CAPITAL SENIOR LIVING CORP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-13445

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CAPITAL SENIOR LIVING CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 75-2678809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

14160 DALLAS PARKWAY, SUITE 300 75254
DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(972) 770-5600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

The aggregate market value of the 9,423,680 shares of the Registrant's
Common Stock, par value $0.01 per share ("Common Stock"), held by nonaffiliates,
based upon the closing price of the Registrant's Common Stock as reported by the
New York Stock Exchange on March 21, 2002 was approximately $35,998,458. For
purposes of this computation, all officers, directors and 10% beneficial owners
of the Registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors or 10% beneficial owners are,
in fact, affiliates of the Registrant. As of March 20, 2002, 19,719,843 shares
of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant's definitive proxy statement pertaining to the 2002 Annual
Meeting of Stockholders (the "Proxy Statement") and filed or to be filed not
later than 120 days after the end of the fiscal year pursuant to Regulation 14A
is incorporated herein by reference into Part III.
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CAPITAL SENIOR LIVING CORPORATION

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

OVERVIEW

Capital Senior Living Corporation (together with its subsidiaries, the
"Company") is one of the largest operators of senior living communities in the
United States in terms of resident capacity. As of December 31, 2001, the
Company owned interests in and/or operated 48 communities in 20 states with a
capacity of approximately 7,600 residents, including 39 communities in which it
owned interests and 9 communities that it managed for third parties pursuant to
management contracts. As of December 31, 2001, the Company was developing two
new communities, that are expected to be completed in the first quarter of 2002
and will have a capacity of approximately 292 residents. As of December 31,
2001, the Company also operated one home care agency. Approximately 93% of the
total revenues for the senior living communities owned and managed by the
Company as of December 31, 2001 are derived from private pay sources. As of
December 31, 2001, the stabilized communities that the Company operated and in
which it owned interests had an average occupancy rate of approximately 93% and
those stabilized communities that the Company managed had an average occupancy
rate of approximately 90%. The Company and its predecessors have provided senior
living services since 1990.

The Company was incorporated in Delaware in October 1996 in anticipation of
its initial public offering. Simultaneously with the consummation of its initial
public offering, the Company and the Company's founders engaged in a series of
transactions (the "Formation Transactions"), which resulted in the Company
acquiring certain assets, entities and partnership interests of its founders and
entities affiliated with its founders. The primary components of the Formation
Transactions were as follows:

- The stock of Capital Senior Living, Inc., Capital Senior Management 1,
Inc., Capital Senior Management 2, Inc., Capital Senior Development,
Inc., and Quality Home Care, Inc. was contributed by the Company's
founders in exchange for 7,687,347 shares of the Company's common stock
and notes aggregating approximately $18.1 million. The primary assets of
these entities consisted of third-party management contracts, development
contracts and a home health care agency. The notes were repaid with some
of the proceeds of the Company's initial public offering.

- The Company purchased substantially all of the assets of Capital Senior
Living Communities, L.P. ("CSLC") in exchange for the assumption of
approximately $71 million in debt (the "LBHI Loan") and $5.8 million in
cash. The LBHI Loan was repaid with some of the proceeds of the Company's
initial public offering. The primary assets of CSLC were (i) four senior
living communities; (ii) approximately 56% of the limited partnership
interests in HealthCare Properties, L.P. ("HCP"); and (iii) approximately
31% of certain notes (the "NHP Notes") issued by NHP Retirement Housing
Partners I Limited Partnership ("NHP"). The primary assets of NHP
consisted of five senior living communities. NHP has subsequently been
dissolved and is currently being liquidated. The Company owns 33% of the
NHP Notes and received a payment of $5.6 million in January 2002.

At the time of the Formation Transaction, the primary assets of HCP
consisted of: (i) approximately $9.9 million in cash and cash equivalents; (ii)
four physical rehabilitation facilities; and (iii) four skilled nursing
facilities. The Company currently owns approximately 57% of the limited
partnership interests of HCP. HCP has subsequently sold or disposed of three of
the four physical rehabilitation facilities and the four skilled nursing
centers. HCP's remaining physical rehabilitation facility is held for sale.

On September 30, 1998, the Company acquired four of the five senior living
communities from NHP for cash consideration of $40.7 million. The purchase price
for the properties was determined by independent appraisal. NHP sold its
remaining community, the Amberleigh, in Buffalo, New York on December 31, 2001.

On October 28, 1998, the Company acquired two senior living communities
from Gramercy Hill Enterprises ("Gramercy"), and Tesson Heights Enterprises
("Tesson"), for aggregate consideration of approximately $34 million.

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On August 15, 2000, the Company completed its merger (the "ILM Merger")
with ILM Senior Living, Inc. ("ILM") and the acquisition of the Villa Santa
Barbara property interest held by ILM II Senior Living, Inc. ("ILM II"). The
consummation of the ILM Merger and acquisition of the Villa Santa Barbara
property interest held by ILM II resulted in the Company acquiring ownership of
eight senior living communities with a capacity of approximately 1,300
residents. The ILM Merger was accounted for as a purchase and included total
cash consideration for the eight communities of approximately $97.6 million,
consisting of $87.5 million to the ILM stockholders and $10.1 million for ILM
II's interest in the Villa Santa Barbara property. The consideration was agreed
upon as the result of arm's-length negotiations between the parties to the ILM
Merger and ILM II. The Company had managed the ILM and ILM II communities since
1996 pursuant to management agreements with ILM and ILM II.

On February 9, 2001, the Company announced that it was terminating its
merger agreement with ILM II. A tax issue disclosed in ILM II's Annual Report on
Form 10-K filed on January 31, 2001 could have caused a material adverse change
under the merger agreement with ILM II, and therefore put the Company in the
position of having to terminate the merger agreement. The Company does not
expect to incur any additional costs related to the merger agreement. The
Company continues to manage the five remaining ILM II communities on a
month-to-month basis pursuant to the terms of the previous management agreement
between the Company and a subsidiary of ILM II. On February 28, 2002, ILM II
notified the Company that it had entered into an agreement to sell the five
communities and would, therefore, be terminating the management agreement
effective April 1, 2002.

In December 2001, the Company formed a joint venture, BRE/CSL, L.L.C.
("BRE/CSL"), a Delaware limited liability company, with Blackstone Real Estate
Advisors ("Blackstone"), which will seek to acquire in excess of $200 million of
senior housing properties. The venture is owned 90% by Blackstone and 10% by the
Company. The Company will manage the communities owned by the joint venture
under long-term management contracts. On December 31, 2001, the venture acquired
its first property, The Amberleigh at Woodside Farms, a 394 resident capacity
independent living facility, from NHP. In connection with the acquisition by
BRE/CSL, the Company contributed $1.8 million to the venture. The Company
expects to recover approximately $1.4 million of its contribution to BRE/CSL
when permanent financing is obtained for the Amberleigh community. In addition,
the Company has entered into a contribution agreement to contribute four of its
senior living communities to the joint venture.

INDUSTRY BACKGROUND

The senior living industry encompasses a broad and diverse range of living
accommodations and supportive services that are provided primarily to persons 75
years of age or older. For the elderly who require limited services, independent
living residences supplemented at times by home health care, offers a viable
option. Most independent living communities typically offer community living
packaged with basic services consisting of meals, housekeeping, laundry, 24-hour
staffing, transportation, social and recreational activities and health care
monitoring.

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

The National Investment Conference estimates that as of 2000, 50% of senior
housing properties with supportive services in the U.S. are assisted living
communities, 34% are skilled nursing facilities, 7% are

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independent living communities, 4% are continuing care retirement communities
and 5% offer a combination of property types.

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

The Company believes that the senior living industry will require large
capital infusions over the next 10 years to meet the growing demand for senior
living communities. The National Investment Conference has estimated that
capital demand for private pay independent living communities will increase by
$38 billion between 2000 and 2010, while estimated capital demand for private
pay assisted living communities will increase by $29 billion during the same
ten-year period. As a result, the Company believes there will continue to be
growth opportunities in the senior living market for providing services to the
elderly.

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

CONSUMER PREFERENCE

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

The likelihood of living alone increases with age. Most of this increase is
due to an aging population in which women outlive men. In 1993, eight out of 10
noninstitutionalized elderly who lived alone were women. According to the United
States Bureau of Census, based on 1993 data, the likelihood of women living
alone increases from 32% for 65 to 74-year-olds to 57% for those women aged 85
and older. Men show similar trends with 13% of the 65 to 74-year-olds living
alone rising to 29% of the men aged 85 and older living alone. Societal changes,
such as high divorce rates and the growing numbers of persons choosing not to
marry, have further increased the number of Americans living alone. This growth
in the number of elderly living alone has resulted in an increased demand for
services that historically have been provided by a spouse, other family members
or live-in caregivers.

DEMOGRAPHICS

The primary market for the Company's senior living services is comprised of
persons aged 75 and older. This age group is one of the fastest growing segments
of the United States population and is expected to more than double by the year
2030. The population of seniors aged 85 and over has increased from
approximately 3.1 million in 1990 to over 4.3 million by 2000, an increase of
39%. This age cohort is expected to grow to approximately 6.0 million by 2010
and approximately 8.8 million by 2030. As the number of persons aged 75 and over
continues to grow, the Company believes that there will be corresponding
increases in the number of persons who need assistance with ADLs. According to
industry analyses, approximately 19% of persons aged 75 to 79, approximately 24%
of persons aged 80 to 84 and approximately 45% of persons aged 85 and older need
assistance with ADLs. According to the Alzheimer's Association the number of
persons afflicted with Alzheimer's disease is expected to grow from the current
4.0 million to 14.0 million by the year 2050, given current treatment options.

RESTRICTED SUPPLY OF NURSING BEDS

The majority of states in the United States have adopted Certificate of
Need or similar statutes generally requiring that, prior to the addition of new
skilled nursing beds, the addition of new services, or the making of

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

COST-CONTAINMENT PRESSURES

In response to rapidly rising health care costs, governmental and private
pay sources have adopted cost containment measures that have reduced admissions
and encouraged reduced lengths of stays in hospitals and other acute care
settings. The federal government had previously acted to curtail increases in
health care costs under Medicare by limiting acute care hospital reimbursement
for specific services to pre-established fixed amounts. Private insurers have
begun to limit reimbursement for medical services in general to predetermined
charges, and managed care organizations (such as health maintenance
organizations) are attempting to limit hospitalization costs by negotiating for
discounted rates for hospital and acute care services and by monitoring and
reducing hospital use. In response, hospitals are discharging patients earlier
and referring elderly patients, who may be too sick or frail to manage their
lives without assistance, to nursing homes and assisted living residences where
the cost of providing care is typically lower than hospital care. In addition,
third-party payors are increasingly becoming involved in determining the
appropriate health care settings for their insureds or clients, based primarily
on cost and quality of care. Based on industry data, the typical day-rate in an
assisted living facility is two-thirds of the cost for comparable care in a
nursing home.

SENIOR AFFLUENCE

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

REDUCED RELIANCE ON FAMILY CARE

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

OPERATING STRATEGY

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

PROVIDE A BROAD RANGE OF HIGH-QUALITY PERSONALIZED CARE

Central to the Company's operating strategy is its focus on providing
high-quality care and services that are personalized and tailored to meet the
individual needs of each community resident. The Company's

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residences and services are designed to provide a broad range of care that
permits residents to "age in place" as their needs change and as they develop
further physical or cognitive frailties. By creating an environment that
maximizes resident autonomy and provides individualized service programs, the
Company seeks to attract seniors at an earlier stage, before they need the
higher level of care provided in a skilled nursing facility. The Company also
maintains a comprehensive quality assurance program designed to ensure the
satisfaction of its residents and their family members. The Company conducts
annual resident satisfaction surveys that allow residents at each community to
express whether they are "very satisfied," "satisfied" or "dissatisfied" with
all major areas of a community, including, housekeeping, maintenance, activities
and transportation, food service, security and management. In 2001 and 2000, the
Company achieved a 97% and 93% overall approval rating, respectively, from the
residents' satisfaction survey.

OFFER SERVICES ACROSS A RANGE OF PRICING OPTIONS

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

MAINTAIN AND IMPROVE OCCUPANCY RATES

The Company continually seeks to maintain and improve occupancy rates by:
(i) retaining residents as they "age in place" by extending optional care and
service programs; (ii) attracting new residents through the on-site marketing
programs focused on residents and family members; (iii) selecting sites in
underserved markets; (iv) aggressively seeking referrals from professional
community outreach sources, including area religious organizations, senior
social service programs, civic and business networks, as well as the medical
community; and (v) continually refurbishing and renovating its communities.

IMPROVE OPERATING EFFICIENCIES

The Company seeks to improve operating efficiencies at its communities by
actively monitoring and managing operating costs. By having an established
national portfolio of communities with regional management in place, the Company
believes it has established a platform to achieve operating efficiencies through
economies of scale in the purchase of bulk items, such as food, and in the
spreading of fixed costs, such as corporate overhead, over a larger revenue
base, and to provide more effective management supervision and financial
controls. The Company's development strategy includes regional clustering of new
communities to achieve further efficiencies.

EMPHASIZE EMPLOYEE TRAINING AND RETENTION

The Company devotes special attention to the hiring, screening, training,
supervising and retention of its employees and caregivers to ensure that quality
standards are achieved. In addition to normal on-site training, the Company
conducts annual national management meetings and encourages sharing of expertise
among managers. The Company's commitment to the total quality management concept
is emphasized throughout its training program. This commitment to the total
quality management concept means identification of the "best practices" in the
senior living market and communication of those "best practices" to the
Company's executive directors and their staff. The identification of best
practices is realized by a number of means, including: emphasis on regional and
executive directors keeping up with professional trade journals; interaction
with other professionals and consultants in the senior living industry through
seminars, conferences and consultations; visits to other properties; leadership
and participation at national and local trade organization events; and
information derived from marketing studies and resident satisfaction surveys.
This information is continually processed by regional managers and the executive
directors and communicated to the Company's employees as part of their training.
The Company's staffing of each community with an executive director allows it to
hire more professional employees at these positions, while the Company's
developed career path

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helps it to retain the professionals it hires. The Company hires an executive
director for each of its communities and provides them with autonomy,
responsibility and accountability. The Company believes its commitment to and
emphasis on employee training and retention differentiates the Company from many
of its competitors.

UTILIZE COMPREHENSIVE INFORMATION SYSTEMS

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

SENIOR LIVING SERVICES

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

The Company's operating philosophy is to provide affordable, quality living
communities and services to senior citizens and deliver a continuum of care for
its residents as their needs change over time. This continuum of care, which
integrates independent living and assisted living and is bridged by home care,
sustains residents' autonomy and independence based on their physical and mental
abilities. As residents age, in many of the Company's communities, they are able
to obtain the additional needed services within the same community, avoiding the
disruptive and often traumatic move to a different facility.

INDEPENDENT LIVING SERVICES

The Company provides independent living services to seniors who do not yet
need assistance or support with ADLs, but who prefer the physical and
psychological comfort of a residential community that offers health care and
other services. As of December 31, 2001, the Company had ownership interests in
34 communities and managed an additional seven communities that provide
independent living services, with an aggregate capacity for 5,142 and 1,097
residents, respectively.

Independent living services provided by the Company include daily meals,
transportation, social and recreational activities, laundry, housekeeping,
24-hour staffing and health care monitoring. The Company also fosters the
wellness of its residents by offering health screenings (such as blood pressure
checks), periodic special services (such as influenza inoculations), dietary and
similar programs, as well as ongoing exercise and fitness classes. Classes are
given by health care professionals to keep residents informed about health and
disease management. Subject to applicable government regulation, personal care
and medical services are available to independent living residents through
either the community staff or through the Company's or other independent home
care agencies. The Company's independent living residents pay a fee ranging from
$1,050 to $3,450 per month, in general, depending on the specific community,
program of services, size of the unit and amenities offered. The Company's
contracts with its independent living residents are generally for a term of one
year and are typically terminable by the resident upon 30 days notice.

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ASSISTED LIVING SERVICES

The Company offers a wide range of assisted living care and services,
including personal care services, 24 hour staffing, support services, and
supplemental services. As of December 31, 2001, the Company had ownership
interests in 15 communities and managed an additional eight communities that
provide assisted living services, with an aggregate capacity for 626 and 412
residents, respectively. The residents of the Company's assisted living
residences generally need help with some or all ADLs, but do not require the
more acute medical care traditionally given in nursing homes. Upon admission to
the Company's assisted living communities, and in consultation with the
resident, the resident's family and medical consultants, each resident is
assessed to determine his or her health status, including functional abilities
and need for personal care services. The resident also completes a lifestyles
assessment to determine the resident's preferences. From these assessments, a
care plan is developed for each resident to ensure that all staff members who
render care meet the specific needs and preferences of each resident where
possible. Each resident's care plan is reviewed periodically to determine when a
change in care is needed.

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

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

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

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

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

- Level I typically provides for minimum levels of care and service, for
which the Company generally charges a monthly fee per resident ranging
from $1,400 to $3,325, depending upon unit size and the project design
type. Typically, Level I residents need minimal assistance with ADLs.

- Level II provides for relatively higher levels and increased frequency of
care, for which the Company generally charges a monthly fee per resident
ranging from $1,695 to $3,525, depending upon the unit size and the
project design type. Typically, Level II residents require moderate
assistance with ADLs and may need additional personal care, support and
supplemental services.

- Level III provides for the highest level of care and service, for which
the Company generally charges a monthly fee per resident ranging from
$1,995 to $3,700, depending upon the unit size and the project design
type. Typically, Level III residents are either very frail or impaired
and utilize many of the Company's services on a regular basis.

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

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Resident fees for these special units are dependent on the size of the unit, the
design type and the level of services provided.

SKILLED NURSING SERVICES

In its skilled nursing facilities, the Company provides traditional
long-term care through 24-hour-per-day skilled nursing care by registered
nurses, licensed practical nurses and certified nursing assistants. The Company
also offers a comprehensive range of restorative nursing and rehabilitation
services in its communities including, but not limited to, physical,
occupational, speech and medical social services. As of December 31, 2001, the
Company had ownership interests in four facilities that provides nursing
services, with an aggregate capacity for 354 residents.

HOME CARE SERVICES

As of December 31, 2001, the Company provided private pay, home care
services to clients at one of its senior living communities through the
Company's on-site, home care agency and made private pay, home care services
available to clients at a majority of its senior living communities through
third-party providers. The Company believes that the provision of private pay,
home care services is an attractive adjunct to its independent living services
because it allows the Company to provide more services to its residents as they
age in place and increases the length of stay in the Company's communities. In
addition, the Company makes available to residents certain customized physician,
dentistry, podiatry and other health-related services that may be offered by
third-party providers.

OPERATING COMMUNITIES

The table below sets forth certain information with respect to senior
living communities owned, leased and managed by the Company as of December 31,
2001. The Company is expanding certain of these communities, primarily to add
assisted living units.

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(1) Independent living (IL) residences, assisted living (AL) residences and
skilled nursing (SN) beds.

(2) In the case of a community shown as 10% owned, represents the Company's
ownership of approximately 10% of the limited partner interests in BRE/CSL.
Those communities shown as approximately 57% owned represent the Company's
ownership of approximately 57% of the limited partner interests in HCP.

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Those communities shown as approximately 1% owned represent the Company's
ownership of approximately 1% of the limited partnership interests in the
Triad Entities.

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

(4) The Company's home care agency is on-site at The Harrison at Eagle Valley
community.

(5) Represents communities owned by the Company and leased to third parties
pursuant to master leases under which the Company receives rent regardless
of whether the units are occupied. These leases were in place at the time
the Company acquired its interest in these communities. Subsequent to
December 31, 2001, the Hearthstone and Trinity Hills facilities were sold.

(6) With respect to the ILM II communities, the management contracts have been
terminated effective April 1, 2001, and with respect to the LCOR
communities, the management contracts have been terminated effective May 31,
2001.

THIRD-PARTY MANAGEMENT CONTRACTS

The Company is a party to a property management agreement (the "ILM II
Management Agreement") with ILM II Lease Corporation, a corporation formed by
ILM II, that operates five senior living communities. The ILM II Management
Agreement commenced on July 29, 1996. The ILM II Management Agreement was
originally scheduled to expire on March 31, 2001. The Company is currently
managing the ILM II communities on a month-to-month basis under the terms of the
original ILM II Management Agreement. Under the terms of the ILM II Management
Agreement, the Company earns a base management fee equal to 4% of the gross
operating revenues of the communities under management (as defined), and is also
eligible to receive an incentive management fee equal to 25% of the amount by
which the average monthly net cash flow of the communities (as defined) for the
12-month period ending on the last day of each calendar month exceeds a
specified base amount. The Company earned management fees of $0.6 million and
incentive management fees of $21,000 under the ILM II Management Agreement for
the year ended December 31, 2001. On February 28, 2002, ILM II notified the
Company that it had entered into an agreement to sell the five communities and
would, therefore, be terminating the management agreement effective April 1,
2002.

The Company is party to property management agreements (the "LCOR
Agreements") with affiliates of LCOR Incorporated ("LCOR") to operate four
independent living and assisted living communities owned by LCOR. The locations
covered by the agreement are: Trumbull, Connecticut, Libertyville, Illinois,
Summit, New Jersey and Naperville, Illinois. Three LCOR Agreements provide for a
base management fee of the greater of $15,000 per month or 5% of gross revenues,
plus an incentive fee equal to 25% of the excess cash flow over budgeted
amounts. The remaining LCOR Agreement provides for a base management fee of the
greater of $13,321 per month or 5% of gross revenues, plus an incentive fee
equal to 25% of the excess cash flow over budgeted amounts. The terms of the
LCOR Agreements are for 10 years with a five-year renewal at the Company's
option. On March 1, 2002, LCOR notified the Company of its intent to terminate
the LCOR Agreements, effective May 31, 2002, as a result of the Company not
funding certain alleged operating deficits, which the Company could optionally
fund under the LCOR Agreements. The Company has notified LCOR that the Company
believes this termination was without cause.

The Company was party to three separate property management agreements (the
"Buckner Agreements") with Buckner Retirement Services, Inc. ("Buckner"), a
not-for-profit corporation that operates three senior living communities. The
Buckner Agreements commenced in April 1996, January 1998 and June 2000 and were
scheduled to expire in March 2001, December 2002 and May 2005, respectively,
except that either party could terminate the agreements for cause under limited
circumstances. Under the terms of the Buckner Agreement for Buckner Parkway
Place, the Company earned a base management fee of $39,082 per month. Under the
terms of the Buckner Westminster Place Agreement, the Company earned a base
management fee of $9,700 per month. Under the terms of the Buckner Calderwoods
Agreement, the Company earned a base management fee of $11,800 per month. Also,
in the case of the Buckner Agreements, the Company was also eligible to receive
a productivity reward equal to 5% of the gross revenues generated during the
immediately

10

preceding month that exceed $721,000, $194,000 and $235,000, respectively. The
agreements have a productivity reward limit of 20% of the base management fee
per month. The amounts that exceed the limit are deferred.

The Buckner Westminister Place agreement expired on its own terms in March
of 2001. With respect to Calderwoods, the Company and Buckner entered into a
Management Termination, Consulting, Licensing and Transfer Agreement (the
"Calderwoods Termination Agreement") effective September 30, 2001 whereby the
Company and Buckner mutually agreed to terminate the Management Agreement then
in place between the parties. Under the terms of the Calderwoods Termination
Agreement, the Company will continue to provide certain consulting services and
earn a consulting/licensing fee of three and one-half percent of the facility's
gross revenues through December 31, 2001 and three percent of the facility's
gross revenues beginning on January 1, 2002 and continuing through May 31, 2005.

With respect to Parkway Place, the Company terminated for cause its
Management Agreement at that facility with Buckner effective December 31, 2001
due to Buckner's failure to reimburse the Company for certain health benefits
paid by the Company for the employees of that particular facility. The Company
has subsequently filed a claim with the American Arbitration Association seeking
reimbursement of these expenses, as well as severance compensation pursuant to
the Management Agreement. Buckner has filed an answer and a counterclaim in this
arbitration and proceedings are continuing.

The Company also manages communities for the Triad Entities and the BRE/CSL
joint venture under long-term management contracts. The management agreements
with the Triad Entities provide for managements fees equal to the greater of 5%
of gross revenue or $5,000 per month per community, plus overhead
reimbursements. The management agreement with BRE/CSL relating to the Amberleigh
community provides for a management fee of 5% of gross revenue, plus
reimbursement for costs and expenses related to the community.

GROWTH STRATEGIES

The Company believes that the fragmented nature of the senior living
industry and the limited capital resources available to many small, private
operators provide an attractive opportunity for the Company to expand its
existing base of senior living operations. The Company believes that its current
operations throughout the United States serve as the foundation on which the
Company can build senior living networks in targeted geographic markets and
thereby provide a broad range of high quality care in a cost-efficient manner.

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

PURSUE MANAGEMENT AGREEMENTS

The Company intends to pursue single or portfolio management opportunities
for senior living communities. The Company believes that its management
infrastructure and proven operating track record will allow the Company to take
advantage of increased opportunities in the senior living market for new
management contracts and other transactions. In addition, the Company will
manage the communities acquired by the BRE/CSL joint venture under long-term
management contracts.

PURSUE STRATEGIC ACQUISITIONS

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

11

of potential acquisition opportunities in the future. In reviewing acquisition
opportunities, the Company will consider, among other things, geographic
location, competitive climate, reputation and quality of management and
communities, and the need for renovation or improvement of the communities.

The Company formed the BRE/CSL joint venture with Blackstone, in December
2001, and the joint venture will seek to acquire in excess of $200 million of
senior housing properties. BRE/CSL is owned 90% by Blackstone and 10% by the
Company. Pursuant to the terms of the joint venture, each of the Company and
Blackstone must approve any acquisitions made by the joint venture. Each party
must also contribute its pro rata portion of the costs of any acquisition. On
December 31, 2001, the venture acquired its first property, The Amberleigh at
Woodside Farms, a 394 resident capacity independent living facility, from NHP.
In connection with the acquisition by BRE/CSL, the Company contributed $1.8
million to the venture. The Company expects to recover approximately $1.4
million of its contribution to BRE/CSL when permanent financing is obtained for
the Amberleigh community. In addition, the Company has entered into a
contribution agreement to contribute four of its senior living communities to
the joint venture. The Company will manage these communities once owned by the
joint venture under long-term management contracts.

DEVELOP NEW SENIOR LIVING COMMUNITIES

General. The Company intends to continue to expand its operations through
the development, construction, marketing and management of new senior living
communities in selected markets that provide a quality lifestyle that is
affordable to a large segment of seniors.

Triad Entities. The Company has opened 15 new Waterford and Wellington
communities in the last three years and is currently developing two new
Wellington communities pursuant to arrangements with Triad Senior Living, Inc.,
and its affiliates, which are unrelated third parties (the "Triad Entities").
The Waterford and Wellington community models are designed to provide
middle-income residents with a senior living community having amenities typical
of higher-priced communities. This is accomplished through more efficient space
design, emphasizing common areas and providing more efficient layouts of the
living areas. The Company believes that the Waterford and Wellington designs
meet the desire of many of the Company's residents to move into a new residence
that approximates, as nearly as possible, the comfort of their prior home.

As of December 31, 2001, there were two Wellington communities being
developed for the Triad Entities where the Company will manage these communities
under management agreements and where the Company has a 1% limited partner
interest. The following table summarizes information regarding the communities
being developed for the Triad Entities that the Company expects to be completed
in the first quarter of 2002.

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

(1) "Pre-lease" indicates that marketing activities have commenced and the
community is within six months of opening.

Triad IV estimates the cost of completion and lease up of these communities
to be $22 million to $24 million. The Company has agreed to fund up to $10
million in unsecured loans to Triad IV during the construction and lease up
phase on these two communities. The Company also has operating deficit loan
obligations in its management contracts with Triad IV in addition to the
unsecured loans from the Company.

The development agreements between each Triad Entity and the Company
generally provide for a development fee of 4% of project costs, plus
reimbursements for expenses and overhead not to exceed 4% of project costs. The
Triad Entities also enter into management agreements with the Company providing
for

12

management fees to the Company in an amount equal to the greater of 5% of gross
revenues or $5,000 per month per community, plus overhead reimbursements not to
exceed 1% of gross revenues. The Company has the option, but not the obligation,
to purchase the partnership interests of the other partners in the Triad
Entities for an amount equal to the amount paid for the partnership interest by
the other partners, plus a noncompounded return of 12% per annum, except for
Triad I. The property management agreements also provide the Company with an
option, but not the obligation, to purchase the communities developed by the
Triad Entities, other than Triad I, upon their completion for an amount equal to
the fair market value, based on a third-party appraisal, but not less than hard
and soft costs and lease-up costs. In December 1999, Triad I completed a
recapitalization in which an affiliate of Lehman Brothers purchased from a third
party 80% of the limited partnership interests in Triad I for an investment of
$12,000,000. Lehman Brothers affiliate's investment enabled Triad I to repay the
Company approximately $9,000,000 in loans. The Company increased its equity
contribution in Triad I to $3,000,000 and owned a 19% limited partnership
interest in Triad I until the fourth quarter of fiscal 2000. On October 1, 2000,
the Company reduced its ownership interest in each of the Triad Entities to 1%.
This reduction was accomplished by converting a portion of the Company's
investment in each of the Triad Entities to notes receivable. The Company has
the option, but not the obligation, to purchase the Triad I communities for an
amount specified in the partnership agreement. The Company continues to manage
the communities in Triad I. The Company has made no determination as to whether
it will exercise any of these purchase options. The Company will evaluate the
possible exercise of each purchase option based upon the business and financial
factors which may exist at the time those options may be exercised.

EXPAND REFERRAL NETWORKS

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

OPERATIONS

CENTRALIZED MANAGEMENT

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

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

REGIONAL MANAGEMENT

The Company provides oversight and support to each of its senior living
communities through experienced regional and district managers. A district
manager will oversee the marketing and operations of two to four communities
clustered in a small geographic area. A regional manager will cover a larger

13

geographic area consisting of five to twelve communities. In most cases, the
district and regional managers will office out of the Company's senior living
communities. Currently there are regional managers based in the Northeast,
Southeast, Midwest, Southwest and West regions.

The executive director at each community reports to a regional or district
manager. The regional and district managers report directly to the President and
Chief Operating Officer of the Company. The district and regional managers make
regular site visits to each of their communities. The site visits involve a
physical plant inspection, quality assurance review, staff training, financial
and systems audits, regulatory compliance, and team building.

COMMUNITY-BASED MANAGEMENT

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

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

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

QUALITY ASSURANCE

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

Resident and Resident's Family Input. On a routine basis the Company
provides residents and their family members the opportunity to provide valuable
input regarding the day-to-day delivery of services. On-site management at each
community has fostered and encouraged active resident councils and resident
committees who meet independently. These resident bodies meet with on-site
management on a monthly basis to offer input and suggestions as to the quality
and delivery of services. Additionally, at each community the Company conducts
annual resident satisfaction surveys to further monitor the satisfaction levels
of both residents and their family members. These surveys are sent directly to
the corporate headquarters for tabulation and distribution to on-site staff and
residents. For 2001 and 2000, the Company achieved a 97% and 93% approval
rating, respectively, from its residents. For any departmental area of service
scoring below a 90%, a plan of correction is developed jointly by on-site,
regional and corporate staff for immediate implementation.

Regular Community Inspections. On a monthly basis, a community inspection
is conducted by regional and/or corporate staff. Included as part of this
inspection is the monitoring of the overall appearance and maintenance of the
community interiors and grounds. The inspection also includes monitoring staff
profession-

14

alism and departmental reviews of maintenance, housekeeping, activities,
transportation, marketing, administration and food and health care services, if
applicable. The monthly inspection also includes observing of residents in their
daily activities and the community's compliance with government regulations.

Independent Service Evaluations. The Company engages the services of
outside professional independent consulting firms to evaluate various components
of the community operations. These services include mystery shops, competing
community analysis, pricing recommendations and product positioning. This
provides management with valuable unbiased product and service information. A
plan of action regarding any areas requiring improvement or change is
implemented based on information received. At communities where health care is
delivered, these consulting service reviews include the on-site handling of
medications, record keeping and general compliance with all governmental
regulations.

MARKETING

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

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

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

GOVERNMENT REGULATION

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

The health care industry is subject to extensive regulation and frequent
regulatory change. At this time, no federal laws or regulations specifically
regulate assisted or independent living residences. While a number of states
have not yet enacted specific assisted living regulations, certain of the
Company's assisted living communities are subject to regulation, licensing,
Certificate of Need and permitting by state and local health care and social
service agencies and other regulatory authorities. While such requirements vary
from state to state, they typically relate to staffing, physical design,
required services and resident characteristics. The Company believes that such
regulation will increase in the future. In addition, health care providers are
receiving increased scrutiny under anti-trust laws as integration and
consolidation of health care delivery increases and affects competition. The
Company's communities are also subject to various zoning restrictions, local
building codes, and other ordinances, such as fire safety codes. Failure by the
Company to comply with

15

applicable regulatory requirements could have a material adverse effect on the
Company's business, financial condition, and results of operations. Regulation
of the assisted living industry is evolving. The Company is unable to predict
the content of new regulations and their effect on its business. There can be no
assurance that the Company's operations will not be adversely affected by
regulatory developments.

The Company believes that its communities are in substantial compliance
with applicable regulatory requirements. However, in the ordinary course of
business, one or more of the Company's communities could be cited for
deficiencies. In such cases, the appropriate corrective action would be taken.
To the Company's knowledge, no material regulatory actions are currently pending
with respect to any of the Company's communities.

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

The Health Insurance Portability and Accountability Act ("HIPPA") passed in
1996 by Congress, established standards for the use and access to health
information. The law encompasses accountability and funding provisions for fraud
and abuse, portability of health insurance for employees and simplification
measures for all covered entities. In the administrative simplification
provisions are various rules and regulations for standard transactions, code
sets and identifiers. In addition, HIPPA provides specific regulations for
maintaining the confidentiality and security of health information. The various
requirements under HIPPA phase in beginning in October 2002 through 2004. The
Company continues to evaluate the proposed regulations to ensure that the
systems required are in place in order to maintain compliance with the new HIPPA
regulations.

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

Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased or managed communities that the Company believes
would have a material adverse effect on its business, financial condition, or
results of operations. The Company believes that its communities are in
compliance in all material respects with all federal, state and local laws,
ordinances and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware of any material

16

non-compliance, liability, or claim relating to hazardous or toxic substances or
petroleum products in connection with any of the communities the Company
currently operates.

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

COMPETITION

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

EMPLOYEES

As of December 31, 2001, the Company employed 2,657 persons, of which 1,382
were full-time employees (49 of whom are located at the Company's corporate
offices) and 1,275 were part-time employees. None of the Company's employees is
currently represented by a labor union and the Company is not aware of any union
organizing activity among its employees. The Company believes that its
relationship with its employees is good.

17

EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth certain information concerning each of the
Company's executive officers and key employees as of December 31, 2001:

James A. Stroud has served as a director and Chief Operating Officer of the
Company and its predecessors since January 1986. He currently serves as Chairman
of the Board, and Chairman and Secretary of the Company. Mr. Stroud also serves
on the boards of various educational and charitable organizations and in varying
capacities with several trade organizations, including as a member of the
Founder's Council and Leadership Council of the Assisted Living Federation of
America. Mr. Stroud also serves as an Owner/ Operator Advisory Group member to
the National Investment Conference and as a Founding Sponsor of the Johns
Hopkins University Senior Housing and Care Program. Mr. Stroud was the past
President and Member of the board of directors of the National Association for
Senior Living Industry Executives. He also was a founder of the Texas Assisted
Living Association and served as a member of its board of directors. Mr. Stroud
has earned a Masters in Law, is a licensed attorney and is also a Certified
Public Accountant. Mr. Stroud has had positions with businesses involved in
senior living for 17 years.

Lawrence A. Cohen has served as a director and Vice Chairman since November
1996. He has served as Chief Executive Officer since May 1999 and was Chief
Financial Officer from November 1996 to May 1999. From 1991 to 1996, Mr. Cohen
served as President and Chief Executive Officer of Paine Webber Properties
Incorporated, which controlled a real estate portfolio having a cost basis of
approximately $3.0 billion, including senior living facilities of approximately
$110.0 million. From 1991 to 1998, Mr. Cohen was President and a member of the
board of directors of ILM and ILM II. Mr. Cohen serves on the boards of various
charitable organizations, and was a founding member and is on the executive
committee of the Board of the American Seniors Housing Association. Mr. Cohen
has earned a Masters in Law, is a licensed attorney and is also a Certified
Public Accountant. Mr. Cohen has had positions with businesses involved in
senior living for 17 years.

Keith N. Johannessen has served as President of the Company and its
predecessors since March 1994, and previously served as Executive Vice President
from May 1993 until February 1994. Mr. Johannessen has served as a director and
Chief Operating Officer since May 1999. From 1992 to 1993, Mr. Johannessen
served as Senior Manager in the health care practice of Ernst & Young. From 1987
to 1992, Mr. Johannessen was Executive Vice President of Oxford Retirement
Services, Inc. Mr. Johannessen has served on the State of the Industry and Model
Assisted Living Regulations Committees of the American Seniors Housing
Association. Mr. Johannessen has been active in operational aspects of senior
housing for 23 years.

Ralph A. Beattie joined the Company as Executive Vice President and Chief
Financial Officer in May 1999. From 1997 to 1999, he served as Executive Vice
President and the Chief Financial Officer of Universal Sports America, Inc.,
which was honored as the number one growth company in Dallas for 1998. For the
eight years prior to that he was Executive Vice President and Chief Financial
Officer for Haggar Clothing

18

Company, during which time Haggar successfully completed its initial public
offering. Mr. Beattie has earned his Masters of Business Administration and is
both a Certified Management Accountant and a Certified Financial Planner.

Rob L. Goodpaster has served as Vice President -- National Marketing of the
Company and its predecessors since December 1992. From 1990 to 1992, Mr.
Goodpaster was National Director for Marketing for Autumn America, an owner and
operator of senior housing facilities. Mr. Goodpaster is a member of the Board
of Directors of the National Association For Senior Living Industries. Mr.
Goodpaster has been active in the operational, development and marketing aspects
of senior housing for 25 years.

David W. Beathard, Sr. has served as Vice President -- Operations of the
Company and its predecessors since August 1996. From 1992 to 1996, Mr. Beathard
owned and operated a consulting firm which provided operational, marketing, and
feasibility consulting regarding senior housing facilities. Mr. Beathard has
been active in the operational, sales and marketing, and construction oversight
aspects of senior housing for 27 years.

David R. Brickman has served as Vice President and General Counsel of the
Company and its predecessors since July 1992. From 1989 to 1992, Mr. Brickman
served as in-house counsel with LifeCo Travel Management Company, a corporation
that provided travel services to U.S. corporations. Mr. Brickman has earned a
Masters of Business Administration and a Masters in Health Administration. Mr.
Brickman has either practiced law or performed in-house counsel functions for 15
years.

Paul T. Lee has served as Vice President -- Finance since February 1999.
From 1992 to 1998, Mr. Lee served in various management positions of Chief Auto
Parts Inc. which was one of the nation's largest automotive aftermarket retail
chains. From 1995 to 1998, he held the position of Assistant Treasurer. Prior to
joining Chief Auto Parts, Mr. Lee held various positions in the finance
department of Brice Foods, Inc. from 1988 to 1992.

Jerry D. Lee, a Certified Public Accountant, has served as Corporate
Controller since April 1999. Prior to joining the Company, Mr. Lee served as the
Senior Vice President of Finance, from 1997 to 1999, for Universal Sports
America, Inc., which produced sporting events and provided sports marketing
services for collegiate conferences and universities. From 1984 to 1997, Mr. Lee
held various accounting management positions with Haggar Clothing Company. Mr.
Lee is a member of the Financial Executives International, the American
Institute of Certified Public Accountants and is also a member of the Texas
Society of Certified Public Accountants.

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

ITEM 2. PROPERTIES

The executive and administrative offices of the Company are located at
14160 Dallas Parkway, Suite 300, Dallas, Texas 75254, and consist of
approximately 20,000 square feet. The lease on the premises extends through
August 31, 2002 and the Company is currently evaluating various alternatives for
its executive and administrative offices after this lease term. The Company
believes that its corporate office facilities are adequate to meet its
requirements through the end of its lease terms. The Company also leases an
executive office space in New York, New York pursuant to an annual lease
agreement.

As of December 31, 2001, the Company owned, leased and/or managed the
senior living communities referred to in Item 1 above under the caption
"Operating Communities."

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ITEM 3. LEGAL PROCEEDINGS

On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP in the Delaware Court of Chancery, Civil Action No. 16725
(the "Delaware Action") against NHP, the general partner of NHP ("General
Partner"), the Company and Capital Senior Living Properties 2-NHPCT, Inc.
(collectively, the "Defendants"). Mr. Lewis purchased ninety Assignee Interests
in NHP in February 1993 for $180. The complaint alleges, among other things,
that the Defendants breached, or aided and abetted a breach of, the express and
implied terms of the NHP Partnership Agreement in connection with the sale of
four properties by NHP to Capital Senior Living Properties 2-NHPCT, Inc in
September 1998 (the "1998 Transaction"). The complaint seeks, among other
relief, rescission of the 1998 Transaction and unspecified damages. On July 9,
1999, the Defendants filed a motion to dismiss the case. Subsequently, the
plaintiff amended his complaint adding allegations challenging the terms of the
sale in December 2001 of the Amberleigh retirement facility to BRE/ CSL.

On January 31, 2002, the parties to the Delaware Action entered into a
Memorandum of Understanding providing for the settlement of the Delaware Action
subject to certain terms and conditions, including the filing of an amended
complaint and receipt of the approval of the Court of Chancery. The proposed
settlement contemplates the creation of a settlement fund in the amount of
approximately $0.8 million, of which NHP will contribute $0.3 million, the
amount of the deductible of NHP's directors and officers' liability insurance
policy at the time the Delaware Action was filed (the "D&O Policy"). Virtually
all of the balance of the settlement fund will be contributed by the various
insurance brokers and agents, and their insurers, in connection with the
resolution of certain claims for coverage under the D&O Policy. The settlement
contribution of the Company and its affiliates will be $43,000. If approved by
the Court of Chancery, the settlement fund, less any award of attorney's fees
for plaintiff's counsel approved by the court, will be distributed to a class of
Assignee Holders of NHP.

On December 6, 2001, Leonard Kalmenson filed a motion to intervene in the
Delaware Action on the behalf of a putative class of holders of Pension Notes in
the event the Court of Chancery determines that the claims asserted in the
Delaware Action are derivative in nature. The Complaint in Intervention filed by
Mr. Kalmenson names as defendants the Defendants in the Delaware Action as well
as Retirement Associates, Inc., the sole stockholder and General Partner, and
various current and former directors of the General Partner. The Complaint in
Intervention essentially alleges, among other things, a variety of claims
challenging the 1998 Transaction and a claim for breach of contract relating to
the failure of NHP to pay the full amount of principal and interest owed on the
Pension Notes on their maturity date. NHP and the Company believe that the
allegations asserted by Mr. Kalmenson are without merit and that his motion to
intervene is moot in view of the proposed settlement of the Delaware Action. The
Company is unable at this time to estimate any liability related to this claim,
if any.

On January 16, 2002, the Company filed a claim with the American
Arbitration Association seeking reimbursement of certain health care expenses,
as well as severance compensation from Buckner Retirement Services, Inc.
pursuant to a management agreement between the parties. Buckner has filed an
answer and a counterclaim in this arbitration and proceedings are continuing.

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

The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the senior living and health care
services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs. The Company
currently maintains property, liability and professional medical malpractice
insurance policies for the Company's owned and managed communities under a
master insurance program in amounts and with such coverages and deductibles that
the Company believes are within normal industry standards based upon the nature
and risks of the Company's business, and the Company believes that such
insurance coverage is adequate. The Company also has an umbrella excess
liability

20

protection policy. There can be no assurance that a claim in excess of the
Company's insurance will not arise. A claim against the Company not covered by,
or in excess of, the Company's insurance could have a material adverse effect
upon the Company. In addition, the Company's insurance policies must be renewed
annually. There can be no assurance that the Company will be able to obtain
liability insurance in the future or that, if such insurance is available, it
will be available on acceptable terms.

Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased, or managed communities that it believes would have
a material adverse effect on the Company's business, financial condition, or
results of operations. The Company believes that its communities are in
compliance in all material respects with all federal, state, and local laws,
ordinances, and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware of any material non-compliance, liability, or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of the communities it currently operates.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the Company's security holders
during the fourth quarter ended December 31, 2001.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY; RELATED STOCKHOLDER MATTERS

(a) The Company's shares of common stock are listed for trading on the New
York Stock Exchange ("NYSE") under the symbol "CSU" The following table sets
forth, for the periods indicated, the high and low sales prices for the
Company's common stock, as reported on the NYSE. At December 31, 2001 there were
approximately 3,700 stockholders of record of the Company's common stock.

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

(b) Recent Sales of Unregistered Securities. Information with respect to
this Item is set forth above under the caption Item 1. Business "Overview." The
issuance therein described of the Company's Common

21

Stock to Messrs. Jeffrey L. Beck, James A. Stroud (including a trust) and
Lawrence A. Cohen in the Formation Transactions in exchange for the capital
stock of certain contributed entities was carried out in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act of
1933, as amended, pursuant to a binding written agreement entered into prior to
the filing of a registration statement filed in connection with the Company's
initial public offering.

(c) Use of Proceeds. Not Applicable.

22

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data of the Company. The
selected financial data for the years ended December 31, 2001, 2000, 1999, 1998
and 1997 are derived from the audited consolidated financial statements of the
Company.

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

(1) General and administrative expenses include officers' salaries of $1.4
million, $1.2 million, $0.9 million, $0.7 million and $3.3 million, for the
years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively.
Prior to November 1997, these amounts were primarily composed of salaries
and bonuses paid to the founders and were based in part on federal income
tax regulations regarding distributions of closely held corporations and S
corporations. Effective upon the Company's initial public offering, these
federal income tax regulations no longer applied to the Company.
Compensation of the founders since October 1, 1997 has been based on the
founders' employment agreements.

(2) No provision for income taxes has been recorded from January 1, 1997 through
completion of the Formation Transactions as the operating companies included
in the historical financial statements, prior to the Company's initial
public offering, were S corporations or partnerships and accordingly were
not subject to income taxes during the period.

(3) Pro forma income taxes have been calculated based on the assumption that the
S corporations and partnerships were subject to income taxes. Pro forma
income tax expense has been calculated using statutory federal and state tax
rates, estimated at 39.5%.

(4) The Company refinanced $47.7 million of mortgage loans reflected as
short-term debt in fiscal 1998 to long term fixed rate mortgage loans in
fiscal 1999.

24

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The following discussion and analysis addresses the Company's results of
operations on a historical consolidated basis for the years ended December 31,
2001, 2000 and 1999. The following should be read in conjunction with the
Company's historical consolidated financial statements and the selected
financial data contained elsewhere in this report.

The Company is one of the largest operators of senior living communities in
the United States in terms of resident capacity. The Company's operating
strategy is to provide high quality senior living services at an affordable
price to its residents, while achieving and sustaining a strong, competitive
position within its chosen markets, as well as to continue to enhance the
performance of its operations. The Company provides a wide array of senior
living services to the elderly at its communities, including independent living,
assisted living (with special programs and living units at some of its
communities for residents with Alzheimer's and other forms of dementia), skilled
nursing and home care services.

During the years 1990 through 2001, the Company acquired interests in and
continues to own 39 communities and expanded its senior living management
services by entering into management service contracts on nine communities for
two independent third-party owners and provided development and construction
management services for new residence properties in addition to adding a home
care service agency.

The Company generates revenue from a variety of sources. For the year ended
December 31, 2001, the Company's revenues were derived as follows: 89.0% from
the operation of 18 owned communities; 5.1% from lease rentals from triple net
leases; 5.3% from management fees arising from management services provided for
18 affiliate-owned senior living communities and nine third-party owned senior
living communities; and 0.6% from development fees earned for managing the
development and construction of new senior living communities for affiliate
owned senior living communities.

The Company believes that the factors affecting the financial performance
of communities managed under contracts with third parties do not vary
substantially from the factors affecting the performance of owned and leased
communities, although there are different business risks associated with these
activities.

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

The Company's current management contracts expire on various dates through
June 2011 and provide for management fees based generally upon rates that vary
by contract from 4% of net revenues to 7% of net revenues. In addition, certain
of the contracts provide for supplemental incentive fees that vary by contract
based upon the financial performance of the managed community. The Company's
development fees are generally based upon a percentage of construction cost and
are earned over the period commencing with the initial development activities
and ending with the opening of the community.

During 1998, 1997 and 1996, the Company paid approximately $0.1 million,
$5.6 million, and $3.2 million, respectively, for partnership interests in HCP.
As a result of additional purchases, the Company's ownership interest in HCP
exceeded 50% on June 26, 1997 and was 57% at December 31, 2001. Accordingly,
this partial acquisition has been accounted for by the purchase method of
accounting, and the assets, liabilities, minority interest, and the results of
operations of HCP have been consolidated in the Company's financial statements
since January 1, 1997. The Company, through its ownership in HCP, leased two
properties under triple net leases at December 31, 2001. Subsequent to the end
of the Company's 2001 fiscal

25

year, these properties were sold for $5.8 million. After the sale of these
properties, HCP owns one community that is currently classified as held for
sale.

The Company acquired, on November 1, 1997, the NHP Notes owned by an
affiliate of the Company in the Formation Transactions for $18.7 million. The
NHP Notes bear simple interest at 13% per annum and matured on December 31,
2001. Interest is paid quarterly at a rate of 7%, with the remaining 6% interest
deferred. From November 1, 1997 through September 30, 1998, the Company recorded
interest income at 10.5% of the purchase price paid, which was determined based
on the discounted amount of principal and interest payments to be made following
the maturity date (December 31, 2001) of the NHP Notes (using a six-month lag
between maturity and full repayment), due to uncertainties regarding the
ultimate realization of the accrued interest. On September 30, 1998, the Company
purchased four properties from NHP. NHP in turn redeemed $7.5 million of the
Company's investment in the NHP Notes and distributed approximately $5.3 million
of deferred interest not previously paid on such notes. From October 1, 1998
through December 31, 1998, the Company reevaluated its investment in the NHP
Notes and began recording additional income after giving consideration to
current payment of interest, partial redemption of the NHP Notes with accrued
interest and the estimated residual value in NHP. This change in estimate
resulted in $0.6 million of additional income in 1998. In the fourth quarter of
fiscal 1999, the Company reevaluated the assumptions related to its investment
in the NHP Notes, and as a result reduced the income expected to be earned from
the NHP Notes. This change in estimate resulted in a $1.2 million reduction in
interest income in the fourth quarter of 1999. During the fourth quarter of
2001, the Company reevaluated its assumptions related to the NHP Notes, and as a
result, reduced interest income in the fourth quarter by $0.5 million. At
December 31, 2001, the Company's effective interest rate on the NHP Notes was
16.7%. Subsequent to December 31, 2001, NHP distributed its available cash and
proceeds from the sale of its community in Buffalo, New York to the NHP note
holders. The Company received $5.6 million of this distribution as a payment on
its NHP Notes.

The Company formed the BRE/CSL joint venture with Blackstone in December
2001, and the joint venture will seek to acquire in excess of $200 million of
senior housing properties. BRE/CSL is owned 90% by Blackstone and 10% by the
Company. Pursuant to the terms of the joint venture, each of the Company and
Blackstone must approve any acquisitions made by the joint venture. Each party
must also contribute its pro rata portion of the costs of any acquisition. On
December 31, 2001, the venture acquired its first property, The Amberleigh at
Woodside Farms, a 394 resident capacity independent living facility, from NHP.
In connection with the acquisition by BRE/CSL the Company contributed $1.8
million to the venture. The Company expects to recover approximately $1.4
million of its contribution to BRE/CSL when permanent financing is obtained for
the Amberleigh community. In addition, the Company has entered into a
contribution agreement to contribute four of its senior living communities to
the joint venture. The Company will manage these communities once owned by the
joint venture under long-term management contracts.

The Company is developing two communities both of which are expected to be
completed in the first quarter of fiscal 2002 and will seek to acquire
additional senior living communities through the BRE/CSL joint venture it
established with Blackstone. The development of senior living communities
typically involves a substantial commitment of capital over an approximate
12-month construction period during which time no revenues are generated,
followed by a 18- to 24-month lease-up period. The Company anticipates that
newly opened or expanded communities will operate at a loss during a substantial
portion of the lease-up period. The Company's growth strategy may also include
the acquisition of senior living communities, home care agencies and other
properties or businesses that are complementary to the Company's operations and
growth strategy.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
financial statements and related footnotes. Management bases its estimates and
assumptions on historical experience, observance of industry trends and various
other sources of information and factors, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from these
estimates.
26

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially could result in
materially different results under different assumptions and conditions. The
Company believes the following critical accounting policies require management's
most difficult, subjective and complex judgments.

REVENUE RECOGNITION

Resident and health care revenue is recognized at estimated net realizable
amounts, based on historical experiences, due from residents in the period to
which the rental and other services are provided.

Revenues from the Medicare and Medicaid programs accounted for 9% of the
Company's net revenues. Under the Medicare program, payments are determined
based on established rates that differ from private pay rates. Revenue from the
Medicare program is recorded at established rates and adjusted for differences
between such rates and estimated amounts payable from the program. Any
differences between estimated and actual reimbursements are included in
operations in the year of settlement, which have not been material. Under the
Medicaid program, communities are entitled to reimbursement at established rates
that are lower than private pay rates. Patient service revenue for Medicaid
patients is recorded at the reimbursement rates as the rates are set
prospectively by the state upon the filing of an annual cost report.

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

Management services revenue and development fees are recognized when
earned. Management services revenue relates to providing certain management and
administrative support services under management contracts. The Company's
management contracts include contingent management services revenue, usually
based on exceeding certain gross revenue targets. These contingent revenues are
recognized based on actual results according to the calculations specified in
the various management agreements.

INVESTMENTS IN PARTNERSHIPS

Triad Entities. The Company holds a 1% interest in each of the Triad
Entities and accounts for its investment in the Triad Entities under the equity
method of accounting. The Company has loan commitments to the Triad Entities for
construction and pre-marketing expenses, in addition to requirements to fund the
Triad Entities' operating deficits through an operating deficit guarantee
provided for in its management agreement with the Triad Entities. The Company
evaluates the carrying value of these receivables by comparing the discounted
cash flows expected from the operations of the Triad Entities, to the carrying
value of the receivables. These cash flow models consider lease-up rates,
expected operating costs, debt service requirements and various other factors.
Management believes, based on the assumptions used in these cash flow models,
that the notes receivable are fully recoverable during the term of the Company's
management contract with the Triad Entities.

Under equity accounting, the Company has recognized losses in the Triad
Entities of $0.5 million as of December 31, 2001. The recognition of these
losses have reduced the Company's investments in the Triad Entities to zero and
additional losses of $0.3 million have been recorded as a reduction to the
Company's notes receivable from the Triad Entities. The Company's share of
future losses will also be recorded as a reduction of notes receivable from the
Triad Entities.

BRE/CSL. During the fourth quarter of 2001, the Company formed the BRE/CSL
joint venture with Blackstone, which will seek to acquire in excess of $200
million of senior housing properties. The venture is owned 90% by Blackstone and
10% by the Company. The Company accounts for its investment in this joint
venture under the equity method of accounting. The Company recorded its
investment at cost and will adjust its investment for its share of earnings and
losses of BRE/CSL.

27

ASSETS HELD FOR SALE

The Company determines the fair value, net of costs of disposal, of an
asset on the date the asset is categorized as held for sale, and the asset is
recorded at the lower of its fair value, net of cost of disposal, or carrying
value on that date. The Company periodically reevaluates assets held for sale to
determine if the assets are still recorded at the lower of fair value, net of
cost of disposal, or carrying value. The Company currently has one community and
six parcels of land held for sale. The fair value of these properties is
generally determined based on market rates, industry trends and recent
comparable sales transactions. The actual sales price of these assets could
differ significantly from the Company's estimates.

RESULTS OF OPERATIONS

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

28

YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000

Revenues. Total revenues increased $10.9 million or 18.3% to $70.5 million
in 2001 compared to $59.7 million in 2000. Resident and health care revenue
increased $13.6 million or 27.7% to $62.8 million in 2001 compared to $49.2
million in the prior year. This increase in resident and healthcare revenue is
primarily due to a full year of revenue from the eight communities acquired in
August 2000, that were formerly owned by ILM and ILM II. These eight communities
increased the Company's resident capacity of owned communities by approximately
1,300 units. Rental and lease income decreased by $1.0 million due to the
expiration of triple net leases on four communities leased to HealthSouth, along
with lease income that was earned in the prior year on the ILM communities.
Unaffiliated management services revenue decreased $0.3 million or 13.2%,
primarily due to the acquisition of the eight communities from ILM and ILM II,
that were formerly managed by the Company. Affiliated management services
revenue increased $0.7 million or 67.6%, due to management fees earned on the
management of 17 Triad communities in 2001 compared to 14 Triad communities in
2000. In addition, the Company received a full year of management fees in 2001
on 11 Triad communities that were opened during the fourth quarter of 2000. The
Company did not earn any unaffiliated development fees during 2001, resulting in
a reduction in unaffiliated development fees of $0.6 million. Affiliated
development fee revenue decreased $1.6 million to $0.4 million, reflecting the
completion of one and 11 Triad communities in 2001 and 2000, respectively.

Expenses. Total expenses increased $7.1 million or 14.2% to $57.3 million
in 2001 compared to $50.2 million in 2000. Operating expenses increased to $37.2
million in 2001 compared to $29.5 million in the prior year. This 26.0% increase
primarily resulted from a full year of operations from the eight ILM communities
acquired in August 2000. General and administrative expenses increased 8.0% or
$0.9 million primarily as a result of the ILM acquisition. Bad debt expense
decreased from $4.3 million in 2000 to $1.0 million in 2001. Bad debt expense in
fiscal 2001 primarily related to writing off $0.6 million in receivables related
to one of the Company's triple net leases, along with normal write offs of
resident receivables. The bad debt expense in 2000 relates to writing off or
reserving $1.2 million in development fees receivable, $2.2 million in notes
receivable and $0.8 million in valuation adjustments on five parcels of land
held for sale. Depreciation and amortization expenses increased 36.7% to $7.1
million in 2001 compared to $5.2 million in 2000, reflecting a full year of
depreciation on the communities acquired from ILM and ILM II.

Other income and expenses. Interest expense increased $2.9 million to
$14.9 million in 2001 compared to $12.0 million in 2000. This 24.3% increase in
interest expense is the result of a full year of interest incurred on the debt
used to acquire the ILM communities and refinancing three of the Company's owned
communities compared to a partial year of interest in the prior year, as the ILM
assets were acquired in August 2000, partially offset by lower interest rates on
the Company's variable rate loans in the current fiscal year. Gain (loss) on
sale of assets increased by $2.9 million in the current year compared to the
prior year. In 2001, the Company sold one community, two parcels of land and a
house for $5.2 million, which resulted in the recognition of a gain of $2.6
million and net proceeds to the Company of $4.8 million. In 2000, the Company
sold two communities and a house for $4.8 million, that resulted in the
recognition of a loss of $0.4 million and net cash proceeds of $4.5 million.
Interest income primarily represents interest earned on loans the Company made
to the Triad Entities along with interest earned on the Company's investment in
the NHP Notes. Equity in the earnings of affiliates represents the Company's
share of the losses incurred by the Triad Entities.

Provision for income taxes. Provision for income taxes in 2001 was $1.9
million or 39.1% of income before taxes, compared to $0.8 million or 38.1% of
income before taxes in 2000. The effective tax rates for 2001 and 2000 differ
from the statutory tax rates because of state income taxes and permanent tax
differences.

Minority interest. Minority interest increased $0.4 million to $1.6
million in 2001 compared to $1.2 million in 2000 primarily due to the gains on
sale of two HCP properties partially offset by a decrease in operating income at
HCP.

Extraordinary charge. The Company recognized an extraordinary charge, net
of minority interest and income tax benefit, of $0.2 million. The charge
resulted from a loan foreclosure on HCP's McCurdy property.

29

Net income. As a result of the foregoing factors, net income increased
$1.5 million to $2.8 million for 2001, as compared to $1.2 million for 2000.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

Revenues. Total revenues decreased $4.3 million or 6.7% to $59.7 million
in 2000 compared to $64.0 million in 1999. Resident and health care revenue
increased $8.1 million or 19.7% to $49.2 million in 2000 compared to $41.1
million in the prior year. This increase in resident and healthcare revenue is
primarily due to the acquisition of eight communities in August 2000 formerly
owned by ILM. These eight communities increased the Company's resident capacity
of owned communities by approximately 1,300 units. Unaffiliated management
services revenue decreased $0.4 million or 15.7%, due primarily to the
acquisition of the eight communities from ILM and ILM II, which the Company
formerly managed. Affiliated management services revenue increased $0.6 million
or 128.1%, due to fees earned on the management of 14 Triad communities in 2000
compared to three Triad communities in 1999. Unaffiliated development fees
decreased to $0.6 million in 2000 compared to $1.3 million in 1999. This
decrease reflects the completion and opening of three communities for
unaffiliated third parties. Affiliated development fee revenue decreased $12.1
million to $2.0 million, reflecting the completion of 11 Triad communities in
2000. The Company reduced its ownership percentage to a 1% limited partnership
interest in each of the Triad Entities.

Expenses. Total expenses decreased $4.1 million or 7.9% to $50.1 million
in 2000 compared to $54.2 million in 1999. Operating expenses increased to $29.5
million in 2000 compared to $24.5 million in the prior year. This 20.7% increase
primarily results from the acquisition of the eight ILM communities in August
2000. General and administrative expenses increased 20.7% or $1.9 million as a
result of the ILM acquisition and the write-off of other preacquisition costs on
mergers that were not completed by the Company. Bad debt expense decreased from
$15.9 million in 1999 to $4.3 million in 2000. The bad debt expenses in 2000
relates to writing off or reserving $1.2 in development fees receivable, $2.2
million in notes receivable and $0.8 million in valuation adjustments on five
parcels of land held for sale. Bad debt expense in 1999 related to writing off
or reserving $10.5 million in development fees, $1.6 million in pursuit cost
from affiliates and $3.9 million in notes receivable from joint ventures. These
write offs resulted from various Triad Entities canceling the development of 19
Waterford communities, since the joint ventures were unable to secure financing
on attractive terms for the completion of these communities. Depreciation and
amortization expenses increased 11.0% to $5.2 million in 2000 compared to $4.7
million in 1999 as a result of the ILM acquisition.

Other income and expenses. Other income and expenses decreased $5.8
million to a net other expense of $6.3 million in 2000 compared to $0.5 million
net other expense in the prior year. This decrease is primarily the result of a
$4.9 million increase in interest expense. This increase in interest expense
reflects additional debt incurred of approximately $95.2 million as a result of
the Company acquiring the ILM assets and refinancing three of the Company's
owned communities. In addition, in the current fiscal year, the Company incurred
a net loss on sale of assets of $0.4 million compared to a net gain on sale of
assets in 1999 of $0.7 million.

Provision for income taxes. Provision for income taxes in 2000 was $0.8
million or 38.1% of income before taxes, compared to $3.0 million or 38.2% of
income before taxes in 1999. The effective tax rates for 2000 and 1999 differ
from the statutory tax rates because of state income taxes and permanent tax
differences.

Minority interest. Minority interest decreased $0.2 million to $1.2
million in 2000 compared to $1.4 million in 1999 primarily due to the losses on
sale of three HCP properties partially offset by an increase in operating income
at HCP.

Net income. As a result of the foregoing factors, net income decreased
$3.6 million to $1.2 million for 2000, as compared to $4.8 million for 1999.

QUARTERLY RESULTS

The following table presents certain quarterly financial information for
the four quarters ended December 31, 2001 and 2000. This information has been
prepared on the same basis as the audited

30

Consolidated Financial Statements of the Company appearing elsewhere in this
report and include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the quarterly results
when read in conjunction with the audited Consolidated Financial Statements of
the Company and the related notes thereto.

LIQUIDITY AND CAPITAL RESOURCES

In addition to approximately $10.0 million of cash balances on hand as of
December 31, 2001, the Company's principal source of liquidity is expected to be
cash flows from operations, proceeds from the sale of noncore assets, proceeds
from NHP Note redemptions and cash flows from BRE/CSL. Of the $10.0 million in
cash balances, $1.7 million relates to cash held by HCP. The Company expects its
available cash and cash flows from operations, proceeds from the sale of assets,
and cash flows from BRE/CSL to be sufficient to fund its short-term working
capital requirements. The Company's long-term capital requirements, primarily
for acquisitions, the payment of operating deficit guarantees, development, and
other corporate initiatives, will be dependent on its ability to access
additional funds through joint ventures and the debt and/or equity markets.
There can be no assurance that the Company will continue to generate cash flows
at or above current levels or that the Company will be able to obtain the
capital necessary to meet the Company's long-term capital requirements.

The Company had net cash provided by operating activities of $14.3 million
in fiscal 2001 compared to $19.7 million and $3.1 million in fiscal 2000 and
1999, respectively. In fiscal 2001, the net cash provided by operating
activities was primarily derived from net income of $2.8 million along with net
noncash charges of $8.4 million, a decrease in accounts receivable of $4.2
million, a decrease in federal and state taxes receivable of $2.6 million, a
decrease in prepaid and other assets of $0.7 million, offset by increases in
interest of

31

$4.0 million and a net decrease in accounts payable and accrued expenses of $0.5
million. In fiscal 2000, the net cash provided by operating activities was
primarily derived from net income of $1.2 million along with net noncash charges
of $12.3 million, decreases in accounts receivable of $4.3 million, increases in
accounts payable and accrued expenses of $2.5 million, a decrease in federal and
state taxes receivable of $2.3 million, offset by increases in interest and
notes receivable of $1.8 million and an increase in prepaid and other assets of
$1.1 million. In fiscal 1999, the net cash provided by operating activities was
primarily derived from net income of $4.8 million along with net noncash charges
of $22.7 million offset by increases in accounts and interest receivables of
$14.1 million, an increase in other assets of $1.5 million, and a reduction in
federal and state income taxes of $7.7 million.

The Company had net cash used in investing activities of $15.7 million,
$116.2 million and $16.5 million in fiscal 2001, 2000, and 1999, respectively.
In fiscal 2001, the Company's net cash used in investing activities was
primarily the result of advances to Triad Entities of $17.1 million for
operating deficits and capital expenditures and capital expenditures of $2.1
million, investments in limited partnerships of $1.3 million, offset by the
proceeds from the sale of one community and two parcels of land for $4.8
million, net of selling costs. In fiscal 2000, the Company's net cash used in
investing activities was primarily the result of acquisition costs of $102.0
million for the eight ILM communities, advances to Triad Entities of $18.2
million for operating deficits and capital expenditures and capital expenditures
of $3.1 million, offset by the proceeds of the sale of HCP assets of $4.5
million and a distribution from a limited partnership of $2.6 million. In fiscal
1999, the Company's net cash used in investing activities was primarily the
result of advances to Triad Entities of $22.8 million and capital expenditures
of $1.9 million, offset by the proceeds from the sale of the HCP property of
$2.7 million and a distribution from a limited partnership of $5.4 million.

The Company had net cash used in financing activities of $11.5 million in
fiscal 2001 compared to net cash provided by financing activities of $87.5
million and $10.6 million in fiscal 2000 and 1999, respectively. For fiscal
2001, net cash used in financing activities was primarily the result of
distributions to minority partners of $7.6 million, net repayments on notes of
$2.9 million and the restriction of $1.0 million under the terms of one of the
Company's loan agreements. For fiscal 2000, the net cash provided by financing
activities was primarily the result of increase in debt outstanding as a result
of the Company's acquisition of the eight ILM communities and refinancing of
three owned communities, offset by repayments on the Company's line of credit of
$30.0 million, distributions of $4.0 million to minority partners and $3.7
million in loan costs and the restriction of $1.1 million under the terms of a
certain loan agreement. For fiscal 1999, the net cash provided by financing
activities was primarily the result of increases in debt outstanding under the
Company's line of credit and notes payable.

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

The cash flows and profitability of the Company's owned communities that
are leased to third parties depend on the ability of the lessee to make timely
lease payments. During 2001, HCP leased four communities to HealthSouth
Rehabilitation Corporation ("HealthSouth") under a master lease agreement, that
expired on November 30, 2001. Three of the four communities were closed by the
lessee and effective August 5, 1999, HealthSouth agreed to transfer control of
the closed communities to the Company. The assets of one of the two communities,
with the exception of two houses, were sold on September 29, 1999. On January
11, 2000, the Company sold the HCP community in Martin, Tennessee to HealthSouth
for $2.4 million. On July 12, 2000, the Company sold the house owned by HCP in
Gallatin, Tennessee for $0.4 million. On August 4, 2000, the Company sold HCP's
community in Mt. Dora, Florida for $2.0 million. On September 25, 2001, HCP sold
the remaining house in Goodlettsville, Tennessee for $0.3 million.
Notwithstanding the sales, HealthSouth continued to make its full lease payments
to HCP with no reduction in rent for its four leases until the lease expired in
November 2001. The remaining property leased to HealthSouth was reclassified
during the fourth quarter to held for sale. In addition to the HealthSouth
leases, there were four other skilled nursing facilities leased by HCP. During
2001, the lessee on a triple net leased community in Evansville, Indiana
defaulted on its minimum lease payments. HCP made the decision not to put
additional money into the
32

property, which was built in 1916, and notified the lender that they would not
continue paying the lender's mortgage payment on the property. Consequently,
during the third quarter of 2001, the lender foreclosed on the property. The
foreclosure resulted in the Company recognizing an extraordinary charge, net of
minority interest and income tax benefit of $0.2 million. During 2001, HCP
operated, through a lease to an affiliate, one skilled nursing community in
Cambridge, Massachusetts, until it was sold on August 15, 2001 for $3.6 million.
At December 31, 2001, the Company had two additional properties leased to third
parties. Subsequent to December 31, 2001, these two properties were sold for
$5.8 million.

The cash flows and profitability of the Company's third-party management
fees are dependent upon the revenues and profitability of the communities the
Company manages. While the management contracts are generally terminable only
for cause, in certain cases contracts can be terminated upon the sale of a
community, subject to the Company's rights to offer to purchase such community.

The Company will seek to acquire senior living communities through its
BRE/CSL joint venture. The BRE/CSL joint venture with Blackstone will seek to
acquire in excess of $200 million of senior housing properties. The venture is
owned 90% by Blackstone and 10% by the Company. The Company will manage the
communities owned by the joint venture under long-term management contracts. On
December 31, 2001, the venture acquired its first property, The Amberleigh at
Woodside Farms, a 394 resident capacity independent living facility, from NHP.
In connection with the acquisition by BRE/CSL, the Company contributed $1.8
million to the venture. The Company expects to recover approximately $1.4
million of its contribution to BRE/CSL when permanent financing is obtained for
the Amberleigh community.

The Company has entered into development and management agreements with the
Triad Entities for the development and management of new senior living
communities. The Triad Entities own and finance the construction of new senior
living communities. These communities are primarily Waterford communities. The
development of senior living communities typically involves a substantial
commitment of capital over an approximate 12-month construction period, during
which time no revenues are generated followed by an 18 to 24 month lease up
period.

The Company has a 1% limited partnership interest in each of the Triad
Entities and is accounting for these investments under the equity method of
accounting based on the provisions of the Triad Entities partnership agreements.

33

The following table sets forth, as of December 31, the capital invested in
each of the Triad Entities, information related to loans made by the Company to
each Triad Entity and information on deferred income related to each Triad
Entity (dollars in thousands):

The Company typically receives a development fee of 4% of project costs, as
well as reimbursement of expenses and overhead not to exceed 4% of project
costs. These fees are recorded over the term of the development project on a
basis approximating the percentage of completion method. In addition, when the
properties become operational, the Company typically receives management fees in
an amount equal to the greater of 5% of gross revenues or $5,000 per month per
community, plus overhead expenses.

The Company has the option, but not the obligation, to purchase the
partnership interests of the other parties in Triad Entities for an amount equal
to the amount paid for the partnership interest by the other partners, plus a
noncompounded return of 12% per annum except for Triad I. In addition, each
Triad Entity except Triad I provides the Company with an option, but not the
obligation, to purchase the community developed by the applicable partnership
upon their completion for an amount equal to the fair market value (based on a
third-party appraisal but not less than hard and soft costs and lease-up costs)
of the community.

In December 1999, Triad I completed a recapitalization in which Lehman
Brothers purchased from third parties 80% of the limited partnership interest in
Triad I for an investment of $12.0 million. The investment enabled Triad I to
repay the Company approximately $9.0 million in loans. The Company increased its
equity contribution in Triad I to $3.0 million and continued to own a 19%
limited partnership interest. The Company has the option to purchase the Triad I
communities for an amount specified in the partnership agreement. The Company
continues to manage the communities in the Triad I partnership.

The Company has made no determination as to whether it will exercise any of
these purchase options.

34

During the fourth quarter of fiscal 2000, the Company reduced its ownership
interest in each of the Triad Entities to 1%. This reduction was accomplished by
converting a portion of the Company's investments in each of the Triad Entities
to notes receivable.

Deferred interest income is being amortized into income over the life of
the loan commitment that the Company has with each of the Triad Entities.
Deferred development and management fee income are being amortized into income
over the expected remaining life of the Triad partnerships.

Each of the Triad Entities finances the development of new communities
through a combination of equity funding, traditional construction loans and
permanent financing with institutional lenders secured by first liens on the
communities and unsecured loans from the Company. The Company loans may be
prepaid without penalty. The financings from institutional lenders are secured
by first liens on the communities, as well as assignment to the lenders of the
construction contracts and the development and management agreements with the
Company. Each development and management agreement assigned to an institutional
lender is also guaranteed by the Company and those guarantees are also assigned
to the lenders. In most cases, the management agreements contain an obligation
of the Company to fund operating deficits to the Triad Entities if the other
financing sources of the Triad Entities have been fully utilized. These
operating deficit funding obligations are guaranteed by the Company and include
making loans to fund debt service obligations to the Triad Entities' lenders.
Amounts funded to date under these operating deficit agreements are disclosed in
the table above. The Company expects to be required to fund additional amounts
under these operating deficit agreements in the future.

Set forth below is information on the construction loan facilities entered
into by each of the Triad Entities as of December 31, 2001 (dollars in
thousands):

During 2001, Triad V was notified by the lender of its failure to comply
with certain terms of its loan agreement with the lender. The lender, however,
has expressed its intention to work with the borrower and the parties have
signed a term sheet to modify the original loan agreement. The lender is
continuing to fund Triad V's draw requests. The Company under the terms of its
management agreement is responsible for funding the operating deficits of Triad
V. If the lender and Triad V are unable to finalize a mutually agreeable
forbearance agreement with respect to this loan and the lender exercises its
rights under its loan agreement with Triad V, the outcome could result in the
impairment of the Company's notes receivable with Triad V.

35

Summary financial information regarding the financial position and results
of operations of the Triad Entities as of December 31 and for the years then
ended is as follows (in thousands):

IMPACT OF INFLATION

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

FORWARD-LOOKING STATEMENTS

Certain information contained in this report constitutes "Forward-Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "estimate" or "continue" or the negative thereof
or other variations thereon or comparable terminology. The Company cautions
readers that forward-looking statements, including, without limitation, those
relating to the Company's future business prospects, revenues, working capital,
liquidity, capital needs, interest costs, and income, are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements, due to several important
factors herein identified, among others, and other risks and factors identified
from time to time in the Company's reports filed with the SEC.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk is exposure to changes in interest rates
on debt instruments. As of December 31, 2001, the Company had $182.3 million in
outstanding debt comprised of various fixed and variable rate debt instruments
of $54.9 million and $127.4 million, respectively.

Changes in interest rates would affect the fair market value of the
Company's fixed rate debt instruments but would not have an impact on the
Company's earnings or cash flows. Fluctuations in interest rates on the
Company's variable rate debt instruments that are tied to either the LIBOR or
the prime rate would affect

36

the Company's earnings and cash flows but would not affect the fair market value
of the variable rate debt. For each percentage point change in interest rates,
the Company's annual interest expense would increase by approximately $1.3
million based on the Company's outstanding variable debt as of December 31,
2001. In addition, an increase in interest rates could result in operating
deficit obligations, relating to the Triad Entities, that could require funding
by the Company. The Triad Entities, as of December 31, 2001, have $153.0 million
in outstanding bank debt comprised of various fixed and variable rate debt
instruments of $26.9 million and $126.1 million, respectively.

The following table summarizes information on the Company's debt
instruments outstanding as of December 31, 2001. The table presents the
principal due and weighted average interest rates for the Company's various debt
instruments by fiscal year. Weighted average variable interest rates are based
on the Company's floating rate as of December 31, 2001.

INTEREST RATE RISK

Principal Amount and Average Interest Rate by Expected Maturity Date ($ in
thousands)

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are included under Item 14 of this Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The Company had no disagreements on accounting or financial disclosure
matters with its independent accountants to report under this Item 9.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information contained under the caption "Election of Directors" in the
Proxy Statement is incorporated herein by reference in response to this Item 10.
See also Item 1.

ITEM 11. EXECUTIVE COMPENSATION

Information contained under the captions "Executive Compensation" and
"Election of Directors" in the Proxy Statement is incorporated herein by
reference in response to this Item 11.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information contained under the caption "Principal Stockholders and Stock
Ownership of Management" in the Proxy Statement is incorporated herein by
reference in response to this Item 12.

37

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information contained under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference in
response to this Item 13.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

The following documents are filed as part of this Report:

(1) Financial Statements:

The response to this portion of Item 14 is submitted as a separate
section of this Report. See Index to Financial Statements at page F-1.

(2) Financial Statement Schedules:

All schedules have been omitted as the required information is
inapplicable or the information is presented in the financial statements
or related notes.

(3) Exhibits:

The exhibits listed on the accompanying Index To Exhibits at page
E-1 are filed as part of this Report.

(4) The Company did not file any reports on Form 8-K during the
quarterly period ended December 31, 2001.

38

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized, on March 26, 2002.

CAPITAL SENIOR LIVING CORPORATION

By: /s/ LAWRENCE A. COHEN
------------------------------------
Lawrence A. Cohen
Vice Chairman of the Board
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Each person whose signature to
this report appears below hereby appoints Lawrence A. Cohen and James A. Stroud
and each of them, any one of whom may act without the joinder of the other, as
his or her attorney-in-fact to sign on his behalf, individually and in each
capacity stated below, and to file all amendments to this report, which
amendment or amendments may make such changes in and additions to the report as
any such attorney-in-fact may deem necessary or appropriate.

39

INDEX TO FINANCIAL STATEMENTS

F-1

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Shareholders
Capital Senior Living Corporation

We have audited the accompanying consolidated balance sheets of Capital
Senior Living Corporation as of December 31, 2001 and 2000, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the consolidated financial statements of HealthCare
Properties, L.P. and subsidiaries, a 57% owned subsidiary, for the year ended
December 31, 1999, which statements reflect total revenues of $9.5 million for
the year ended December 31, 1999. 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., for the year ended
December 31, 1999 is based solely on the report of the other auditors.

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

In our opinion, based on our audits and the report of other auditors for
1999, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Capital Senior Living
Corporation as of December 31, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.

ERNST & YOUNG LLP

Dallas, Texas
February 8, 2002,
except for Note 18, as to which the date is
March 5, 2002

F-2

INDEPENDENT AUDITORS' REPORT

The Partners
HealthCare Properties, L.P.:

We have audited the consolidated statements of income, partnership equity
and cash flows of HealthCare Properties, L.P. and subsidiaries (a Delaware
limited partnership) for the year ended December 31, 1999. These consolidated
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our 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 results of operations and cash
flows of HealthCare Properties, L.P. and subsidiaries for the year ended
December 31, 1999, in conformity with generally accepted accounting principles.

KPMG LLP

Dallas, Texas
February 4, 2000,
except as to the
third paragraph of
Note 13 which is
as of March 1, 2000

F-3

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes.

F-4

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes.

F-5

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See accompanying notes.

F-6

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

F-7

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001

1. ORGANIZATION AND FORMATION

Capital Senior Living Corporation, a Delaware corporation (together with
its subsidiaries, the "Company"), is one of the largest operators of senior
living communities in the United States in terms of resident capacity. The
Company owns, operates, develops and manages senior living communities
throughout the United States. As of December 31, 2001, the Company owned
interests in and/or operated 48 communities in 20 states with a capacity of
approximately 7,600 residents, including 39 communities in which it owned
interests and 9 communities that it managed for third parties pursuant to
multi-year management contracts. In addition, the Company operates one home care
agency. The accompanying consolidated financial statements include the financial
statements of Capital Senior Living Corporation and its subsidiaries. All
material intercompany balances and transactions have been eliminated in
consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

The Company considers all highly liquid investments with original
maturities of three months or less at the date of acquisition to be cash
equivalents. The Company has deposits in banks that exceed Federal Deposit
Insurance Corporation insurance limits. Management believes that credit risk
related to these deposits is minimal. Cash and cash equivalents, at December 31,
2001 and 2000, includes the cash and cash equivalents of HealthCare Properties,
L.P. ("HCP") of $1.7 million and $13.5 million, respectively. Restricted cash
represents amounts held in deposits that are required as collateral under the
terms of certain loan agreements.

LONG-LIVED ASSETS

Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets. The estimated
useful lives are 30 to 40 years for buildings and building improvements, 20
years for land improvements and 5 to 10 years for furniture, equipment and
automobiles.

Management contract rights of $0.5 million, included in other assets, are
stated at cost and amortized on a straight-line basis over their respective
contract lives. Accumulated amortization for management contract rights at
December 31, 2001 and 2000 was $0.5 million and $0.4 million, respectively.
Goodwill of $1.3 million, included in other assets, is the excess purchase price
over the fair value of the assets acquired in the Formation Transaction to the
extent of the minority interest and is amortized over 30 years on a straight-
line basis. Accumulated amortization for goodwill at December 31, 2001 and 2000
was $0.3 million and $0.1 million, respectively.

At each balance sheet date, the Company reviews the carrying value of its
management contract rights, goodwill, and property and equipment to determine if
facts and circumstances suggest that they may be impaired or that the
amortization or depreciation period may need to be changed. The Company
considers external factors relating to each asset, including contract changes,
local market developments, and other publicly available information. The
carrying value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flows from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
the carrying value exceeds the fair market value, generally based on discounted
cash flows, of the long-lived asset. The Company does not believe there are any
indicators that would require an adjustment to the carrying value of the
management contract rights, goodwill or property and equipment or their
remaining useful lives as of December 31, 2001 and 2000.

ASSETS HELD FOR SALE

The Company determines the fair value, net of costs of disposal, of an
asset on the date the asset is categorized as held for sale, and the asset is
recorded at the lower of its fair value, net of cost of disposal, or
F-8

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

carrying value on that date. The Company periodically reevaluates assets held
for sale to determine if the assets are still recorded at the lower of fair
value, net of cost of disposal, or carrying value. The Company currently has one
community and six parcels of land held for sale. The fair value of these
properties is generally determined based on market rates, industry trends and
recent comparable sales transactions. The actual sales price of these assets
could differ significantly from the Company's estimates.

During 1999, the Company reclassified four of its properties in HCP to
assets held for sale. Three of the properties had been leased to Rebound Inc., a
subsidiary of HealthSouth Corporation ("HealthSouth"), under a master lease
agreement. These properties were closed by the lessee. Effective August 5, 1999,
HealthSouth agreed to transfer control of the closed communities to the Company.
The assets of one of the four communities, with the exception of two houses,
were sold on September 20, 1999. The assets of two of the remaining communities
and one house were sold during 2000. During 2001, the Company reclassified one
of HCP's properties to held for sale and sold the remaining house. In addition,
during 2001 a lender foreclosed on a property owned by HCP that had been
classified as held for sale resulting in an extraordinary charge of $0.2
million, net of minority interest and income tax benefit.

During 2000, the Company forgave $3.2 million of notes receivable with
other partnerships in exchange for five parcels of land, which the Company
classified as held for sale. During the fourth quarter of 2000, the Company
recorded a write-down on the remaining house and five parcels of land of $1.0
million to record these assets at their estimated net realizable value. This
write-down is reflected as provision for bad debts in the statements of income.
During 2001, the Company forgave $1.2 million in notes receivable with a
partnership in exchange for two parcels of land. During 2001, the Company sold
one of the parcels of land.

The Company estimates the six parcels of land and the one remaining
community that were held for sale at December 31, 2001, have an aggregate fair
value, net of costs of disposal, of $4.9 million. The amounts the Company will
ultimately realize could differ materially from this estimate.

INVESTMENTS IN PARTNERSHIPS

Triad Entities. The Company holds a 1% interest in each of the Triad
Entities and accounts for its investment in the Triad Entities under the equity
method of accounting. The Company has loan commitments to the Triad Entities for
construction and pre-marketing expenses, in addition to requirements to fund the
Triad Entities' operating deficits through an operating deficit guarantee
provided for in its management agreement with the Triad Entities. The Company
evaluates the carrying value of these receivables by comparing the discounted
cash flows expected from the operations of the Triad Entities to the carrying
value of the receivables. These cash flow models consider lease-up rates,
expected operating costs, debt service requirements and various other factors.
Management believes, based on the assumptions used in these cash flow models,
that the notes receivable are fully recoverable during the term of the Company's
management contract with the Triad Entities.

Under equity accounting, the Company has recognized losses in the Triad
Entities of $0.5 million as of December 31, 2001. The recognition of these
losses have reduced the Company's investments in the Triad Entities to zero and
additional losses of $0.3 million have been recorded as a reduction to the
Company's notes receivable from the Triad Entities. The Company's share of
future losses will also be recorded as a reduction of notes receivable from the
Triad Entities.

BRE/CSL. During the fourth quarter of 2001, the Company formed the BRE/CSL
joint venture with Blackstone, which will seek to acquire in excess of $200
million of senior housing properties. The venture is owned 90% by Blackstone and
10% by the Company. The Company accounts for its investment in this joint
venture under the equity method of accounting. The Company recorded its
investment at cost and will adjust its investment for its share of earnings and
losses of BRE/CSL.

F-9

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

The Company accounts for income taxes under the liability method. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Management regularly evaluates the
realizability of deferred tax assets and provides a valuation allowance, if
considered necessary, based on such evaluation.

REVENUE RECOGNITION

Resident and health care revenue is recognized at estimated net realizable
amounts, based on historical experiences, due from residents in the period to
which the rental and other services are provided.

Revenues from the Medicare and Medicaid programs accounted for 9%, 12%, and
11% in 2001, 2000 and 1999, respectively of the Company's net revenues. Two
communities are providers of services under the Medicaid program. Accordingly,
these communities are entitled to reimbursement under the foregoing program at
established rates that are lower than private pay rates. Patient service revenue
for Medicaid patients is recorded at the reimbursement rates as the rates are
set prospectively by the state upon the filing of an annual cost report. Three
communities are providers of services under the Medicare program and are
entitled to payment under the foregoing programs in amounts determined based on
established rates that differ from private pay rates. In 1998 and prior years,
payments were based on the filing of an annual cost report prepared in
accordance with federal regulations, which are subject to audit and retroactive
adjustments in future periods. Revenue from the Medicare program is recorded at
established rates and adjusted for differences between such rates and estimated
amounts payable from the program. Any differences between estimated and actual
reimbursements are included in operations in the year of settlement, which have
not been material.

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

Management services revenue, resident and healthcare revenue and
development fees are recognized when earned. Management services revenue relates
to providing certain management and administrative support services under
management contracts, which have terms expiring through 2011. Management
services revenue is shown net of reimbursed expenses. The reimbursed expenses
from affiliates were $10.7 million, $5.1 million and $1.7 million, for the years
ended December 31, 2001, 2000, and 1999, respectively. Reimbursed expenses from
unaffiliated parties were $13.0 million, $11.4 million, and $12.5 million, for
the years ended December 31, 2001, 2000 and 1999, respectively.

The Company's management contracts include contingent management services
revenue, usually based on exceeding certain gross revenue targets. These
contingent revenues are recognized based on actual results according to the
calculations specified in the various management agreements.

Affiliated development fees in the accompanying statements of income
represent development fees earned from the Triad Entities (see Note 3).

CREDIT RISK

The Company's resident receivables are generally due within 30 days and
development fee receivables are due through completion of construction, which is
generally one year. The Company does not require collateral.

F-10

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Credit losses, on resident receivables, have been within management's
expectations, and management believes that the allowance for doubtful accounts
adequately provides for any expected losses.

ADVERTISING

Advertising is expensed as incurred. Advertising expenses for the years
ended December 31, 2001, 2000 and 1999 were $0.4 million each year.

NET INCOME PER SHARE

Basic net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share considers the dilutive effect of outstanding options
calculated using the treasury stock method.

The following table set forth the computation of basic and diluted net
income per share (in thousands, except for per share amounts):

STOCK-BASED COMPENSATION

The Company has elected to follow the intrinsic value method in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its employee and
director stock options. In accordance with APB 25, since the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, generally no compensation expense is recognized. The
Company has adopted the disclosure-only provisions for the fair value method of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123"). Stock option grants to non-employees are accounted
for in accordance with the fair value method of FASB 123.

F-11

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEGMENT INFORMATION

The Company evaluates the performance and allocates resources of its senior
living facilities based on current operations and market assessments on a
property-by-property basis. The Company does not have a concentration of
operations geographically or by product or service as its management functions
are integrated at the property level.

RECLASSIFICATIONS

Certain reclassifications have been made to prior year amounts to conform
to current year presentation.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
financial statements and related footnotes. Management bases its estimates and
assumptions on historical experience, observance of industry trends and various
other sources of information and factors, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from these
estimates. Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties, and potentially could result in
materially different results under different assumptions and conditions. The
Company believes revenue recognition, investments in partnerships and assets
held for sale are its most critical accounting policies and require management's
most difficult, subjective and complex judgments.

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board issued Statement 133, "Accounting
for Derivative Instruments and Hedging Activities" in June 1998. The Statement
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. As a result of the Company's minimal use of derivatives, the adoption
of FAS 133 by the Company in the first quarter of fiscal 2001 did not have a
material effect on the Company's earnings or financial position.

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of 2002. Application of the non-amortization provisions of the
Statement is not expected to result in a material change in the Company's net
income, but the amount has not yet been determined, as previous business
combinations have not yet been analyzed under the new rules. During 2002, the
Company will perform the first of the required impairment tests.

The Financial Accounting Standards Board recently issued Statements of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" and Statements of Financial Accounting Standards No. 144,
"Accounting for the Impairment of Long-Lived Assets."

The Company does not expect the adoption of these standards to have a
material effect on the Company's earnings or financial position.

F-12

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES

The Company has entered into development and management agreements with the
Triad Entities for the development and management of new senior living
communities. The Triad Entities own and finance the construction of new senior
living communities. These communities are primarily Waterford communities. The
development of senior living communities typically involves a substantial
commitment of capital over an approximate 12-month construction period, during
which time no revenues are generated, followed by an 18 to 24 month lease up
period.

The Company has a 1% limited partnership interest in each of the Triad
Entities and is accounting for these investments under the equity method of
accounting based on the provisions of the Triad Entities partnership agreements.

The following table sets forth, as of December 31, the capital invested in
each of the Triad Entities, information related to loans made by the Company to
each Triad Entity and information on deferred income related to each Triad
Entity (dollars in thousands):

The Company typically receives a development fee of 4% of project costs, as
well as reimbursement of expenses and overhead not to exceed 4% of project
costs. These fees are recorded over the term of the development project on a
basis approximating the percentage of completion method. In addition, when the
properties become operational, the Company typically receives management fees in
an amount equal to the greater of 5% of gross revenues or $5,000 per month per
community, plus overhead expenses.

The Company has the option, but not the obligation, to purchase the
partnership interests of the other parties in Triad Entities for an amount equal
to the amount paid for the partnership interest by the other partners, plus a
noncompounded return of 12% per annum except for Triad I. In addition, each
Triad Entity

F-13

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

except Triad I provides the Company with an option, but not the obligation, to
purchase the community developed by the applicable partnership upon their
completion for an amount equal to the fair market value (based on a third-party
appraisal but not less than hard and soft costs and lease-up costs) of the
community.

In December 1999, Triad I completed a recapitalization in which Lehman
Brothers purchased from third parties 80% of the limited partnership interest in
Triad I for an investment of $12.0 million. The investment enabled Triad I to
repay the Company approximately $9.0 million in loans. The Company increased its
equity contribution in Triad I to $3.0 million and continued to own a 19%
limited partnership interest. The Company has the option to purchase the Triad I
communities for an amount specified in the partnership agreement. The Company
continues to manage the communities in the Triad I partnership.

The Company has made no determination as to whether it will exercise any of
these purchase options.

During the fourth quarter of fiscal 2000, the Company reduced its ownership
interest in each of the Triad Entities to 1%. This reduction was accomplished by
converting a portion of the Company's investments in each of the Triad Entities
to notes receivable.

Deferred interest income is being amortized into income over the life of
the loan commitment that the Company has with each of the Triad Entities.
Deferred development and management fee income are being amortized into income
over the expected remaining life of the Triad partnerships.

Each of the Triad Entities finances the development of new communities
through a combination of equity funding, traditional construction loans and
permanent financing with institutional lenders secured by first liens on the
communities and unsecured loans from the Company. The Company loans may be
prepaid without penalty. The financings from institutional lenders are secured
by first liens on the communities, as well as assignment to the lenders of the
construction contracts and the development and management agreements with the
Company. Each development and management agreement assigned to an institutional
lender is also guaranteed by the Company and those guarantees are also assigned
to the lenders. In most cases, the management agreements contain an obligation
of the Company to fund operating deficits to the Triad Entities if the other
financing sources of the Triad Entities have been fully utilized. These
operating deficit funding obligations are guaranteed by the Company and include
making loans to fund debt service obligations to the Triad Entities' lenders.
Amounts funded to date under these operating deficit agreements are disclosed in
the table above. The Company expects to be required to fund additional amounts
under these operating deficit agreements in the future.

Set forth below is information on the construction loan facilities entered
into by each of the Triad Entities as of December 31, 2001 (dollars in
thousands):

F-14

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 2001, Triad V was notified by the lender of its failure to comply
with certain terms of its loan agreement with the lender. The lender, however,
has expressed its intention to work with the borrower and the parties have
signed a term sheet to modify the original loan agreement. The lender is
continuing to fund Triad V's draw requests. The Company under the terms of its
management agreement is responsible for funding the operating deficits of Triad
V. If the lender and Triad V are unable to finalize a mutually agreeable
forbearance agreement with respect to this loan and the lender exercises its
rights under its loan agreement with Triad V, the outcome could result in the
impairment of the Company's notes receivable with Triad V.

Summary financial information regarding the financial position and results
of operations of the Triad Entities as of December 31 and for the years then
ended is as follows (in thousands):

4. ACQUISITIONS

On August 15, 2000, the Company completed its merger with ILM Senior
Living, Inc. ("ILM") and the acquisition of the Villa Santa Barbara property
interest held by ILM II Senior Living, Inc. ("ILM II"). This transaction
resulted in the Company acquiring ownership of eight senior living communities
with a capacity of approximately 1,300 residents. The Company had managed the
ILM communities since 1996 pursuant to a management agreement with ILM. The
merger was accounted for as a purchase and included total cash consideration for
the eight communities of approximately $97.6 million, net of closing costs of
$4.4 million, consisting of $87.5 million to the ILM shareholders and $10.1
million for ILM II's interest in the Villa Santa Barbara property. The
consideration was agreed upon as the result of arm's-length negotiations between
the parties to the merger and with ILM II. The Company also refinanced three of
its existing communities in conjunction with the merger and repaid approximately
$25.8 million of a $34.0 million line of credit with Bank One Texas, N.A., as
agent, resulting in an amended loan facility of up to $9.0 million. GMAC
Commercial Mortgage Corporation ("GMAC") provided approximately $102.0 million
and Newman Financial Services, Inc. ("Newman") provided approximately $20.0
million of financing for the merger and the refinancing. The balance of the
merger consideration and amounts necessary for the refinancing came from the
Company's existing cash resources.

The results of operations for the above acquisition are included in the
Company's statement of income from the date of acquisition.

F-15

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following pro forma consolidated results of operations, have been
prepared as if the above-mentioned acquisitions had occurred on January 1 of the
year preceding the acquisition, and are as follows (in thousands, except per
share amounts):

The unaudited pro forma consolidated amounts are presented for
informational purposes only and do not necessarily reflect the financial
position or results of operations of the Company that would have actually
resulted had the acquisitions occurred on January 1 of the year preceding the
acquisition.

On February 9, 2001, the Company announced that it was terminating its
merger agreement with ILM II. A tax issue disclosed in ILM II's Annual Report on
Form 10-K filed on January 31, 2001 could have caused a material adverse change
under the merger agreement with ILM II, and therefore put the Company in the
position of having to terminate the merger agreement. The Company does not
expect to incur any additional costs related to the merger agreement. The
Company continues to manage the five remaining ILM II communities on a
month-to-month basis pursuant to the terms of the previous management agreement
between the Company and a subsidiary of ILM II. On February 28, 2002, ILM II
notified the Company that it had entered into an agreement to sell the five
communities and would, therefore, be terminating the management agreement
effective April 1, 2002.

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

In 2001, the Company sold one community, two parcels of land and a house
for $5.2 million, which resulted in the recognition of a gain of $2.6 million
and net proceeds of $4.8 million. The two parcels of land and the house were
classified as held for sale. In 2000, the Company sold two communities and a
house for $4.8 million, which resulted in the recognition of a net loss of $0.4
million and net cash proceeds of

F-16

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$4.5 million. These assets were held for sale at December 31, 1999. During 1999,
the Company sold one of its properties for $2.7 million, net of sales
commission, which resulted in the recognition of a gain of $0.7 million.

Subsequent to December 31, 2001, HCP sold its Hearthstone community for net
proceeds of $3.9 million, which resulted in the recognition of a gain of $1.8
million.

6. ACCRUED EXPENSES

Accrued expenses consists of the following (in thousands):

F-17

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. NOTES PAYABLE AND LINE OF CREDIT

Notes payable consists of the following:

The aggregate maturities of notes payable at December 31, 2001, are as
follows (in thousands):

2002........................................................ $ 25,594
2003........................................................ 3,392
2004........................................................ 3,579
2005........................................................ 3,775
2006........................................................ 3,996
Thereafter.................................................. 134,460
--------
$174,796
========

F-18

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In August 2000, in connection with the Company's merger with ILM I and the
acquisition of ILM II's interest in the Villa Santa Barbara property the Company
borrowed $102.0 million from GMAC and $20.0 million from Newman. The Company
also refinanced three of its existing communities in conjunction with the merger
and repaid approximately $25.8 million of a $34.0 million line of credit with
Bank One Texas, N.A., as agent, resulting in an amended loan facility of up to
$9.0 million. The line of credit was subsequently amended to extend the maturity
date to July 2003 and to modify certain loan covenant requirements. Under the
terms of the line of credit, interest is due monthly and the principal is due at
the end of the term of the credit agreement. Borrowings under the line of credit
are secured by one senior living community with a net book value of $7.7 million
at December 31, 2001, and bear interest at the prime rate or LIBOR plus 2.25%
(4.34% and 8.96% at December 31, 2001 and 2000, respectively). The amount
outstanding under the line of credit was $7.6 million at December 31, 2001 and
2000.

In connection with obtaining these notes and line of credit, the Company
incurred $3.7 million and $0.7 million in fiscal 2000 and 1999, respectively, in
financing charges that were deferred and amortized over the life of the line of
credit. Accumulated amortization was $1.4 million and $0.7 million at December
31, 2001 and 2000, respectively.

Under the line of credit, the Company must maintain certain levels of
tangible net worth and comply with other restrictive covenants. The Company was
in compliance with its debt covenants at December 31, 2001 and 2000.

8. EQUITY

The Company is authorized to issue preferred stock in series and to fix and
state the voting powers and such designations, preferences and relative
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions, thereof. Such
action may be taken by the Board without stockholder approval. The rights,
preferences and privileges of holders of common stock are subject to the rights
of the holders of preferred stock.

Net income (loss) of HCP is generally allocated 98% to the limited partners
and 2% to the general partner. The net income of HCP from the disposition of a
property is allocated: (i) to partners with deficit capital accounts on a pro
rata basis; (ii) to limited partners until they have been paid an amount equal
to the amount of their adjusted investment (as defined); (iii) to the limited
partners until they have been allocated income equal to their 12% Liquidation
Preference; and (iv) thereafter, 80% to the limited partners and 20% to the
general partner. The net loss of HCP from the disposition of a property is
allocated: (i) to partners with positive capital accounts on a pro rata basis
and (ii) thereafter, 98% to the limited partners and 2% to the general partner.
Distributions of available cash flow are generally distributed 98% to the
limited partners and 2% to the general partner, until the limited partners have
received an annual preferential distribution, as defined. Thereafter, available
cash flow is distributed 90% to the limited partners and 10% to the general
partner. HCP made distributions of $7.6 million and $4.0 million to minority
partners in 2001 and 2000, respectively.

9. STOCK OPTIONS

The Company adopted a stock option plan during 1997, providing for the
grant of incentive and nonqualified stock options to employees and directors.
This plan was amended during fiscal 2000 to increase the number of options
available for grant under the plan from 1.6 million to 2.0 million shares and
2.0 million shares of common stock are reserved for future issuance. The option
exercise price and vesting provisions of such options are fixed when the option
is granted. The options expire four to ten years from the date of grant and vest
from zero to five years. The option exercise price is the fair market value of a
share of common stock on the date the option is granted.

F-19

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the Company's stock option activity, and related information
for the years ended December 31, 2001, 2000 and 1999 is presented below:

The weighted average remaining contractual life of the options at December
31, 2001, 2000 and 1999, is approximately 8.0, 8.4 and 8.8 years, respectively.
Options outstanding, as of December 31, 2001, are exercisable at prices ranging
from $1.80 to $13.50. Unoptioned shares available for the granting of options at
December 31, 2001, 2000 and 1999 were 407,605, 275,000 and 502,000,
respectively.

In January 2001, certain employees of the Company elected to forfeit
640,500 options originally priced between $10.19 and $13.50. These options were
added back to the pool of options available to grant in January 2001.

During 1999, the Company recorded compensation expense of $0.2 million
relating to 52,500 options held by a former officer of the Company that became
vested in conjunction with his change in employee status. These options are
included in the table above.

The average daily price of the stock during 2001, 2000 and 1999 was $2.06,
$3.09, and $8.94, respectively, per share.

Pro forma information regarding net income per share has been determined as
if the Company had accounted for its employee stock options under the fair value
method. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for 2001, 2000 and 1999, respectively: risk free interest rate of
6.5, 6.5 and 6.5 percent; dividend yields of zero percent for all years;
expected lives of seven and one-half years for all years; and

F-20

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

volatility factors of the expected market price of the Company's common stock of
62.8, 60.6, and 58.4 percent. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods.

10. INCOME TAXES

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

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

F-21

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the Company's deferred tax assets and liabilities, are as
follows (in thousands):

11. EMPLOYEE BENEFIT PLANS

Effective January 1, 1999, the Company adopted a 401(k) salary deferral
plan (the "Plan"). Contributions to the Plan are in the form of employee salary
deferrals, which are subject to employer matching contributions of up to 2% of
the employee's annual salary. All employees of the Company meeting minimum
service and age requirements are eligible to participate in the Plan. The
Company incurred administrative expenses related to the Plan of $14,500, $13,000
and $0 in 2001, 2000 and 1999, respectively. Matching contributions of $0.2
million, $0.2 million and $0.1 million were contributed to the Plan in 2001,
2000 and 1999, respectively.

12. RELATED PARTY TRANSACTIONS

A former officer, director and significant shareholder of the Company is
chairman of the board of a bank where the Company holds the majority of its
operating cash accounts.

13. CONTINGENCIES

On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP in the Delaware Court of Chancery, Civil Action No. 16725
(the "Delaware Action") against NHP, the general partner of NHP ("General
Partner"), the Company and Capital Senior Living Properties 2-NHPCT, Inc.
(collectively, the "Defendants"). Mr. Lewis purchased ninety Assignee Interests
in NHP in February 1993 for $180. The complaint alleges, among other things,
that the Defendants breached, or aided and abetted a breach of, the express and
implied terms of the NHP Partnership Agreement in connection with the sale of
four properties by NHP to Capital Senior Living Properties 2-NHPCT, Inc in
September 1998 (the "1998 Transaction"). The complaint seeks, among other
relief, rescission of the 1998 Transaction and unspecified damages. On July 9,
1999, the Defendants filed a motion to dismiss the case. Subsequently, the
plaintiff amended his complaint adding allegations challenging the terms of the
sale in December 2001 of the Amberleigh retirement facility to BRE/CSL.

On January 31, 2002, the parties to the Delaware Action entered into a
Memorandum of Understanding providing for the settlement of the Delaware Action
subject to certain terms and conditions, including the filing of an amended
complaint and receipt of the approval of the Court of Chancery. The proposed
settlement contemplates the creation of a settlement fund in the amount of
approximately $0.8 million, of which NHP will contribute $0.3 million, the
amount of the deductible of NHP's directors and officers' liability insurance
policy at the time the Delaware Action was filed (the "D&O Policy"). Virtually
all of the balance of the settlement fund will be contributed by the various
insurance brokers and agents, and their insurers, in connection with the
resolution of certain claims for coverage under the D&O Policy. The settlement
contribution of the Company and its affiliates will be $43,000. If approved by
the Court of Chancery, the

F-22

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

settlement fund, less any award of attorney's fees for plaintiff's counsel
approved by the court, will be distributed to a class of Assignee Holders of
NHP.

On December 6, 2001, Leonard Kalmenson filed a motion to intervene in the
Delaware Action on the behalf of a putative class of holders of Pension Notes in
the event the Court of Chancery determines that the claims asserted in the
Delaware Action are derivative in nature. The Complaint in Intervention filed by
Mr. Kalmenson names as defendants the Defendants in the Delaware Action as well
as Retirement Associates, Inc., the sole stockholder and General Partner, and
various current and former directors of the General Partner. The Complaint in
Intervention essentially alleges, among other things, a variety of claims
challenging the 1998 Transaction and a claim for breach of contract relating to
the failure of NHP to pay the full amount of principal and interest owed on the
Pension Notes on their maturity date. NHP and the Company believe that the
allegations asserted by Mr. Kalmenson are without merit and that his motion to
intervene is moot in view of the proposed settlement of the Delaware Action. The
Company is unable at this time to estimate any liability related to this claim,
if any.

On January 16, 2002, the Company filed a claim with the American
Arbitration Association seeking reimbursement of certain health care expenses,
as well as severance compensation from Buckner Retirement Services, Inc.
pursuant to a management agreement between the parties. Buckner has filed an
answer and a counterclaim in this arbitration and proceedings are continuing.

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

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of financial instruments at December
31, 2001 and 2000 are as follows (in thousands):

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

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

Notes receivable: The Company evaluates the carrying value of notes
receivable by comparing the discounted cash flows expected from the operations
of the communities to the carrying value of the notes receivable. These cash
flow models consider lease-up rates, expected operating costs, debt service
requirements and various other factors.

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

F-23

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. INVESTMENTS IN LIMITED PARTNERSHIPS

The investments in limited partnerships balance consists of the following
(in thousands):

BRE/CSL

During the fourth quarter of 2001, the Company formed a joint venture
("BRE/CSL") with Blackstone Real Estate Advisors ("Blackstone"), which will seek
to acquire in excess of $200 million of senior housing properties. The venture
is owned 90% by Blackstone and 10% by the Company. The Company will manage the
communities owned by the joint venture under long-term management contracts. On
December 31, 2001, the joint venture acquired its first property, The Amberleigh
at Woodside Farms, a 394 resident capacity independent living facility, from
NHP. In connection with the acquisition by BRE/CSL, the Company contributed $1.8
million to the venture. In addition, the Company has entered into a contribution
agreement to contribute four of its senior living communities to the joint
venture. The Company accounts for its investment in this joint venture under the
equity method of accounting.

HCP

HCP is consolidated in the accompanying consolidated financial statements.
At December 31, 2001, 2000 and 1999, the Company owned approximately 57% of
HCP's limited partner units.

NHP

The NHP Notes bear simple interest at 13% per annum and matured on December
31, 2001. Interest is paid quarterly at a rate of 7%, with the remaining 6%
interest deferred. In the fourth quarter of fiscal 1999, the Company reevaluated
the assumptions related to its investment in the NHP Notes, and as a result
reduced the income expected to be earned from the NHP Notes. This change in
estimate resulted in a $1.2 million reduction in interest income in the fourth
quarter of 1999. During the fourth quarter of 2001, the Company reevaluated its
assumptions related to the NHP Notes, and as a result reduced interest income in
the fourth quarter by $0.5 million. At December 31, 2001, the Company's
effective interest rate on the NHP Notes was 16.7%. Subsequent to December 31,
2001, NHP distributed its available cash and proceeds from the sale of its
community in Buffalo, New York to the NHP note holders. The Company received
$5.6 million of this distribution. NHP has been dissolved and is currently being
liquidated.

During 1999, the Company paid $378 increasing the ownership of limited
partnership units in NHP to 4.8%. In addition, the Company invested $13,500 in
NHP Notes, during 1999, bringing the Company's ownership of NHP Notes to 33.1%.
The Company classifies its investment in NHP Notes as held to maturity. HCP and
NHP are subject to the reporting obligations of the Securities and Exchange
Commission.

F-24

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. ALLOWANCE FOR DOUBTFUL ACCOUNTS

The components of the allowance for doubtful accounts and notes receivable
are as follows (in thousands):

In the fourth quarter of fiscal 2000 the Company wrote off $1.6 million in
notes receivable and $1.4 million in development fees receivable relating to
certain communities that were under development for the Triad Entities. In
addition, during the fourth quarter of 2000, the Company recorded a write-down
on a house and five parcels of land of $1.0 million to record these assets at
their estimated net realizable value.

In the fourth quarter of fiscal 1999, the Company wrote off $3.9 million in
notes receivable and $10.5 million in development fees receivable from Triad
Entities that were unable to secure financing on favorable terms for the
development of their senior living communities. These joint ventures were in
various stages of developing 19 Waterford communities. In addition, the Company
acquired five sites currently owned by these joint ventures and the contractual
rights to the remaining thirteen sites that were being developed by these joint
ventures. Recoveries in 1999 relate to a settlement with the Bankruptcy Trustee
for NCA Cambridge on rental income written off prior to August 1996.

17. LEASES

The Company leases its corporate headquarters under an operating lease
expiring in 2002. Additionally, the senior living communities have entered into
various contracts for services for duration of 5 years or less and are on a fee
basis as services are rendered. Rent expense under these leases was $0.5
million, $0.6 million and $0.3 million for 2001, 2000 and 1999, respectively.
Future commitments are as follows (in thousands):

2002........................................................ $410
2003........................................................ 121
2004........................................................ 103
2005........................................................ 59
2006........................................................ 23
Thereafter.................................................. --
----
$716
====

HCP leases its property and equipment to tenants under noncancelable
operating leases. The lease terms expire in 2006 with options to renew for
additional five-year terms and options to purchase the leased property at the
current fair market value at the end of the initial lease term. The leases
generally provide for contingent rentals based on the performance of the
property. Contingent rentals aggregated $0.2 million, $0.1 million and $0.3
million in 2001, 2000 and 1999, respectively.

Minimum rentals for the HCP leases are $37,000 in 2002. There are no
minimum rentals thereafter as the properties were sold in the first quarter of
fiscal 2002. Property and improvements less accumulated

F-25

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

depreciation attributable to such rentals amounted to $1.2 million and $6.5
million at December 31, 2001 and 2000, respectively.

18. SUBSEQUENT EVENTS

On January 1, 2002, HCP sold its Hearthstone facility for net proceeds of
$2.6 million after the payment of settlement costs, resulting in a gain of $1.8
million. On February 28, 2002, HCP sold its Trinity Hills facility for net
proceeds of $1.7 million after the payment of settlement costs, resulting in a
gain of $0.5 million.

On January 31, 2002 the Company granted options to certain employees, to
purchase 58,000 shares of the Company's common stock at an exercise price of
$4.14.

The Company issued 396 and 2,100 shares of common stock on February 12,
2002 and on March 5, 2002, respectively, pursuant to the exercise of stock
options by certain employees of the Company.

On February 28, 2002, ILM II notified the Company that it had entered into
an agreement to sell the five communities managed by the Company and would,
therefore, be terminating the management agreement effective April 1, 2002.

On March 1, 2002, LCOR notified the Company of its intent to terminate the
LCOR Management Agreements, effective May 31, 2002, as a result of the Company
not funding certain alleged operating deficits, which the Company could
optionally fund under the LCOR Management Agreements. The Company has notified
LCOR that the Company believes this termination was without cause.

F-26

INDEX TO EXHIBITS

The following documents are filed as a part of this report. Those exhibits
previously filed and incorporated herein by reference are identified below.
Exhibits not required for this report have been omitted.

E-1

E-2

E-3

E-4

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

* Incorporated by reference to exhibit of corresponding number included in
Registration Statement No. 333-33379 on Form S-1 filed by the Company with
the Securities and Exchange Commission. Compensation plan, benefit plan or
employment contract or arrangement.

(a) Incorporated by reference to exhibit of corresponding number from the
Company's Annual Report on Form 10-K for the year ended December 31, 1997,
filed by the Company with the Securities and Exchange Commission.

(b) Incorporated by reference to the exhibit of corresponding number from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998, filed by the Company with the Securities and Exchange
Commission.

(c) Incorporated by reference to the exhibit shown in parentheses from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998, filed by the Company with the Securities and Exchange
Commission.

(d) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated September 30, 1998, filed by
the Company with the Securities and Exchange Commission.

(e) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated October 29, 1998, filed by the
Company with the Securities and Exchange Commission.

(f) Incorporated by reference to the exhibit shown in parentheses from the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
filed by the Company with the Securities and Exchange Commission.

E-5

(g) Incorporated by reference to the exhibit shown in parentheses from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999, filed by the Company with the Securities and Exchange
Commission.

(h) Incorporated by reference to the exhibit shown in parentheses from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1999, filed by the Company with the Securities and Exchange Commission.

(i) Incorporated by reference to the exhibit shown in parentheses from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999, filed by the Company with the Securities and Exchange
Commission.

(j) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated February 7, 1999, filed by the
Company with the Securities and Exchange Commission.

(k) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated February 7, 1999, filed by the
Company with the Securities and Exchange Commission.

(l) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated October 19, 1999, filed by the
Company with the Securities and Exchange Commission.

(m) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated October 19, 1999, filed by the
Company with the Securities and Exchange Commission.

(n) Incorporated by reference to the exhibit shown in parentheses from the
Company's Registration Statement on Form S-8, filed on December 3, 1999, by
the Company with Securities and Exchange Commission.

(o) Incorporated by reference to the exhibit shown in parenthesis from the
Company's Annual Report on Form 10-K, dated March 30, 2000, filed by the
Company with the Securities and Exchange Commission.

(p) Incorporated by reference to the exhibit shown in parenthesis from the
Company's Current Report on Form 8-K, dated August 15, 2000, filed by the
Company with the Securities and Exchange Commission.

(q) Incorporated by reference to the exhibit shown in parenthesis from the
Company's Current Report on Form 8-K, dated November 28, 2000, filed by the
Company with the Securities and Exchange Commission.

(r) Incorporated by reference to the exhibit shown in parenthesis from the
Company's Annual Report on Form 10-K, dated March 20, 2001, filed by the
Company with the Securities and Exchange Commission.

(s) Filed herewith.

E-6