- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A AMENDMENT NO. 1 TO CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): September 30, 1998 Capital Senior Living Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 1-17445 75-2678809 - ---------------------------------------------------- ----------------------- ---------------------------------------- (State or other jurisdiction of (Commission File (IRS Employer incorporation) Number) Identification No.) 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240 - ------------------------------------------------------------- --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including are (972) 770-5600 (Not Applicable) - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 Item 2. Acquisition or Disposition of Assets - --------------------------------------------- On September 30, 1998, Capital Senior Living Corporation (the "Company"), through Capital Senior Living Properties 2 - NHPCT, Inc. ("Purchaser"), an indirect wholly-owned subsidiary, completed the acquisition of four senior living communities from NHP Retirement Housing Partners I Limited Partnership ("NHP") for cash consideration of $40,650,000. As previously reported on the Company's Current Report on Form 8-K, dated September 30, 1998 (which is being amended by this Amendment No. 1), the Company completed the acquisition, pursuant to the terms of the Asset Purchase Agreement, which was previously filed as Exhibit 2.1 hereto, dated as of July 24, 1998, by and between NHP and Capital Senior Living Properties, Inc. The funds for the transaction were provided from working capital of the Company and from the proceeds of a loan pursuant to the terms of the Loan Agreement, which was previously filed as Exhibit 2.3 hereto, dated as of September 30, 1998, by and between Purchaser and Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. The senior living communities acquired by the Company are The Atrium of Carmichael in Carmichael, California; Crosswoods Oaks in Citrus Heights, California; The Heatherwood in Southfield, Michigan; and The Veranda Club in Boca Raton, Florida. Capital Senior Living, Inc. ("CSL"), a subsidiary of the Company, has operated these communities under a long-term management contract since 1992. The purchase price for the properties was determined by independent appraisal. Personnel working at the property sites and certain home office personnel who perform services for NHP are employees of CSL. NHP (prior to the acquisitions) reimbursed CSL for the salaries, related benefits, and overhead reimbursements of such personnel. Capital Realty Group Brokerage, Inc., a company wholly-owned by Messrs. Jeffrey L. Beck and James A. Stroud, the Chief Executive and Chief Operating Officers of the Company, respectively, received a brokerage fee of $1,219,500 related to this transaction, which was paid by NHP. The Company has previously filed a Current Report on Form 8-K, dated October 28, 1998, related to its acquisition of certain senior living communities from Gramercy Hill Enterprises and Tesson Heights Enterprises (the "Gramercy/Tesson Form 8-K"). The Gramercy/Tesson Form 8-K will be amended pursuant to the Securities and Exchange Commission rules. The pro forma financial statements to be included in the amendment to the Gramercy/Tesson Form 8-K will be substantially similar to the pro forma financial statements contained herein. Item 7. Financial Statements and Exhibits - ------------------------------------------- (a) Financial Statements of business acquired. Set forth below are the Independent Auditors' Reports, Consolidated Balance Sheet at December 31, 1997 and 1996 and the Consolidated Statements of Stockholders' Equity, Consolidated Statements of Operations and Consolidated Statements of Cash Flows for each of the three years ended December 31, 1997 of NHP Retirement Housing I Limited Partnership as described more fully in the notes thereto. 2 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Partners NHP Retirement Housing Partners I Limited Partnership We have audited the accompanying statements of financial position of NHP Retirement Housing Partners I Limited Partnership as of December 31, 1997 and 1996, and the related statements of operations, partners' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NHP Retirement Housing Partners I Limited Partnership at December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Dallas, Texas February 13, 1998 3 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- STATEMENTS OF FINANCIAL POSITION -------------------------------- December 31, ------------ 1997 1996 ---- ---- ASSETS (Note 6) ------ Cash and cash equivalents (Note 2) $ 4,495,733 $ 4,017,181 Interest receivable 0 1,200 Other receivables 31,892 28,363 Pension notes issuance costs (Note 1) 1,009,842 1,264,634 Pension notes organization costs (Note 1) 215,326 265,102 Prepaid expenses 300,654 285,111 Rental property (Notes 1, 4 and 10): Land 6,820,468 6,318,028 Buildings and improvements, net of accumulated depreciation of $15,456,154 in 1997 and $13,752,920 in 1996 42,670,005 43,853,213 Other assets 41,920 39,052 ----------------- ---------------- Total assets $ 55,585,840 $ 56,071,884 ================= ================ LIABILITIES AND PARTNERS' DEFICIT --------------------------------- Liabilities: Accounts payable $ 320,796 $ 336,446 Interest payable (Note 6) 23,730,407 20,681,172 Pension Notes (Note 6) 42,672,000 42,672,000 Other liabilities (Note 2) 882,625 818,377 ----------------- ---------------- 67,605,828 64,507,995 ----------------- ---------------- Partners' deficit (Notes 5 and 7): General Partner (1,596,670) (1,465,252) Assignee Limited Partner - 42,691 investment units outstanding (10,423,318) (6,970,859) ----------------- ---------------- Total partners' deficit (12,019,988) (8,436,111) ----------------- ---------------- Total liabilities and partners' deficit $ 55,585,840 $ 56,071,884 ================= ================ See notes to financial statements. 4 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- STATEMENTS OF OPERATIONS ------------------------ Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- REVENUES: Rental income $ 15,243,028 $ 14,241,055 $ 13,754,959 Interest income 89,872 79,811 83,348 Other income 215,238 167,233 182,319 -------------- -------------- --------------- 15,548,138 14,488,099 14,020,626 -------------- -------------- --------------- COSTS AND EXPENSES: Salaries, related benefits and overhead reimbursements (Note 3) 3,984,975 3,825,002 3,919,906 Management fees, dietary fees and other services (Note 3) 1,432,813 1,350,502 1,326,272 Administrative and marketing 778,400 754,504 700,594 Utilities 890,070 874,156 852,805 Maintenance 521,464 451,412 444,394 Resident services, other than salaries 296,468 297,794 292,097 Food services, other than salaries 1,591,266 1,511,771 1,513,898 Depreciation 1,703,233 1,615,089 1,525,513 Taxes and insurance 1,183,215 1,101,282 1,067,522 -------------- -------------- --------------- 12,381,904 11,781,512 11,643,001 -------------- -------------- --------------- INCOME FROM RENTAL OPERATIONS 3,166,234 2,706,587 2,377,625 -------------- -------------- --------------- COSTS AND EXPENSES: Interest expense - pension notes (Note 6) 6,036,275 5,775,285 5,521,051 Amortization of pension notes issuance costs 254,792 254,792 254,792 Amortization of pension notes organization costs 49,776 49,776 49,776 Other expenses 348,308 201,402 242,555 -------------- -------------- --------------- 6,689,151 6,281,255 6,068,174 -------------- -------------- --------------- NET LOSS $ (3,522,917) $ (3,574,668) $ (3,690,549) ============== ============== =============== ALLOCATION OF NET LOSS: General Partner $ (70,458) $ (71,493) $ (73,811) Assignor Limited Partner (3,452,459) (3,503,175) (3,616,738) -------------- -------------- --------------- $ (3,522,917) $ (3,574,668) $ (3,690,549) ============== ============== =============== NET LOSS PER ASSIGNEE INTEREST $ (81) $ (82) $ (85) ============== ============== =============== See notes to financial statements. 5 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- STATEMENTS OF PARTNERS' EQUITY (DEFICIT) ---------------------------------------- General Partner- Capital Realty Assignee Group Senior Limited Housing, Inc. Partners Total ---------------- -------- ----- Partners' equity (deficit) at January 1, 1995 $ (1,197,854) $ 149,054 $ (1,048,800) Distributions (60,960) 0 (60,960) Net Loss (73,811) (3,616,738) (3,690,549) ---------------- --------------- --------------- Partners' deficit at December 31, 1995 (1,332,625) (3,467,684) (4,800,309) Distributions (61,134) 0 (61,134) Net Loss (71,493) (3,503,175) (3,574,668) ---------------- --------------- --------------- Partners' deficit at December 31, 1996 (1,465,252) (6,970,859) (8,436,111) Distributions (60,960) 0 (60,960) Net Loss (70,458) (3,452,459) (3,522,917) ---------------- --------------- --------------- Partners' deficit at December 31, 1997 $ (1,596,670) $ (10,423,318) $ (12,019,988) ================ =============== =============== See notes to financial statements. 6 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- STATEMENTS OF CASH FLOWS ------------------------ Year Ended December 31, 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Rent collections $ 15,239,499 $ 14,244,537 $ 13,747,228 Interest received 91,072 79,876 83,325 Other income 215,238 167,233 182,319 Management fees, dietary fees and other services (1,429,906) (1,351,527) (1,326,188) Salary, related benefits and overhead reimbursements (3,971,789) (3,816,530) (3,925,369) Other operating expenses paid (5,595,097) (5,202,737) (5,114,939) Interest paid (2,987,040) (2,995,574) (2,987,040) --------------- -------------- -------------- Net cash provided by operating activities 1,561,977 1,125,278 659,336 Cash flows from investing activity: Capital expenditures (1,022,465) (525,567) (712,919) --------------- -------------- -------------- Net cash used in investing activity (1,022,465) (525,567) (712,919) Cash flows from financing activity: Distributions (60,960) (61,134) (60,960) --------------- -------------- -------------- Net cash used in financing activity (60,960) (61,134) (60,960) --------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents 478,552 538,577 (114,543) Cash and cash equivalents at beginning of year 4,017,181 3,478,604 3,593,147 --------------- -------------- -------------- Cash and cash equivalents at end of year $ 4,495,733 $ 4,017,181 $ 3,478,604 =============== ============== ============== 7 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- STATEMENTS OF CASH FLOWS ------------------------ (continued) Year Ended December 31, 1997 1996 1995 ---- ---- ---- RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net loss $ (3,522,917) $ (3,574,668) $ (3,690,549) --------------- -------------- -------------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 1,703,233 1,615,089 1,525,513 Amortization of pension notes organization costs 49,776 49,776 49,776 Amortization of pension notes issuance costs 254,792 254,792 254,792 Interest Payable 3,049,235 2,779,711 2,534,011 Changes in operating assets and liabilities: Interest receivable 1,200 65 (23) Other assets and receivables (6,397) 827,993 (7,461) Prepaid expenses (15,543) (5,959) (5,759) Accounts payable (15,650) (254,782) 88,374 Purchase installments 0 (552,000) 0 Other liabilities 64,248 (14,739) (89,338) --------------- -------------- -------------- Net cash provided by operating activities $ 1,561,977 $ 1,125,278 $ 659,336 =============== ============== ============== See notes to financial statements. 8 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- December 31, 1997 and 1996 1. SUMMARY OF PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ----------------------------------------------------------------------- Organization ------------ NHP Retirement Housing Partners I Limited Partnership (the Partnership) is a limited partnership organized under the laws of the State of Delaware on March 10, 1986. The Partnership was formed for the purpose of raising capital by issuing both Pension Notes (Notes) to tax-exempt investors and selling additional partnership interests in the form of Assignee Interests (Interests) to taxable individuals. Interests represent assignments of the limited partnership interests of the Partnership issued to the Assignor Limited Partner, NHP RHP-I Assignor Corporation. The proceeds from the sale of the Notes and Interests have been invested in residential rental properties for retirement age occupants. A description of the Projects now owned directly or indirectly and operated by the Partnership is as follows: The Amberleigh. This project is a 271 unit retirement living center located in Williamsville, New York. The facility was approximately 97 % and 98 % occupied at December 31, 1997 and 1996 , respectively. The Atrium of Carmichael. This project is a 153 unit retirement living center located in Sacramento, California. This facility was approximately 99 % and 98 % occupied at December 31, 1997 and 1996 , respectively. Crosswood Oaks. This project is an 122 unit retirement living center located in Sacramento, California. This facility was approximately 91 % and 86 % occupied at December 31, 1997 and 1996 , respectively. The Heatherwood. This project is an 160 unit retirement living center located in Southfield, Michigan. This facility was approximately 98 % and 81 % occupied at December 31, 1997 and 1996 , respectively. Veranda Club. This project is an 189 unit retirement living center located in Boca Raton, Florida. This facility was approximately 96 % and 98 % occupied at December 31, 1997 and 1996 , respectively. Significant Accounting Policies ------------------------------- Offering costs, issuance costs and organization costs related to the sale of Notes are being amortized using the straight line method over the term of the Notes. Accumulated amortization at December 31, 1997 and 1996 was $2,547,920 and $2,293,128 , respectively. Selling commissions related to the sale of Interests were recorded as a direct reduction to the capital account of the holders of Interests. Accumulated amortization at December 31, 1997 and 1996 was 497,760 and $447,984 , respectively. Direct costs of acquisition, including acquisition fees and expenses paid to the General Partner, have been capitalized as a part of buildings and improvements. 9 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (Continued) Other fees and expenses of the Partnership are recognized as expenses in the period the related services are performed. Interest expense on Notes is calculated using the effective interest method (see Note 6). Operating deficit and cash flow guarantee payments received from the sellers of The Heatherwood, The Atrium and Crosswood Oaks are recognized as a reduction of the basis of the respective properties. Buildings and improvements are recorded at the lower of cost or net recoverable value (Note 10) and depreciated using the straight-line method, assuming a 30-year life and a 30% salvage value. Furniture and equipment are recorded at cost and depreciated using the straight line method over 5 years. The cost of rental property and their useful lives are summarized as follows: Useful Life 1997 1996 ----------- ---- ---- Land $ 6,820,468 $ 6,318,028 ============= ============== Land improvements 30 years 91,318 75,809 Building and building improvement 30 years 55,239,208 55,179,219 Furniture and equipment 5 years 2,795,633 2,351,105 ------------- -------------- 58,126,159 57,606,133 Less-accumulated depreciation (15,456,154) (13,752,920) ------------- -------------- $ 42,670,005 $ 43,853,213 ============= ============== Rental income is recognized when earned based on residents' signed rental agreements. Rental payments received in advance are deferred and recognized when earned. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. New Accounting Pronouncements ----------------------------- The Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income effective for fiscal 1998. Statement No. 130 requires reporting and display of comprehensive income and its components in the financial statements. This new Statement will only expand the Partnership's disclosures with respect to this item. 2. CASH AND CASH EQUIVALENTS ------------------------- As of December 31, 1997 and 1996 , cash and cash equivalents consisted of demand deposits and repurchase agreements. All repurchase agreements have an original maturity of three months or less and, therefore, are considered to be cash equivalents. Cash and cash equivalents also includes $531,056 and $504,879 of tenant security deposits at December 31, 1997 and 1996 , respectively, which are designated for the purpose of providing refunds to tenants upon move-out. 10 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (Continued) 3. TRANSACTIONS WITH THE GENERAL PARTNER AND ITS AFFILIATES -------------------------------------------------------- Through January 22, 1995, the sole general partner of the Partnership was NHP/RHGP-I Limited Partnership (NHP/RHGP-I). The sole limited partner of the Partnership is NHP RHP-I Assignor Corporation, a Delaware corporation which is an affiliate of NHP/RHGP-I. On December 19, 1991, the General Partner executed an amended and restated purchase agreement with Capital Realty Group Properties, Inc. (CRG) for the transfer of the General Partner's interest in the Partnership, subject to the approval of Assignee Holders. CRG's rights and obligations under the purchase agreement were subsequently assigned to an affiliate, Capital Realty Group Senior Housing, Inc. (CRGSH). CRGSH is the management agent under a five year contract with an optio to renew for an additional five years under certain conditions. Pursuant to a Consent Solicitation dated October 25, 1994, Assignee Holders holding more than 64% of the equity interests in the Partnership approved the election of CRGSH, as the replacement general partner of the Partnership. Effective January 23, 1995, CRGSH became the sole general partner of the Partnership. Effective February 1, 1995, CRGSH assigned its contract rights to manage the Partnership's properties to Capital Senior Living, Inc. ("CSL"), a subsidiary of Capital Senior Living Corporation. CRGSH and CSL received $1,429,906, $1,351,527, and $1,326,188 in 1997, 1996 and 1995, respectively, for management fees, dietary services fees and other operating expense reimbursements related to services provided to the Properties and the Partnership. Personnel working at the Property sites and certain home office personnel who perform services for the Partnership are employees as of February 1, 1995 of CSL, an affiliate of CRGSH, and prior to February 1, 1995 were employees of CRGSH. The Partnership reimburses CRGSH or CSL for the salaries and related benefits of such personnel as reflected in the accompanying financial statements. During 1997 , 1996 and 1995 , such reimbursements for salaries, related benefits and overhead reimbursements amounted to $3,971,789, $3,816,530, and $3,925,369 , respectively. During 1997 and 1996 , an affiliate of the General Partner, Capital Senior Living Communities, L.P., purchased approximately 11,318 and 422 , respectively, of Pension Notes, or approximately 30.74 % of the Partnership's outstanding Pension Notes at an average price of $822 per Note. On November 3, 1997, Capital Senior Living Communities, L.P. sold its Pension Notes to Capital Senior Living Properties, Inc., an affiliate of the General Partner and a subsidiary of Capital Senior Living Corporation, at a price of $1,422 per Note. At December 31, 1997, Capital Senior Living Properties, Inc. holds 13,128 Pension Notes. Capital Senior Living Corporation is subject to the periodic reporting obligations of the Securities and Exchange Commission. A 50% partner in Retirement Living Communities, L.P. ("RLC") is chairman of the board of a bank where the Partnership holds the majority of its operating cash accounts 4. ACQUISITION OF PROPERTY ----------------------- On November 5, 1997, the Partnership purchased approximately 3.10 acres of land adjacent to the Amberleigh property for $500,000 plus closing costs. The land will be used in development of a 60 unit assisted living retirement facility. 11 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (Continued) In connection with the purchase of the Heatherwood in 1988, the Partnership has recorded receivables of $826,877 from the seller and purchase installments and other liabilities due to the seller totaling $816,583. Amounts due to the Seller at December 31, 1995 include $264,583 in property management fees and the remaining $525,000 plus accrued interest of $27,000 purchase installment payment due to the seller. During 1996, the General Partner attempted to contact the Seller, but was unable to do so. The General Partner wrote off the amounts due to and from the Seller and recorded a $10,294 adjustment to income during 1996. 5. CASH DISTRIBUTION POLICIES -------------------------- The Partnership Agreement allows for quarterly payments of substantially all Cash Available For Distribution Before Interest Payments (as defined in the Partnership Agreement), subject to the following: (i) distributions to Assignee Holders may be restricted or suspended for limited periods when the General Partner determines in its absolute discretion that it is in the best interests of the Partnership; and (ii) all Assignee Holder distributions are subject to the payment of Partnership expenses and maintenance of working capital reserves. Cash Available For Distribution Before Interest Payments generally consists of cash received from the ordinary operations of the Partnership less operating expenses, without reduction for interest payments to Pension Note Holders, and working capital reserves. Distributions of Cash Available For Distribution Before Interest Payments are made in the following order of priority, to the extent available: First, to the General Partner in an amount equal to 2 percent of Cash Available For Distribution Before Interest Payments for each quarterly cash distribution period (payable only if the Note Holders receive the distribution as described below). Second, to the Pension Note Holders in an amount equal to an annual return of 7 percent on the adjusted principal amount of their Pension Notes for each quarterly cash distribution period. Third, to the Assignee Holders in an amount equal to an annual return of 7 percent on their adjusted capital contributions for each quarterly cash distribution period. Fourth, to the Pension Note Holders and Assignee Holders pro rata based on the relationship between the adjusted principal amount of the Pension Notes to the adjusted capital contributions of the Assignee Holders until the Note Holders have received an amount equal to an aggregate annual return of 10 percent on the adjusted principal amount of their Pension Notes for each quarterly cash distribution period and the Assignee Holders have received an amount equal to an aggregate annual return of 10 percent on their adjusted capital contributions for each quarterly cash distribution period. Fifth, to the General Partner as a Partnership Incentive Fee in an amount equal to 8 percent of Cash Available For Distribution Before Interest Payments for the fiscal year. If the amount of Cash Available for Distribution Before Interest Payments for any fiscal year is insufficient to pay the General Partner its Partnership Incentive Fee, the fee shall not accrue and shall not be paid from Cash Available For Distribution Before Interest Payments payable in subsequent fiscal years. 12 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (Continued) Sixth, the balance to the Note Holders and Assignee Holders pro rata based on the relationship between the adjusted principal amount of the Pension Notes to the adjusted capital contributions of the Assignee Holders. However, the amount of interest payable to the Note Holders shall not exceed a cumulative noncompounded return of 13 percent per annum on the adjusted principal amount of their Pension Notes. No payments of Cash Available For Distribution Before Interest Payments shall reduce the principal balance of the Pension Notes. No distributions were paid to the Assignee Interest Holders during 1997 , 1996 or 1995 . The General Partner anticipates that distributions to Assignee Interest Holders will be suspended until operating results significantly improve. Cash received from sales or refinancings of any Partnership Property, after retirement of applicable mortgage debt and the payment of all expenses related to the transaction and any payments of debt service on the Pension Notes including interest at a noncompounded rate of 13% per annum less any prior payments (see Note 6), is to be distributed in the following manner: First, to the Assignee Interest Holders until their adjusted capital accounts are reduced to zero; Second, to the Assignee Interest Holders until cumulative cash distributions received equal a 13% non-compounded return on their adjusted capital accounts, reduced by prior distributions; Third, to the General Partner in the form of a disposition fee; and Fourth, 85% to the Assignee Interest Holders and 15% to the General Partner. Taxable net income or loss from operations is allocated to the Interest Holders as a class and to the General Partner in proportion to available cash distributed during the fiscal year. If no cash is distributed during the year, net income or loss is allocated 90% to the Assignee Holders as a class and 10% to the General Partner. Other provisions exist if there is net income or loss other than from operations. As discussed in Note 7, 2% for 1997, 1996 and 1995 of the Cash Available For Distribution Before Interest Payments was paid to the General Partner. Accordingly, net loss for each of the three years in the period ended December 31, 1997 was allocated in the same manner. The deficit balance in the Assignee Limited Partner account reflects their percentage interest in the Partnership's cumulative net losses, although there are no restoration requirements for the Assignee Limited Partner interest upon termination of the Partnership 6. PENSION NOTES ------------- The Notes bear stated simple interest at a rate equal to 13% per annum. Payment of up to 9% of stated interest was subject to deferral through December 31, 1988 and payment of up to 6% of stated interest is subject to deferral thereafter. Deferred interest does not bear interest. 13 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (Continued) Interest not deferred is payable quarterly. Using the effective interest method, interest on principal and accrued interest of the Pension Notes has been accrued at the rate of approximately 9% per annum compounded quarterly. The approximate 9% effective interest rate was calculated using estimates of the amounts of interest that will be deferred and the time period in which such deferred amounts will be paid and will provide a liability for the full amount of deferred interest upon the maturity of the Pension Notes. If interest had been provided based on 13% versus the effective rate of approximately 9%, an additional liabilit of approximately $4,113,073 would be recorded at December 31, 1997 and future interest expense would be reduced by this amount. The Partnership made payments of $2,987,040, $2,995,574 and $2,987,040 in 1997, 1996 and 1995, respectively, to Pension Note Holders. The Partnership's obligation to repay the principal amount of the Notes, which mature on December 31, 2001, and stated interest thereon, is secured by a lien on the Partnership's assets (see Note 9). The liability of the Partnership under the Pension Notes is limited to the assets of the Partnership. The Pension Notes are subject to redemption in whole or in part upon not less than 30 nor more than 60 days prior notice, at the election of the Partnership. 7. DISTRIBUTIONS TO PARTNERS ------------------------- During 1997, 1996 and 1995, the General Partner received distributions, representing 2% of the Cash Available For Distribution Before Interest Payments to the Pension Note Holders. The Partnership did not make a distribution to the holders of Assignee Interests during 1997, 1996 or 1995. 8. INCOME TAXES ------------ The Partnership is not taxed on its income. The partners are taxed in their individual capacities upon their distributive share of the Partnership's taxable income and are allowed the benefits to be derived from possibly off-setting their distributive share of the tax loss against taxable income from other sources subject to application of passive loss rules and subject to "At Risk" basis limitation. The taxable income or loss differs from amounts included in the statement of operations primarily because of different methods used in computing depreciation and interest on the Notes and determining start-up and marketing expenses for financial reporting and Federal income tax purposes. For Federal income tax purposes, the Partnership computes depreciation of buildings and improvements using the Modified Accelerated Cost Recovery System (MACRS) and the Accelerated Cost Recovery System (ACRS), while for financial statement purposes, depreciation is computed using the straight-line method. Interest on Pension Notes is computed in accordance with Internal Revenue Service regulations for original issue discount for Federal income tax purposes, while for financial statement purposes, interest on Pension Notes is computed using the effective interest method. Start-up and marketing costs incurred prior to initial occupancy were capitalized and amortized over sixty months for Federal income tax purposes, while for financial statement purposes, only those start-up and marketing costs that are expected to benefit future operations have been capitalized and amortized over sixty months. 14 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (Continued) A reconciliation between financial statement net loss and net loss for tax purposes follows: Years Ended December 31, ----------------------------------------------------- 1997 1996 1995 ---- ---- ---- Net loss per financial statements $ 3,522,917 $ 3,574,668 $ 3,690,549 Temporary differences in determining losses for Federal income tax purposes: Depreciation 617,872 667,874 671,332 Amortization of start-up and marketing costs (48,116) (48,116) (48,116) Interest expense - pension notes (3,136,298) (2,903,363) (2,673,201) Miscellaneous 5,966 37,148 (18,001) ------------ ------------ ------------ Loss per tax return $ 962,341 $ 1,328,211 $ 1,622,563 ============ ============ ============ The basis of building and improvements, net of accumulated depreciation, for Federal income tax purposes was $35,166,014 and $36,967,094 at December 31, 1997 and 1996, respectively. 9. FUTURE OPERATIONS AND CASH FLOWS -------------------------------- Although cash flow from operations improved in 1997 , cash generated from operations over the past several years prior to 1994 was not adequate to meet the Partnership's minimum interest payment requirements. The shortfall was funded by Partnership's cash reserves, which principally resulted from funds remaining from the initial offering of Partnership Assignee Interests and Pension Notes, after the acquisition of the Partnership's Properties. Given the level of the Partnership's cash reserves at December 31, 1997 , if the Partnership is unable to increase cash generated from operations over time, cash reserves may not be sufficient to satisfy future obligations of the Partnership. If interest payments continue to be deferred at the current rate (see Note 6), the total accrual for unpaid interest and principal will approximate $81 million at December 31, 2001, the maturity date of the Pension Notes, which is far in excess of projected cash reserves. Accordingly, there will need to be very significant improvements in cash flows from operations and/or increases in the disposition and refinancing values of the Properties to fund both the accrued interest and the face value of the Pension Notes upon their maturity. Management plans to continue to manage the Properties prudently to achieve positive cash flows from operations after interest payments. 15 NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP ----------------------------------------------------- A LIMITED PARTNERSHIP --------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (Continued) 10. VALUATION OF RENTAL PROPERTY ---------------------------- In accordance with FASB Statement No 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", the Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If such a shortfall exists, a write-down would be warranted based on the estimated shortfall of discounted cash flows. The Partnership performs such evaluations on an ongoing basis by comparing each property's net book value to the total estimated future operating cash flow for years through 2001 (the year the Pension Notes mature) plus cash projected to be received upon an assumed sale of the properties on December 31, 2001. Sales proceeds, net of an estimated 3% cost of disposal, are estimated using a 10% capitalization rate of the net operating incom projected for each property for the year 2001. During July 1997, the Partnership obtained appraisals of the current market value of its properties. As of December 31, 1997, the July 1997 appraised values exceeded the partnership's net book value of its properties. The Partnership, however, does not intend to sell any Properties in the near future, but rather intends to continue to hold and operate them as rental properties. The Partnership does not believe there are any indicators that would require an adjustment to the carrying value of the properties or their remaining useful lives as of December 31, 1997 or 1996. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS: ----------------------------------- The carrying amounts and fair values of financial instruments at December 31, 1997 and 1996 are as follows: 1997 1996 ------------------------ ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Cash and cash equivalents $ 4,495,733 $ 4,495,733 $ 4,017,181 $ 4,017,181 Pension Notes 42,672,000 60,714,122 42,672,000 27,753,050 The following methods and assumptions were used by the General Partner in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate fair value. Pension Notes: The fair values of Pension Notes are based on discounted cash flows at December 31, 1997 and quoted market prices at December 31, 1996. 16 (b) Pro forma financial information. INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS The unaudited Pro Forma Combined Balance Sheet as of September 30, 1998 and unaudited Pro Forma Combined Statements of Income for the nine months ended September 30, 1998 and the year ended December 31, 1997, represent the financial position and results of operations of the Company for such periods after giving effect to the adjustments described in the accompanying notes, relating to the acquisitions of properties from NHP and Gramercy Hill Enterprises and Tesson Heights Enterprises, as if these transactions had occurred as of September 30, 1998 for the unaudited Pro forma Combined Balance Sheet, and as of January 1, 1997 for the unaudited Pro Forma Combined Statements of Income. The unaudited Pro Forma Combined Balance Sheet and unaudited Pro Forma Combined Statements of Income are preliminary and are presented for informational purposes only and do not necessarily reflect the financial position or results of operations of the Company which would have actually resulted had the acquisitions occurred as of the dates indicated, or the future results of operations of the Company. 17 CAPITAL SENIOR LIVING CORPORATION PRO FORMA COMBINED BALANCE SHEET (Unaudited) Assets September 30, 1998 ----------------------------------------------------------------------------------- The Company Gramercy Tesson Pro Forma The Company Historical Historical Historical Adjustments Pro Forma ----------------------------------------------------------------------------------- Current Assets: Cash and Cash Equivalents $ 34,378,076 $ 523,972 $ 582,334 (1) $(1,106,306) $ 34,378,076 Accounts Receivable, Net 3,254,751 2,604 4,663 - 3,262,018 Accounts Rec from Affiliates, Net 4,910,928 - - - 4,910,928 Deferred Taxes 8,280 - - - 8,280 Prepaid Expenses and Other 636,724 199,368 279,582 (2) (113,147) 1,002,527 ----------------------------------------------------------------------------------- Total Current Assets 43,188,759 725,944 866,579 (1,219,453) 43,561,829 Deferred Taxes 9,788,267 - - - 9,788,267 Property and Equipment, Net 85,299,053 4,772,254 5,524,425 (3) 23,925,945 119,521,677 Investments in Limited Partnerships 15,049,802 - - - 15,049,802 Note Receivable from Affiliate 7,354,617 - - - 7,354,617 Management Contract Rights, Net 207,613 - - - 207,613 Goodwill, Net 1,224,806 - - - 1,224,806 Deferred Financing Charges, Net 603,815 98,534 - (4) 25,112 727,461 Deferred Interest 968,605 - - - 968,605 Other Assets 455,866 - 179,815 (2) (179,815) 455,866 ----------------------------------------------------------------------------------- Total Assets $ 164,141,203 $ 5,596,732 $ 6,570,819 $22,551,789 $ 198,860,543 =================================================================================== Liabilities and Equity Current Liabilities: Accounts Payable $ 2,793,414 $ 75,862 $ 49,193 (2) $ (31,068) $ 2,887,401 Accrued Expenses 1,845,039 263,224 158,632 (2) (237,286) 2,029,609 Line of Credit 6,808,239 - - (5) 10,440,643 17,248,882 Current Portion of Notes Payable 591,114 - - (6) 117,386 708,500 Customer Deposits 620,880 77,000 156,000 (2) (2,050) 851,830 Federal and State Income Taxes Payable 1,114,975 - - - 1,114,975 ----------------------------------------------------------------------------------- Total Current Liabilities 13,773,661 416,086 363,825 10,287,625 24,841,197 Deferred Income 696,763 65,459 119,271 (2) (122,705) 758,788 Notes Payable, Net of Current Portion 37,966,859 6,349,366 8,103,460 (7) 9,136,953 61,556,638 Minority Interest in Consolidated Partnerships 11,201,561 - - - 11,201,561 Equity: Partners' Capital (Deficit) - (1,019,679) - (2) 1,019,679 - Preferred Stock, $.01 Par Value: Authorized Shares-15,000,000; No Shares Issued or Outstanding - - - - - Common Stock, $.01 Par Value: Authorized Shares-65,000,000 Issued And Outstanding Shares-19,717,347 197,173 - - - 197,173 Additional Paid-in Capital 91,740,251 - - - 91,740,251 Retained Earnings (Deficit) 8,564,935 (214,500) (2,015,737) (2) 2,230,237 8,564,935 ----------------------------------------------------------------------------------- Total Equity 100,502,359 (1,234,179) (2,015,737) 3,249,916 100,502,359 ----------------------------------------------------------------------------------- Total Liabilities and Equity $ 164,141,203 $ 5,596,732 $ 6,570,819 $22,551,789 $ 198,860,543 =================================================================================== The accompanying notes are an integral part of these pro forma combined financial statements. 18 CAPITAL SENIOR LIVING CORPORATION PRO FORMA COMBINED STATEMENT OF INCOME (Unaudited) For the Nine Months Ended September 30, 1998 ------------------------------------------------------------------------------------------------ The Company NHP, L.P. Gramercy Tesson Pro Forma The Company Historical Historical Historical Historical Adjustments Pro Forma ------------------------------------------------------------------------------------------------ Revenues: Resident and Health Care Revenue $15,237,396 $12,066,536 $2,366,049 $3,044,770 (1) $(3,863,672) $28,851,079 Rental and Lease Income 3,204,391 - - - - 3,204,391 Unaffiliated Management Services Revenue 1,812,136 - - - - 1,812,136 Affiliated Management Services Revenue 1,191,782 - - - (2) (767,349) 424,433 Development Fees 5,993,044 - - - - 5,993,044 Other 705,504 195,513 99,924 47,305 (1) (49,984) 998,262 ------------------------------------------------------------------------------------------------ Total Revenues 28,144,253 12,262,049 2,465,973 3,092,075 (4,681,005) 41,283,345 Expenses: Operating Expenses 11,635,108 6,555,003 1,120,299 1,142,521 (1) (2,023,371) 18,429,560 General and Administration Expenses 4,180,463 1,676,703 444,437 497,923 (1) (1,734,978) 5,064,548 Depreciation and Amortization 1,695,494 1,549,536 301,499 271,042 (3) 96,020 3,913,591 ------------------------------------------------------------------------------------------------ Total Expenses 17,511,065 9,781,242 1,866,235 1,911,486 (3,662,329) 27,407,699 ------------------------------------------------------------------------------------------------ Income From Operations 10,633,188 2,480,807 599,738 1, 180,589 (1,018,676) 13,875,646 Other Income (Expense): Interest Income 3,403,035 116,343 - - (1) (376,883) 3,142,495 Interest Expense (547,724) (4,748,950) (338,805) (563,172) (4) 1,942,224 (4,256,427) Other - 9,276,111 (1,815) (104,528) (5) (9,276,111) (106,343) ------------------------------------------------------------------------------------------------ Income Before Income Taxes and Minority Interest in Consolidated Partnerships 13,488,499 7,124,311 259,118 512,889 (8,729,446) 12,655,371 Provision for Income Taxes (5,185,848) - - - (6) 329,142 (4,856,706) ------------------------------------------------------------------------------------------------ Income Before Minority Interest in Consolidated Partnerships 8,302,651 7,124,311 259,118 512,889 (8,400,304) 7,798,665 Minority Interest in Consolidated Partnerships (359,912) - - - - (359,912) ------------------------------------------------------------------------------------------------ Net Income (Loss) $ 7,942,739 $ 7,124,311 $ 259,118 $ 512,889 $(8,400,304) $ 7,438,753 ================================================================================================ Net Income Per Share: Basic And Diluted $ 0.40 $ 0.38 ============= ============= Weighted Average Shares Outstanding 19,717,347 19,717,347 ============= ============= The above Pro Forma Adjustments do not reflect the additional deferred interest income earned by the Company on its investments in the NHP Pension Notes. The accompanying notes are an integral part of these pro forma combined financial statements. 19 CAPITAL SENIOR LIVING CORPORATION PRO FORMA COMBINED STATEMENT OF INCOME (Unaudited) For the Year Ended December 31, 1997 -------------------------------------------------------------------------------------------------- The Company NHP, L.P. Gramercy Tesson Pro Forma The Company Historical Historical Historical Historical Adjustments Pro Forma -------------------------------------------------------------------------------------------------- Revenues: Resident and Health Care Revenue $21,206,865 $15,243,028 $2,818,687 $3,908,599 (1) $(4,940,669) $38,236,510 Rental and Lease Income 4,275,611 - - - - 4,275,611 Unaffiliated Management Services Revenue 1,919,618 - - - - 1,919,618 Affiliated Management Services Revenue 1,378,444 - - - (2) (932,496) 445,948 Development Fees 976,694 - - - - 976,694 Other 952,650 215,238 91,969 35,431 (1) (66,883) 1,228,405 --------------------------------------------------------------------------------------------------- Total Revenues 30,709,882 15,458,266 2,910,656 3,944,030 (5,940,048) 47,082,786 Expenses: Operating Expenses 17,474,127 5,260,883 1,351,959 1,415,886 (1) (2,701,332) 22,801,523 General and Administration Expenses 6,311,986 5,417,788 728,611 758,347 (1) (2,268,263) 10,948,469 Depreciation and Amortization 2,117,288 2,007,801 301,873 276,836 (3) 407,340 5,111,138 --------------------------------------------------------------------------------------------------- Total Expenses 25,903,401 12,686,472 2,382,443 2,451,069 (4,562,255) 38,861,130 --------------------------------------------------------------------------------------------------- Income from Operations 4,806,481 2,771,794 528,213 1,492,961 (1,377,793) 8,221,656 Other Income (Expense): Interest Income 3,185,815 89,872 5,477 17,020 (1) (487,608) 2,810,576 Interest Expense (2,022,494) (6,036,275) (615,951) (769,100) (4) 1,819,883 (7,623,937) Other 440,007 (348,308) - - - 91,699 --------------------------------------------------------------------------------------------------- Income before Income Taxes and Minority Interest in Consolidated Partnerships 6,409,809 (3,522,917) (82,261) 740,881 (45,518) 3,499,994 Provision for Income Taxes (792,524) - - - (6) 174,795 (617,729) --------------------------------------------------------------------------------------------------- Income before Minority Interest in Consolidated Partnerships 5,617,285 (3,522,917) (82,261) 740,881 129,277 2,882,265 Minority Interest in Consolidated Partnerships (1,936,122) - - - - (1,936,122) --------------------------------------------------------------------------------------------------- Net Income (Loss) $ 3,681,163 $(3,522,917) $ (82,261) $ 740,881 $ 129,277 $ 946,143 =================================================================================================== Net Income Per Share: Basic and Diluted $ 0.33 $ 0.08 ============= ============== Weighted Average Shares 11,150,087 11,150,087 ============= ============== The above Pro Forma Adjustments do not reflect the additional deferred interest income earned by the Company on its investments in the NHP Pension Notes. The accompanying notes are an integral part of these pro forma combined financial statements. 20 CAPITAL SENIOR LIVING CORPORATION NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited Pro Forma Combined Balance Sheet as of September 30, 1998 and unaudited Pro Forma Combined Statements of Income for the nine months ended September 30, 1998 and the year ended December 31, 1997, represent the financial position and results of operations of the Company for such periods after giving effect to the adjustments described in the accompanying notes, relating to the acquisitions of properties from NHP and Gramcery Hill Enterprises and Tesson Heights Enterprises, as if these transactions had occurred as of September 30, 1998 for the unaudited Pro Forma Combined Balance Sheet, and as of January 1, 1997 for the unaudited Pro Forma Combined Statements of Income. 2. Financing Transaction of NHP and Tesson Heights Enterprises On September 30, 1998, the Company, through Capital Senior Living Properties 2-NHPCT, Inc. ("CSLP 2-NHPCT"), an indirect wholly-owned subsidiary, entered into a $60,000,000 mortgage loan agreement with Lehman Brothers Holdings, Inc. ("LBHI Loan"). The purpose of the LBHI Loan is to provide financing for the acquisition of four NHP senior living communities, as well as for the Tesson Heights Enterprises ("Tesson") senior living community, all of which have been pledged as collateral. Interest costs are based on 30-day LIBOR, which was approximately 7.25% at September 30, 1998. The loan agreement matures October 1, 1999. 3. Financing Transaction of Gramercy Hill Enterprises On October 28, 1998, the Company, through Capital Senior Living Properties 2-Gramercy, Inc. ("CSLP 2-Gramercy"), an indirect wholly-owned subsidiary, entered into a $6,400,000 Assumption and Release Agreement with Fannie Mae in favor of Washington Mortgage Financial Group, Ltd. ("WMFG") and a $1,980,000 multifamily note in favor of WMF Washington Mortgage Corp. ("WMFC"). The purpose of the loans is to provide financing for the acquisition. The senior living community has been pledged as collateral under these loans. Interest costs are approximately 7.50%, respectively. The Assumption and Release Agreement and WMFC note mature on January, 2008 and January, 2010, respectively. 4. Acquisitions of Assets NHP Transection. --------------- On September 30, 1998, the Company, through CSLP 2-NHPCT, an indirect wholly-owned subsidiary, completed the acquisition of four senior living communities from NHP Retirement Housing Partners I Limited Partnership ("NHP") for cash consideration of $40,650,000, pursuant to the terms of the Asset Purchase Agreement, which was previously filed as Exhibit 2.1, dated as of July 24, 1998, by and between NHP and CSLP 2-NHPCT. The funds for the transaction were provided from working capital of the Company and from the proceeds of the LBHI Loan pursuant to the terms of the Loan Agreement, which was previously filed as Exhibit 2.3, dated as of September 30, 1998, by and between Purchaser and Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. 21 CAPITAL SENIOR LIVING CORPORATION NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued) The senior living communities acquired by the Company from NHP are The Atrium of Carmichael in Carmichael, California; Crosswoods Oaks in Citrus Heights, California; The Heatherwood in Southfield, Michigan; and The Veranda Club in Boca Raton, Florida. Capital Senior Living, Inc. ("CSL"), a subsidiary of the Company, has operated these communities under a long-term management contract since 1992. The purchase price for the properties was determined by independent appraisal. Personnel working at the property sites and certain home office personnel who perform services for NHP are employees of CSL. NHP (prior to the acquisitions) reimbursed CSL for the salaries, related benefits, and overhead reimbursements of such personnel. Capital Realty Group Brokerage, Inc., a company wholly-owned by Messrs. Jeffrey L. Beck and James A. Stroud, the Chief Executive and Chief Operating Officers of the Company, respectively, received a brokerage fee of $1,219,500 related to this transaction, which was paid by NHP. The acquisitions were accounted for as a purchase business combination. This transaction is included in the Company's historical balance sheet as of September 30, 1998. Gramercy/Tesson Transactions. ---------------------------- On October 28, 1998, the Company, through CSLP 2-Gramercy and CSLP 2-NHPCT, both indirect wholly-owned subsidiaries, completed the acquisition of two senior living communities from Gramercy Hill Enterprises, a Texas limited partnership ("Gramercy"), and Tesson, for aggregate consideration of approximately $34,000,000, pursuant to the terms of certain Asset Purchase Agreements (previously filed as Exhibit 2.1 and Exhibit 2.2 to the Company's Current Report on Form 8-K, dated October 28, 1998) dated as of July 28, 1998, by and between Gramercy and Tesson, respectively, and CSLP 2-Gramercy and CSLP 2-NHPCT, respectively. The funds for the Tesson transaction were provided from working capital of the Company and from the proceeds of the LBHI Loan, dated as of September 30, 1998, with Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. The funds for the Gramercy transaction were provided from working capital of the Company, the assumption of the $6,400,000 WMFG promissory note and from the proceeds of the $1,980,000 WMFC loan. The senior living communities acquired by the Company from Gramercy and Tesson are Gramercy Hill in Lincoln, Nebraska and Tesson Heights, in St. Louis, Missouri. The purchase price for the properties was determined through negotiations between the parties. The acquisitions were accounted for as a purchase business combination. 5. Basis of Valuation The Company has obtained independent valuations of the senior living communities from third party valuation firms, which were utilized in determining the purchase accounting of the NHP, Gramercy and Tesson businesses acquired. 6. Pro Forma Adjustments The pro forma adjustments to the combined balance sheet and combined statements of income, and related assumptions, are detailed below: 22 CAPITAL SENIOR LIVING CORPORATION NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued) Pro Forma Combined Balance Sheet September 30, 1998 ------------------ (1) Reduction for Gramercy cash of $523,972 and Tesson cash of $582,334 not acquired by the Company. (2) Adjustment to reflect the reduction for certain working capital items of Gramercy and Tesson which were not acquired or assumed by the Company. (3) Increase in value of property and equipment acquired based upon the fair market value of the assets (Gramercy $6,149,498 and Tesson $17,776,449). The property and equipment acquired is being depreciated on a straight line basis over the lives of the assets, which range from four to forty years. (4) Adjustment to reflect the increase in deferred financing charges of Gramercy as a result of the WMFC note. (5) Adjustment to reflect the advance against the Company's line of credit to acquire Gramercy and Tesson. (6) Adjustment to reflect the increase in notes payable-current due to the acquisitions. (7) Adjustment to reflect the increase in notes payable: Recording of the additional funding of the LBHI Loan $15,400,000 Repayment of the Tesson loan with proceeds from the purchase (8,103,460) Recording of the WMFC Loan 1,957,799 Reclassing the current portion of the WMFC Loan (117,386) --------------------------- $9,136,953 =========================== (8) Adjustment to eliminate the historical partners' capital and retained earnings of Gramercy and Tesson as the acquisitions were accounted for as a purchase. 23 CAPITAL SENIOR LIVING CORPORATION NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued) Pro Forma Combined Statements of Income Nine Months Ended Year Ended September 30, 1998 December 31, 1997 -------------------------- ----------------------- (1) Adjustments to reflect the elimination of revenue, interest income, other revenue, operating expenses and general and administrative expenses for NHP entities and partnership level activity not acquired or assumed by the Company and interest income foregone relating to the use of the Company's existing working capital. (2) Adjustment to reflect the elimination of intercompany management fees relating to the NHP properties acquired. (3) Adjustment to reflect the net increase (decrease) in depreciation and amortization expense: Elimination of depreciation expense for NHP entities not acquired or assumed by the Company $(648,308) $(860,379) Addition of depreciation expense as a result of the purchase of property and reevaluation of asset lives 744,328 1,267,719 -------------------------- ----------------------- $96,020 $407,340 ========================== ======================= (4) Adjustment to reflect the net increase (decrease) in interest expense: Elimination of interest expense for NHP and Tesson debt relating to properties and operations not acquired or assumed by the Company $(5,312,122) $(6,805,375) Elimination of amortization of deferred loan costs for debt related to properties not acquired (11,984) (36,389) Addition of interest expense as a result of the financing of the properties 3,373,449 4,499,773 Addition of amortization expense relating to deferred loan costs 8,433 522,108 -------------------------- ----------------------- $(1,942,224) $(1,819,883) ========================== ======================= (5) Adjustment to eliminate NHP and entities gain on the sale of the four properties. (6) The Company was an S corporation for federal income tax purposes through November 5, 1997 and NHP, Gramercy and Tesson operated as partnerships, and accordingly, incurred no income taxes. The Pro Forma adjustment is to reflect income taxes on the Pro Forma company as if it operated as a C corporation using an effective tax rate of 39.5%. 7. Other The unaudited Pro Forma Combined Balance Sheet and unaudited Pro Forma Combined Statements of Income are preliminary and are presented for informational purposes only and do not necessarily reflect the financial position or results of operations of the Company which would have actually resulted had the acquisitions occurred as of the dates indicated, or the future results of operations of the Company. 24 (c) Exhibits. *2.1 Asset Purchase Agreement, dated as of July 24, 1998, by and between Capital Senior Living Properties, Inc. and NHP Retirement Housing Partners I Limited Partnership. *2.2 Assignment and Amendment to Asset Purchase Agreement, effective as of September 29, 1998, by and among NHP Retirement Housing Partners I Limited Partnership, Capital Senior Living Properties, Inc., and Capital Senior Living Properties 2 - NHPCT, Inc. *2.3 Loan Agreement, dated as of September 30, 1998, by and between Capital Senior Living Properties 2 - NHPCT, Inc. and Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. *99.1 Press Release, dated October 5, 1998. - ---------------------- * Filed previously with the Current Report on Form 8-K of the Company, dated September 30, 1998. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CAPITAL SENIOR LIVING CORPORATION (Registrant) Date: December 14, 1998 By: /s/ Lawrence A. Cohen -------------------------------- Lawrence A. Cohen Chief Financial Officer 26 EXHIBIT INDEX Sequentially Exhibit No. Exhibit Description Numbered Page - ----------- ------------------- ------------- *2.1 Asset Purchase Agreement, dated as of July 24, 1998, by and between Capital Senior Living Properties, Inc. and NHP Retirement Housing Partners I Limited Partnership. *2.2 Assignment and Amendment to Asset Purchase Agreement, effective as of September 29, 1998, by and among NHP Retirement Housing Partners I Limited Partnership, Capital Senior Living Properties, Inc., and Capital Senior Living Properties 2 - NHPCT, Inc. *2.3 Loan Agreement, dated as of September 30, 1998, by and between Capital Senior Living Properties 2 - NHPCT, Inc. and Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. *99.1 Press Release, dated October 5, 1998 <FN> - --------------------- * Filed previously with the Current Report on Form 8-K of the Company, dated September 30, 1998. </FN> 27