retirement Community, filed as Exhibit 10-O to the Partnership's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991, and incorporated herein by reference.

10-P Three Management Agreements Dated March 1, 1991, between Capital
Realty Group Management, Inc. and Congregate Housing Partnership of
Indianapolis, Capital Realty Group Management, Inc. and Congregate
Housing Partnership of Cottonwood, Capital Realty Group Management,
Inc. and Sanibel Investment Company, filed as Exhibit 10-K to the
Partnership's 1990 Form 10-K Annual Report filed with the Commission
on April 12, 1991, and incorporated herein by reference.

10-Q Management Agreement Dated September 11, 1991, between Capital Realty
Group Management, Inc. and Retirement Partnership, Ltd. for the
property management services relating to Village Green Apartments
Phase II, filed as Exhibit 10-Q to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

<PAGE>

10-R Management Agreement Dated December 6, 1991, between Capital Realty
Group Management, Inc. and Retirement Partnership, Ltd. for the
property management services relating to Village Green Apartments
Phase I, filed as Exhibit 10-R to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

10-S Management Agreement Dated September 11, 1991, between Capital Realty
Group Management, Inc. and Retirement Partnership, Ltd. for the
property management services relating to Village Green Apartments
Phase II, filed as Exhibit 10-S to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

10-T Management Agreement Dated January 1, 1992, between Capital Realty
Group Senior Housing, Inc. and the Partnership for the property
management services relating to the Canton Regency Retirement
Community, filed as Exhibit 10-T to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

10-U Management Agreement Dated January 1, 1992, between Capital Realty
Group Senior Housing, Inc. and the Partnership for the property
management services relating to the Towne Centre Retirement Community,
filed as Exhibit 10-U to the Partnership's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, and incorporated herein
by reference.

10-V Management Agreement Dated January 1, 1992, between Capital Realty
Group Senior Housing, Inc. and the Partnership for the property
management services relating to The Harrison Retirement Community,
filed as Exhibit 10-V to the Partnership's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, and incorporated herein
by reference.

10-W Management Agreement Dated January 1, 1992, between Capital Realty
Group Senior Housing, Inc. and the Partnership for the property
management services relating to the Cottonwood Village Retirement
Community, filed as Exhibit 10-W to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, and
incorporated herein by reference.

10-X Congregate Housing Partnership, Inc. Assignment of its eleven and
two-thirds (11.6667%) percent interest in Encore Retirement Partners,
Ltd. - 1985 to Retirement Partnership, Ltd., dated April 1991, filed
as Exhibit 10-X to the Partnership's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, and incorporated herein by
reference.

Retirement Partnership, Ltd. Assignment of its eleven and two-thirds
(11.6667%) percent interest in Encore Retirement Partners, Ltd. - 1985
to the Partnership, dated January 1, 1992, filed as Exhibit 10-X to
the Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, and incorporated herein by reference.

10-Y Beck Trophy Club, L.P. Partnership Agreement dated November 28, 1993
filed as Exhibit 10-Y to the Partnership's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1993, and incorporated
herein by reference.

10-Z Beck Trophy Club, L.P. Resale Agreement dated December 3, 1993 filed
as Exhibit 10-Z to the Partnership's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1993, and incorporated herein by
reference.

<PAGE>

10-AA Assignment of Limited Partnership Interest and Second Amendment to
Limited Partnership Agreement of Beck Properties Trophy Club, L.P.,
filed as Exhibit 10-AA to the Partnership's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994, and incorporated
herein by reference.

*10-BB Management agreement dated February 1, 1995 between the Partnership
and CSL relating to The Harrison at Eagle Valley.

*10-CC Management Agreement dated February 1, 1995 between the Partnership
and CSL relating to Towne Centre.

*10-DD Management Agreement dated February 1, 1995 between the Partnership
and CSL relating to Cottonwood Village.

*21 Management Agreement dated February 1, 1995 between the Partnership
and CSL relating to Canton Regency Retirement Community.

*27 List of Subsidiaries.

28-A Financial Data Schedule required by Item 601 of Regulation S-B.

99 Orders appointing Capital Realty Group Management, Inc. as receiver
for Congregate Housing Partnership of Merrillville and Congregate
Housing Partnership of Canton, filed as Exhibit 28-A to the
Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, and incorporated herein by reference.

HealthCare Properties, L.P. financial statements at December 31, 1996.

* Filed herewith.

</TABLE>

List of Subsidiaries
(Exhibit 21)

<PAGE>

LIST OF SUBSIDIARIES

1. Retirement Partnership, Ltd., a Delaware Limited Partnership, 99% owned.

2. HealthCare Properties, L.P., a Delaware Limited Partnership, 56% owned.

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Financial Data Sheet
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