AMERICAN RETIREMENT CORP, 424B4, 1997-06-02

AMERICAN RETIREMENT CORP
424B4, 1997-06-02
SKILLED NURSING CARE FACILITIES

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<PAGE> 1

Filed Pursuant to Rule 424(B)(4)
Registration No. 333-23197

PROSPECTUS

3,125,000 SHARES

[AMERICAN RETIREMENT CORPORATION LOGO]

COMMON STOCK
------------------
All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), of American Retirement Corporation (the "Company") offered hereby (the
"Offering") are being offered by the Company. Prior to the Offering, there has
been no public market for the Common Stock. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price. Approximately $21.9 million of the net proceeds of the Offering will be
received by the existing shareholders of the Company. See "The
Company -- Reorganization" and "Certain Transactions -- Reorganization." It is
anticipated that approximately 500,000 shares of Common Stock will be offered
outside of the United States.

The Common Stock has been approved for listing on The New York Stock
Exchange (the "NYSE") under the symbol "ACR." At the request of the Company, up
to 300,000 shares of Common Stock have been reserved for sale in the Offering to
certain individuals, including directors and employees of the Company, members
of their families, and other persons having business relationships with the
Company. See "Underwriting."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $14.00 $0.98 $13.02
- -------------------------------------------------------------------------------------------------------------
Total(3)................................... $43,750,000 $3,062,500 $40,687,500
=============================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $1,300,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 468,750 shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, and Proceeds to Company will
be $50,312,500, $3,521,875, and $46,790,625, respectively.
------------------
The shares of Common Stock are offered by the Underwriters when, as, and if
delivered to and accepted by the Underwriters, and subject to various prior
conditions, including the right to withdraw, cancel, or modify the Offering and
to reject orders in whole or in part. It is expected that delivery of stock
certificates will be made in New York, New York on or about June 4, 1997.
------------------
NATWEST SECURITIES LIMITED
EQUITABLE SECURITIES CORPORATION

MCDONALD & COMPANY
SECURITIES, INC.
The date of this Prospectus is May 30, 1997
<PAGE> 2
Omitted Graphic and Image Material

The following is a narrative description of graphic and image material
contained in the printed version of the prospectus which has been omitted from
the version of the prospectus filed electronically.

Inside Front Cover Page:

The Company's logo, accompanied by photographs of (i) a resident common
area at one of the Company's communities, (ii) a resident being assisted by a
Company staff member, and (iii) an exterior view of one of the Company's
communities, and the caption "Providing Quality Senior Living and Health Care
Services Since 1978."

Inside Front Cover Page Fold Out:

1. The Company's logo, accompanied by a photograph of Dr. Thomas F. Frist, Sr.
accompanied by the following caption: "Dr. Thomas F. Frist, Sr. ARC Co-Founder"
and the following text: "ARC is committed to the principle that well-planned
and well-managed senior living communities offer the best setting within which
to meet the physical, mental and social needs of a large and growing segment of
contemporary society. This operating philosophy was inspired by ARC's
co-founder, Dr. Thomas F. Frist, Sr.'s vision to enhance the lives of the
elderly by providing the highest quality of care and services in well-operated
communities designed to improve and protect the quality of life, independence,
personal freedom, privacy, spirit and dignity of its residents. As the senior
living industry evolves, ARC is committed to playing a significant and socially
responsible role in its development."

2. A map of the United States with markers indicating the locations of the
Company's operations divided into the following categories: (i) Senior Living
Community/Residence - Owned/Leased; (ii) Senior Living Community/Residence -
Managed; (iii) Senior Living Community/Residence - Development; (iv) Home
Health Care; and (v) ARC Corporate Office.

3. A collage of pictures arranged around the map including photos of: (i) a
resident feeding an ice cream cone to a child; (ii) a resident; (iii) an
external view of one of the Company's communities; (iv) a Company chef
displaying hors d'oeuvres; (v) residents participating in an exercise class;
(vi) the living room of a resident apartment; (viii) an external view of one of
the Company's communities; (ix) two residents in a dining room at a community;
(x) a resident; (xi) a resident fishing at one of the Company's communities;
(xii) a resident common area at one of the Company's communities; (xiii) an
external view of the Company's Trinity Towers community; (xiv) a resident; and
(xv) a resident being assisted by a staff member.

4. The following caption: "On these pages are representative pictures of ARC's
senior living communities and actual residents and employees of these
communities, overlaid on a map showing the company's existing community
locations - both owned/leased and managed - and those currently under
development."

FOR UNITED KINGDOM PURCHASERS: This Prospectus has not been registered in
the United Kingdom and, accordingly, the shares of Common Stock offered hereby
may not be and are not being offered or sold in the United Kingdom other than to
persons whose ordinary activities involve them in acquiring, holding, managing,
or disposing of investments, whether as principal or agent (except in
circumstances that do not constitute an offer to the public within the meaning
of the Public Offers of Securities Regulations 1995 or the Financial Services
Act 1986), and this Prospectus may only be issued or passed on to any person in
the United Kingdom if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or a person to whom this Prospectus may otherwise lawfully be passed on.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS, AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Prospective investors
should consider carefully the information set forth under "Risk Factors."
Immediately prior to the Offering, American Retirement Communities, L.P.
("ARCLP" or the "Predecessor") was reorganized (the "Reorganization") such that
all of ARCLP's assets and liabilities were contributed to the Company in
exchange for a total of 7,812,500 shares of Common Stock, which were immediately
distributed to ARCLP's partners, and a promissory note in the principal amount
of $21.875 million (the "Reorganization Note"). See "The
Company -- Reorganization." Unless otherwise indicated, all information in this
Prospectus (i) gives effect to the Reorganization, and (ii) assumes no exercise
of the Underwriters' over-allotment option. Unless the context otherwise
requires, references to the Company include the Company, its subsidiary
partnerships and corporations, and the Predecessor.

THE COMPANY

The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly, including
independent living, assisted living, skilled nursing, and home health care
services. Established in 1978, the Company believes it ranks among the leading
operators in the senior living and health care services industry. Currently, the
Company operates 21 senior living communities in 12 states, consisting of 11
owned communities, three leased communities, and seven managed communities, with
an aggregate capacity for approximately 5,700 residents. The Company also owns
and operates eight home health care agencies. At March 31, 1997, the Company's
owned communities had an occupancy rate of 94%, its leased communities had an
occupancy rate of 95%, and its managed communities had an occupancy rate of 93%.
For the year ended December 31, 1996, and the three months ended March 31, 1997,
revenues attributable to the Company's senior living communities accounted for
91.5% and 90.5%, respectively, of the Company's total revenues, and revenues
attributable to the Company's home health care agencies accounted for 6.2% and
7.0%, respectively, of the Company's total revenues. Approximately 92.4% of the
Company's total revenues for the year ended December 31, 1996 and approximately
91.1% of the Company's total revenues for the three months ended March 31, 1997
were derived from private pay sources.

Since 1992, the Company has experienced significant growth, primarily
through the acquisition of 13 senior living communities. The Company's revenues
have grown from $17.8 million in 1992 to $75.6 million in 1996, an average
annual growth rate of 43.5%. During the same period, the Company's income from
operations has grown from $2.3 million to $15.6 million, an average annual
growth rate of 61.7%. The Company intends to continue its growth through a
combination of (i) development of free-standing assisted living residences,
including special living units and programs for residents with Alzheimer's and
other forms of dementia; (ii) selective acquisitions of senior living
communities, including assisted living residences; (iii) expansion of existing
communities; and (iv) development and acquisition of home health care agencies.
As part of its growth strategy, the Company is currently developing 21
free-standing assisted living residences, with an estimated aggregate capacity
for 1,826 residents, and is expanding eight of its existing communities to add
capacity to accommodate an additional 704 residents. The Company has also
entered into a letter of intent to acquire one additional home health care
agency and intends to commence operations at five additional home health care
agencies during 1997.

The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the
principal founders of Hospital Corporation of America (now a subsidiary of
Columbia/HCA Healthcare Corporation). The Company's operating philosophy was
inspired by Dr. Frist's and Mr. Massey's vision to enhance the lives of the
elderly by providing the highest quality of care and services in well-operated
communities designed to improve and protect the quality of life, independence,
personal freedom, privacy, spirit, and dignity of its residents. The Company
believes that its senior management, led by W.E. Sheriff, its Chairman and Chief
Executive Officer, and Christopher J. Coates, its President and Chief Operating
Officer, is one of the most experienced management teams in the senior living
industry. The Company's 12 senior officers have been employed by the Company for
an average of nine years and have an average of 14 years of industry experience.
3
<PAGE> 4

The executive directors of the Company's communities have been employed by the
Company for an average of four years and have an average of 11 years of
experience in the senior living industry.

The Company's target market, which consists of seniors age 75 and older, is
one of the fastest growing segments of the United States population. According
to the United States Census Bureau, this age group is expected to grow from 13.2
million in 1990 to over 16.6 million by 2000, an increase of 26%. The Company
believes that the market for senior living and health care services, including
Alzheimer's and dementia care services, will continue to grow as a result of (i)
the aging of the U.S. population, (ii) rising public and private
cost-containment pressures, (iii) declining availability of traditional nursing
home beds as a result of nursing home operators focusing on higher acuity
patients, (iv) the quality of life advantages of assisted living residences over
traditional skilled nursing facilities, and (v) the decreasing availability of
family care as an option for elderly family members. The Company believes that
its experience, reputation, and market presence favorably position it to take
advantage of opportunities in the rapidly growing senior living and health care
industry.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company........................ 3,125,000 shares
Common Stock to be outstanding after the Offering.......... 10,937,500 shares(1)
Use of proceeds............................................ To repay the Reorganization Note; to fund
development activities and possible future
acquisitions; and for general corporate
purposes, including working capital. See
"The Company -- Reorganization" and "Use
of Proceeds."
NYSE symbol................................................ ACR
</TABLE>

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

(1) Includes 7,812,500 shares of Common Stock issued in the Reorganization. Does
not include 635,000 shares of Common Stock reserved for issuance pursuant to
outstanding stock options under the Company's 1997 Stock Incentive Plan,
which options are exercisable at the initial public offering price. See
"Management -- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan"
and "Description of Capital Stock."
4
<PAGE> 5

SUMMARY COMBINED AND CONSOLIDATED FINANCIAL AND OTHER DATA

The following summary combined and consolidated financial and other data is
qualified in its entirety by the more detailed information in the financial
statements and pro forma financial information appearing elsewhere in this
Prospectus. The summary financial data for the year ended December 31, 1994 and
for the three months ended March 31, 1995 is derived from the combined financial
statements of certain affiliated partnerships and corporations (collectively,
the "Predecessor Entities"). The summary financial data for the nine months
ended December 31, 1995, the three months ended March 31, 1996, the year ended
December 31, 1996, and the three months ended March 31, 1997 is derived from the
consolidated financial statements of the Predecessor. See Note 1 to the Combined
and Consolidated Financial Statements.
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
(COMBINED) --------------------------------------
---------------------------
THREE MONTHS NINE MONTHS YEAR ENDED
YEAR ENDED ENDED ENDED DECEMBER 31, 1996
DECEMBER 31, MARCH 31, DECEMBER 31, -----------------------
1994 1995 1995 ACTUAL PRO FORMA(1)
------------ ------------ ------------ -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................. $33,341 $12,356 $48,763 $ 75,617 $ 79,543
Operating expenses.............. 28,126 10,270 38,730 60,066 63,861
------- ------- ------- -------- --------
Income from operations........ 5,215 2,086 10,033 15,551 15,682
Other income (expense), net..... (5,053) (3,334) (6,682) (10,938) (11,353)
------- ------- ------- -------- --------
Income (loss) before income
taxes and extraordinary
item.......................... 162 (1,248) 3,351 4,613 4,329
Income tax expense
(benefit)(2).................. -- 20 55 (920) (920)
------- ------- ------- -------- --------
Income (loss) before
extraordinary item............ 162 (1,268) 3,296 5,533 5,249
Extraordinary item(3)........... -- -- -- (2,335) (2,335)
------- ------- ------- -------- --------
Net income (loss)............... $ 162 $(1,268) $ 3,296 $ 3,198 $ 2,914
======= ======= ======= ======== ========
Net income (loss) available for
distribution to partners and
shareholders.................. $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590
======= ======= ======= ======== ========

UNAUDITED PRO FORMA TAX DATA(4):
Income before income taxes and
extraordinary item............ $ 4,613 $ 4,329
Pro forma income tax expense.... 820 712
-------- --------
Pro forma income before
extraordinary item............ $ 3,793 $ 3,617
======== ========
Pro forma income before
extraordinary item available
for distribution to partners
and shareholders.............. $ 2,689 $ 3,293
======== ========
Pro forma per share data:
Income before extraordinary
item available for
distribution to partners and
shareholders................ $ 0.29 $ 0.35
======== ========
Shares used in computing pro
forma per share data(5)..... 9,375 9,375
======== ========
Pro forma as adjusted per share data(6):
Income before extraordinary
item available for
distribution to partners and
shareholders................ $ 0.30
========
Shares used in computing pro
forma as adjusted per share
data........................ 10,938
========

<CAPTION>
PREDECESSOR
----------------------------------
THREE
THREE MONTHS MONTHS
ENDED MARCH 31, 1996 ENDED
---------------------- MARCH 31,
ACTUAL PRO FORMA(1) 1997
------- ------------ ---------

<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................. $16,316 $19,281 $21,510
Operating expenses.............. 12,843 15,211 17,398
------- ------- -------
Income from operations........ 3,473 4,070 4,112
Other income (expense), net..... (1,821) (2,936) (3,137)
------- ------- -------
Income (loss) before income
taxes and extraordinary
item.......................... 1,652 1,134 975
Income tax expense
(benefit)(2).................. -- -- --
------- ------- -------
Income (loss) before
extraordinary item............ 1,652 1,134 975
Extraordinary item(3)........... (2,335) (2,335) --
------- ------- -------
Net income (loss)............... $ (683) $(1,201) $ 975
======= ======= =======
Net income (loss) available for
distribution to partners and
shareholders.................. $(1,058) $(1,381) $ 975
======= ======= =======
UNAUDITED PRO FORMA TAX DATA(4):
Income before income taxes and
extraordinary item............ $ 1,652 $ 1,134 $ 975
Pro forma income tax expense.... 628 431 370
------- ------- -------
Pro forma income before
extraordinary item............ $ 1,024 $ 703 $ 605
======= ======= =======
Pro forma income before
extraordinary item available
for distribution to partners
and shareholders.............. $ 649 $ 523 $ 605
======= ======= =======
Pro forma per share data:
Income before extraordinary
item available for
distribution to partners and
shareholders................ $ 0.07 $ 0.06 $ 0.06
======= ======= =======
Shares used in computing pro
forma per share data(5)..... 9,375 9,375 9,375
======= ======= =======
Pro forma as adjusted per share
Income before extraordinary
item available for
distribution to partners and
shareholders................ $ 0.05 $ 0.06
======= =======
Shares used in computing pro
forma as adjusted per share
data........................ 10,938 10,938
======= =======
</TABLE>

<TABLE>
<CAPTION>
AT MARCH 31, 1997
-------------------------------
COMPANY
PREDECESSOR ---------------
----------- PRO FORMA
ACTUAL(7) AS ADJUSTED(8)
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 8,854 $ 23,866
Working capital............................................. 1,651 19,163
Total assets................................................ 214,156 229,168
Long-term debt, including current portion................... 157,568 157,568
Partners' and shareholders' equity.......................... 36,357 40,353
</TABLE>

5
<PAGE> 6

<TABLE>
<CAPTION>
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR
--------------------------- -------------------------------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED THREE MONTHS
YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED MARCH 31,
DECEMBER 31, MARCH 31, DECEMBER 31, ---------------------- ------------------
1994 1995 1995 ACTUAL PRO FORMA(1) 1996 1997
------------ ------------ ------------ ------ ------------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Distribution to partners,
including preferred
distributions................. $2,580 $1,400 $5,189 $7,139 $6,359(9) $1,415 $2,500(10)
Revenue mix:
Private pay................... 93.0% 92.2% 91.2% 92.4% 92.5% 90.1% 91.1%
Medicare and other(11)........ 7.0 7.8 8.8 7.6 7.5 9.9 8.9
------ ------ ------ ------ ------ ------ ------
Total................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Resident capacity (at period end):
Owned......................... 2,141 2,386 2,594 3,369 2,886 2,584 2,912
Leased........................ -- -- -- -- 483 -- 483
Managed....................... 3,315 3,079 3,008 2,159 2,159 3,005 2,159
------ ------ ------ ------ ------ ------ ------
Total................... 5,456 5,456 5,602 5,528 5,528 5,589 5,554
Average occupancy rate:
Owned......................... 89% 91% 93% 94% 94% 93% 94%
Leased........................ -- -- -- -- 89 -- 95
Managed....................... 93 95 91 91 90 91 92
------ ------ ------ ------ ------ ------ ------
Total................... 90% 93% 92% 92% 92% 92% 94%
</TABLE>

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

(1) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the May 1996 acquisition (the "Carriage Club
Acquisitions") of Carriage Club of Charlotte, L.P. and Carriage Club of
Jacksonville, L.P. (collectively, "Carriage Club"), and (b) the January
1997 sale-leaseback by the Company of two communities (the "Sale-Leaseback
Transactions") and the application of a portion of the net proceeds
therefrom to retire debt. See "Unaudited Pro Forma Condensed Combined
Financial Information."
(2) Provision for income taxes reflects income tax expense of only one of the
Predecessor Entities because the Predecessor and the other Predecessor
Entities were partnerships. No income tax expense is reflected for periods
prior to 1995 because of losses or the availability of net operating loss
carryforwards ("NOLs"). Both periods in 1995 reflect a provision for
alternative minimum taxes. In 1996, the Company recorded an income tax
benefit and a deferred tax asset of $920,000 because of the anticipated
utilization of NOLs that will offset taxable gains recognized from the
Sale-Leaseback Transactions. See Note 12 to the Combined and Consolidated
Financial Statements.
(3) Amount represents loss on early extinguishment of debt. See Note 9 to the
Combined and Consolidated Financial Statements.
(4) Except for one of the Predecessor Entities, the Predecessor and the
Predecessor Entities, as partnerships, were exempt from U.S. Federal and
state income taxes. The pro forma financial data reflects the effect on
certain income statement data of income tax expense that would have been
recorded had the Predecessor and the other Predecessor Entities not been
exempt from paying such income taxes. Pro forma income tax expense has been
calculated using the statutory U.S. Federal and state tax rates and gives
effect to the recognition in 1996 of the $920,000 deferred tax asset
described in footnote (3) above.
(5) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500
shares, representing the value of the $21.875 million principal amount of
the Reorganization Note (based upon the initial public offering price of
$14.00 per share).
(6) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Reorganization; and (b) the sale of the 3,125,000
shares of Common Stock offered hereby, and the application of a portion of
the estimated net proceeds to retire the Reorganization Note, and (c) for
the year ended December 31, 1996 data, the transactions described in
footnote (1) above. The pro forma as adjusted per share data does not give
effect to a non-recurring $13.5 million ($1.23 per share) charge to income
incurred at the time of the Reorganization in connection with the
conversion from a non-taxable to a taxable entity and the resulting
recognition of a deferred income tax liability for the differences between
the accounting and tax bases of the Company's assets and liabilities. See
Note 16 to the Combined and Consolidated Financial Statements.
(7) Reflects a $2.5 million reduction in partners' and shareholders' equity to
give effect to the accrual as of March 31, 1997 of a $2.5 million
distribution by the Predecessor to its partners (the "Tax Distribution"),
of which $2.0 million was paid in April 1997 and the remaining $500,000
will be paid shortly. The Tax Distribution approximates the income taxes
associated with the Predecessor's anticipated earnings in 1997 through the
date of the Reorganization. See "Dividend Policy and Prior Distributions."
(8) Gives effect to the following transactions as if they had occurred at March
31, 1997: (a) the payment of the Tax Distribution, which had been accrued
as of March 31, 1997; (b) the Reorganization, including a $13.5 million
charge to income resulting in a reduction of shareholders' equity incurred
at the time of the Reorganization in connection with the conversion from a
non-taxable to a taxable entity and the resulting recognition of a deferred
tax liability for the differences between the accounting and tax bases of
the Company's assets and liabilities; and (c) the sale of the 3,125,000
shares of Common Stock offered hereby and the application of a portion of
the estimated net proceeds to retire the Reorganization Note.
(9) Reflects the elimination, on a pro forma basis, of the preferred
distributions paid with respect to $5.2 million of ARCLP's special
redeemable preferred limited partnership interests (the "Preferred
Partnership Interests"), which interests were redeemed with a portion of
the net proceeds from the Sale-Leaseback Transactions. The Company redeemed
$4.8 million of the Preferred Partnership Interests in June 1996 and
distributions of $324,000 paid from January 1996 through June 1996 with
respect to such Preferred Partnership Interests were not eliminated.
(10) Reflects the accrual of the Tax Distribution described in footnote (7)
above.
(11) Includes Medicare (including Medicare-related private co-insurance) and
Medicaid.
6
<PAGE> 7

RISK FACTORS

Potential investors should consider carefully the following factors, as
well as the more detailed information contained elsewhere in this Prospectus,
before making a decision to invest in the Common Stock offered hereby.

SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENTS

At March 31, 1997, the Company had long-term debt (including current
portion) of $157.6 million, of which $146.1 million was payable to one lender,
and was obligated to pay annual rental obligations of approximately $2.5 million
under long-term operating leases. The Company has entered into non-binding
letters of intent to establish operating lease facilities with Nationwide Health
Properties, Inc. ("NHP") and National Health Investors, Inc. ("NHI"), both
health care real estate investment trusts, pursuant to which NHP and NHI, at the
Company's request and upon satisfaction of certain conditions, would develop,
construct, or acquire up to $110.0 million and $100.0 million, respectively, of
senior living communities and lease the communities to the Company
(collectively, the "REIT Facilities"). The Company currently intends to finance
its growth through a combination of bank indebtedness, construction and mortgage
financing, transactions with NHP and NHI or other real estate investment trusts,
proceeds from the Offering, and joint venture arrangements. As a result, a
substantial portion of the Company's cash flow will be devoted to debt service
and lease payments. As of March 31, 1997, the Company's existing debt and lease
agreements required aggregate annual payments for the years ended December 31,
1997, 1998, 1999, 2000 and 2001, assuming no change in the Company's average
interest cost (8.2% at March 31, 1997), ranging from approximately $19.1 million
to $21.3 million. In addition, the Company intends to incur significant
additional indebtedness and lease obligations and therefore expects its annual
debt service and lease obligations over the next five fiscal years will be
significantly greater than the amounts set forth in the preceding sentence. For
the fiscal year ended December 31, 1996, the Company's net cash provided by
operating activities, before giving effect to the payment of interest expense on
the Company's outstanding indebtedness, was approximately $23.6 million. There
can be no assurance that the Company will generate sufficient cash flows from
operations to cover required interest, principal, and operating lease payments.
Any payment or other default could cause the lender to foreclose upon the
communities securing such indebtedness, or, in the case of an operating lease,
could terminate the lease, with a consequent loss of income and asset value to
the Company. Furthermore, because most of the Company's mortgages and
sale-leaseback agreements contain cross-default provisions, a default by the
Company on one of its payment obligations could adversely affect a significant
number of the Company's other properties and, consequently the Company's
business, results of operations, and financial condition.

NEED FOR ADDITIONAL FINANCING; EXPOSURE TO RISING INTEREST RATES

The Company's ability to sustain any operating losses and to otherwise meet
its growth objectives will depend, in part, on its ability to obtain additional
financing on acceptable terms from available financing sources. The Company's
$2.5 million line of credit restricts the Company's ability to incur additional
indebtedness. There can be no assurance that future debt instruments will not
also include covenants restricting the Company's ability to incur additional
debt. Moreover, raising additional funds through the issuance of equity
securities could cause existing shareholders to experience further dilution and
could adversely affect the market price of the Common Stock. There can be no
assurance that the Company will be successful in securing additional financing
or that adequate financing will be available and, if available, will be on terms
that are acceptable to the Company. The Company's inability to obtain additional
financing on acceptable terms could delay or eliminate some or all of the
Company's growth plans.

At March 31, 1997, $42.8 million in principal amount, or approximately
27.2%, of the Company's indebtedness, bore interest at floating rates, with a
weighted average annual rate of 7.5%. In addition, it is anticipated that the
REIT Facilities will require operating lease payments that will be based on
prevailing interest rates. Future indebtedness, from commercial banks or
otherwise, and lease obligations are also expected to be based on interest rates
prevailing at the time such debt and lease arrangements are obtained. Therefore,
increases in prevailing interest rates could increase the Company's interest or
lease payment

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<PAGE> 8

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

DEPENDENCE ON PRIVATE PAY RESIDENTS

Approximately 92.4% of the Company's total revenues for the year ended
December 31, 1996 and approximately 91.1% of the Company's total revenues for
the three months ended March 31, 1997 were attributable to private pay sources.
For the same periods, 7.6% and 8.9%, respectively, of the Company's revenues
were attributable to reimbursement from third-party payors, including Medicare.
The Company expects to continue to rely primarily on the ability of residents to
pay for the Company's services from their own or familial financial resources.
Inflation or other circumstances that adversely affect the ability of the
elderly to pay for the Company's services could have a material adverse effect
on the Company's business, financial condition, and results of operations.

SUBSTANTIAL PORTION OF THE PROCEEDS OF THE OFFERING TO BENEFIT EXISTING
SHAREHOLDERS

The Company will use $21.875 million of the estimated net proceeds of the
Offering to repay the Reorganization Note. The principal amount of the
Reorganization Note was established by the general partner of ARCLP in
consultation with representatives of the limited partners of ARCLP, and was not
the result of arms length negotiation. See "The Company -- Reorganization" and
"Use of Proceeds." ARCLP will distribute in liquidation all amounts received
from the repayment of the Reorganization Note to its limited partners, who are
the existing shareholders of the Company, including approximately $14.9 million
to the Company's non-employee directors and their immediate family members and
affiliates, and $1.3 million to the Company's executive officers and their
immediate family members and affiliates. See "Certain
Transactions -- Reorganization."

NO ASSURANCE AS TO ABILITY TO MANAGE GROWTH

The Company intends to expand its operations through the development,
construction, and acquisition of free-standing assisted living residences and,
to a lesser extent, through the acquisition of other types of senior living
communities, as well as through the expansion of the Company's home health care
services. See "Business -- Growth Strategy." The success of the Company's growth
strategy will depend, in large part, on its ability to effectively operate any
newly acquired or developed residences, communities, or home health care
agencies, as to which there can be no assurance. The Company has limited
experience developing and operating assisted living residences on a
free-standing basis. The Company's growth plans will also place significant
demands on the Company's management and operating personnel. The Company's
ability to manage its future growth effectively will require it to improve its
operational, financial, and management information systems and to continue to
attract, retain, train, motivate, and manage key employees. If the Company is
unable to manage its growth effectively, its business, results of operations,
and financial condition will be adversely affected. See "Business -- Growth
Strategy" and "Management -- Directors and Executive Officers."

LOSSES FROM NEWLY DEVELOPED RESIDENCES AND ACQUISITIONS

Although the Company was profitable in 1994, 1995, and 1996, in view of its
growth plan for development and acquisitions, there can be no assurance that the
Company will continue to be profitable in any future period. Newly developed
assisted living residences are expected to incur operating losses during a
substantial portion of their first twelve months of operations, on average,
until the residences achieve targeted occupancy levels. Newly acquired
residences and communities may also incur losses pending their integration into
the Company's operations. The Company may also incur operating losses as a
result of the expansion of its existing home health care agencies and the
establishment of additional home health care agencies in new markets. See
"Business -- Growth Strategy" and "Business -- Development Activities."

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NO ASSURANCE AS TO ABILITY TO DEVELOP ADDITIONAL ASSISTED LIVING RESIDENCES

An integral component of the Company's growth strategy is to develop and
operate free-standing assisted living residences. As part of its growth
strategy, the Company is currently developing 21 free-standing assisted living
residences, with an estimated aggregate capacity for 1,826 residents, and is
expanding eight of its existing senior living communities to add capacity to
accommodate an additional 704 residents. The Company's ability to develop
successfully assisted living residences will depend on a number of factors,
including, but not limited to, the Company's ability to acquire suitable
development sites at reasonable prices; the Company's success in obtaining
necessary zoning, licensing, and other required governmental permits and
authorizations; and the Company's ability to control construction costs and
project completion schedules. In addition, the Company's development plans are
subject to numerous factors over which it has little or no control, including
competition for developable properties; shortages of labor or materials; changes
in applicable laws or regulations or their enforcement; the failure of general
contractors or subcontractors to perform under their contracts; strikes; and
adverse weather conditions. As a result of these factors, there can be no
assurance that the Company will not experience construction delays, that it will
be successful in developing and constructing currently planned or additional
assisted living residences, or that any developed assisted living residences
will be economically successful. If the Company's development schedule is
delayed, the Company's growth plans could be adversely affected. Additionally,
the Company anticipates that the development and construction of additional
assisted living residences will involve a substantial commitment of capital with
little or no revenue associated with residences under development, the
consequence of which could be an adverse impact on the Company's liquidity. See
"Business -- Development Activities."

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

The Company plans to make strategic acquisitions of senior living
communities (which may include a variety of independent living, assisted living,
and skilled nursing facilities), free-standing assisted living residences, home
health care agencies, and other properties or businesses that are complementary
to the Company's operations and growth strategy. The acquisition of existing
communities or other businesses involves a number of risks. Existing communities
available for acquisition frequently serve or target different markets than
those presently served by the Company. The Company may also determine that
renovations of acquired communities and changes in staff and operating
management personnel are necessary to successfully integrate such communities or
businesses into the Company's existing operations. The costs incurred to
reposition or renovate newly acquired communities may not be recovered by the
Company. In undertaking acquisitions, the Company also may be adversely impacted
by unforeseen liabilities attributable to the prior operators of such
communities or businesses, against whom the Company may have little or no
recourse. The success of the Company's acquisition strategy will be determined
by numerous factors, including the Company's ability to identify suitable
acquisition candidates, the competition for such acquisitions, the purchase
price, the requirement to make operational or structural changes and
improvements, the financial performance of the communities or businesses after
acquisition, the Company's ability to finance the acquisitions, and the
Company's ability to integrate effectively any acquired communities or
businesses into the Company's management, information, and operating systems.
There can be no assurance that the Company's acquisition of senior living
communities and complementary properties and businesses will be completed at the
rate currently expected, if at all, or, if completed, that any acquired
communities or businesses will be successfully integrated into the Company's
operations.

RISKS OF DEVELOPMENT IN CONCENTRATED GEOGRAPHIC AREAS

The Company's growth strategy involves the development of assisted living
residences and the acquisition of senior living communities in concentrated
geographic service areas. See "Business -- Growth Strategy." Accordingly, the
Company's occupancy rates in existing, developed, or acquired communities may be
adversely affected by a number of factors, including regional and local economic
conditions, general real estate market conditions including the supply and
proximity of senior living communities, competitive conditions, and applicable
local laws and regulations. See "Business -- Operating Residences,"
"Business -- Development Activities," and "Business -- Government Regulation."

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INCREASING COMPETITION

The senior living and health care services industry is highly competitive,
and the Company expects that all segments of the industry will become
increasingly competitive in the future. The Company competes with other
companies providing independent living, assisted living, skilled nursing, home
health care, and other similar service and care alternatives. Although the
Company believes there is a need for assisted living residences in the markets
where the Company is operating and developing residences, the Company expects
that competition will increase from existing competitors and new market
entrants, some of whom may have substantially greater financial resources than
the Company. In addition, some of the Company's competitors operate on a
not-for-profit basis or as charitable organizations and have the ability to
finance capital expenditures on a tax-exempt basis or through the receipt of
charitable contributions, neither of which are readily available to the Company.
Furthermore, if the development of new senior living communities (particularly
given the rapid pace of development of new assisted living residences) outpaces
the demand for such communities in the markets in which the Company has or is
developing senior living communities, such markets may become saturated. An
oversupply of such communities in the Company's markets could cause the Company
to experience decreased occupancy, reduced operating margins, and lower
profitability. Consequently, there can be no assurance that the Company will not
encounter increased competition that adversely affects its occupancy rates,
pricing for services, and growth prospects. See "Business -- Competition."

DEPENDENCE ON KEY PERSONNEL

The Company is dependent on the services of its executive officers,
particularly the Company's Chairman and Chief Executive Officer, W.E. Sheriff,
and the Company's President and Chief Operating Officer, Christopher J. Coates,
for the management of the Company. Neither Mr. Sheriff, Mr. Coates, nor any of
the Company's other executive officers has an employment agreement with the
Company. The Company has a key employee life insurance policy in the amount of
$2.0 million covering Mr. Sheriff. The loss by the Company of certain of its
executive officers and the inability to attract and retain qualified management
personnel could adversely affect the Company's business, financial condition,
and results of operations. See "Management -- Directors and Executive Officers."

RESIDENCE MANAGEMENT, STAFFING, AND LABOR COSTS

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

CONTROL BY MANAGEMENT AND CERTAIN SHAREHOLDERS

Upon completion of the Offering, the Company's officers and directors and
entities controlled by them will, collectively, beneficially own approximately
41.5% of the outstanding shares of Common Stock (39.8% if the Underwriters'
over-allotment option is exercised in full). Accordingly, such persons will have
the ability, by voting their shares in concert, to influence the election of the
Company's Board of Directors and the outcome of all other matters submitted to
the Company's shareholders. Furthermore, such influence could preclude any
unsolicited acquisition of the Company and, consequently, adversely affect the
market price of the Common Stock. See "Principal Shareholders."

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GOVERNMENT REGULATION AND THE BURDENS OF COMPLIANCE

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

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

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

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

POTENTIAL FOR ENVIRONMENTAL LIABILITY

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connection with the contamination. Such laws typically impose clean-up
responsibility and liability without regard to whether the owner knew of or
caused the presence of the contaminants, and liability under such laws has been
interpreted to be joint and several unless the harm is divisible and there is a
reasonable basis for allocation of responsibility. The costs of investigation,
remediation, or removal of such substances may be substantial, and the presence
of such substances, or the failure to properly remediate such property, may
adversely affect the owner's ability to sell or lease such property or to borrow
using such property as collateral. In addition, some environmental laws create a
lien on the contaminated site in favor of the government for damages and costs
it incurs in connection with the contamination. Persons who arrange for the
disposal or treatment of hazardous or toxic substances also may be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Finally, the owner of a site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from a site.

LIABILITY AND INSURANCE

The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the 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. Moreover, assisted living residences
offer residents a greater degree of independence in their daily living. This
increased level of independence may subject the resident and the Company to
certain risks that would be reduced in more institutionalized settings. The
Company currently maintains liability insurance in amounts it believes are
sufficient to cover such claims based on the nature of the risks, its historical
experience, and industry standards. There can be no assurance, however, that
claims in excess of the Company's insurance or claims not covered by the
Company's insurance, such as claims for punitive damages, will not arise. A
claim against the Company not covered by, or in excess of, the Company's
insurance could have a material adverse effect upon the Company. In addition,
the Company's insurance policies must be renewed annually. There can be no
assurance that the Company will be able to obtain liability insurance in the
future or that, if such insurance is available, it will be available on
acceptable economic terms. See "Business -- Insurance and Legal Proceedings."

EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS

The Company's Board of Directors has the authority, without action by the
shareholders, to issue up to 5,000,000 shares of preferred stock and to fix the
rights and preferences of such shares. This authority, together with certain
provisions of the Company's Charter (including provisions that implement
staggered terms for directors, limit shareholder ability to call a shareholders'
meeting or to remove directors, and require a supermajority vote to amend
certain provisions of the Charter), may delay, deter, or prevent a change in
control of the Company. In addition, as a Tennessee corporation, the Company is
subject to the provisions of the Tennessee Business Combination Act and the
Tennessee Greenmail Act, each of which may be deemed to have anti-takeover
effects and may delay, deter, or prevent a takeover attempt that might be
considered by the shareholders to be in their best interests. See "Description
of Capital Stock -- Certain Provisions of the Charter, Bylaws, and Tennessee
Law."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of substantial amounts of Common Stock in the public market following
the Offering, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock. Upon completion of the
Offering, the Company will have 10,937,500 shares of Common Stock outstanding.
Of these shares, the 3,125,000 shares sold in the Offering will be freely
tradeable without restriction or limitation under the Securities Act of 1933, as
amended (the "Securities Act"), except for shares purchased by "affiliates" of
the Company, as such term is defined in Rule 144 promulgated under the
Securities Act. The remaining 7,812,500 shares issued in the Reorganization are
"restricted securities" within the meaning of Rule 144 and may not be resold in
the public markets unless registered under the Securities Act or pursuant to an
exemption, such as the safe harbor provided by Rule 144. Holders of the
restricted

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<PAGE> 13

shares have certain contractual registration rights with respect thereto. The
Company, the directors and executive officers of the Company (who in the
aggregate beneficially own 4,542,497 shares of Common Stock), and certain
holders of 5% or more of the Company's Common Stock outstanding after the
Offering have agreed, subject to certain exceptions, not to offer, sell, or
otherwise dispose of any Common Stock for a period of 180 days after the date
hereof. See "Principal Shareholders," "Description of Capital Stock --
Registration Rights," and "Shares Eligible for Future Sale."

As soon as practicable following the consummation of the Offering, the
Company intends to file a registration statement under the Securities Act to
register the issuance of an aggregate of 1,343,750 shares under the Company's
1997 Stock Incentive Plan and Employee Stock Purchase Plan. As of the date
hereof, options to purchase 635,000 shares of Common Stock have been granted
under the 1997 Stock Incentive Plan, which options are exercisable at the
initial public offering price. Following the effective date of such registration
statement, shares of Common Stock issued pursuant to either plan will be freely
tradeable in the open market, subject to lock-up agreements, if applicable. See
"Management -- Compensation Pursuant to Plans" and "Shares Eligible For Future
Sale."

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

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

DILUTION

Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the amount of $10.31 per share in the pro forma net
tangible book value of their shares of Common Stock. See "Dilution."

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THE COMPANY

GENERAL

The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly, including
independent living, assisted living, skilled nursing, and home health care
services. Established in 1978, the Company believes it ranks among the leading
operators in the senior living and health care industry. Currently, the Company
operates 21 senior living communities in 12 states, consisting of 11 owned
communities, three leased communities, and seven managed communities, with an
aggregate capacity for approximately 5,700 residents. The Company also owns and
operates eight home health care agencies. At March 31, 1997, the Company's owned
communities had an occupancy rate of 94%, its leased communities had an
occupancy rate of 95%, and its managed communities had an occupancy rate of 93%.
For the year ended December 31, 1996 and the three months ended March 31, 1997,
revenues attributable to the Company's senior living communities accounted for
91.5% and 90.5%, respectively, of the Company's total revenues, and revenues
attributable to the Company's home health care agencies accounted for 6.2% and
7.0%, respectively, of the Company's total revenues. Approximately 92.4% of the
Company's total revenues for the year ended December 31, 1996 and approximately
91.1% of the Company's total revenues for the three months ended March 31, 1997
were derived from private pay sources.

The Company was incorporated under the laws of the State of Tennessee in
February 1997 as a wholly-owned subsidiary of ARCLP in anticipation of the
Reorganization and the Offering. The Company's principal executive offices are
located at 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027, and its
telephone number at that address is (615) 221-2250.

THE 1995 ROLL-UP

The Company's predecessor, ARCLP, was formed in February 1995 in connection
with the reorganization (the "1995 Roll-Up") of certain Predecessor Entities
that owned, operated, or managed various senior living communities. Each of the
Predecessor Entities was organized at the direction of the members of the
Company's management and controlling shareholders. As a result of the 1995
Roll-Up, ARCLP issued partnership interests to the partners and shareholders of
the Predecessor Entities in exchange for their limited partnership interests and
stock, respectively, and thereby became the owner, directly or indirectly, of
all of the assets of the Predecessor Entities. The general partner of ARCLP is
American Retirement Communities, LLC, a Tennessee limited liability company (the
"LLC"), whose members include W.E. Sheriff, the Company's Chairman and Chief
Executive Officer, and other Company executive officers. See "Certain
Transactions -- The 1995 Roll-Up."

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<PAGE> 15

REORGANIZATION

Prior to the Offering, ARCLP completed a series of transactions resulting
in the Reorganization. Pursuant to the Reorganization, ARCLP contributed all of
its assets, subject to all of its liabilities, to the Company in exchange for
7,812,500 shares of Common Stock and the Reorganization Note in the principal
amount of $21.875 million. The number of shares issued to ARCLP and the
principal amount of the Reorganization Note were established by ARCLP and the
Company in connection with the Reorganization based on a number of factors,
including the value of the assets contributed to the Company. In connection with
the Reorganization, ARCLP made certain representations and warranties to the
Company. Such representations and warranties are limited in scope, however, and
do not cover undisclosed liabilities of ARCLP or other matters related to
ARCLP's business. Following the Reorganization, ARCLP distributed 1,350,000
shares of Common Stock to the LLC, as general partner of ARCLP, and an aggregate
of 6,412,500 shares of Common Stock to the limited partners of ARCLP, generally
in accordance with the limited partners' ARCLP contribution accounts. See
"Principal Shareholders" and "Certain Transactions -- Reorganization."
Immediately after completion of the Offering, the Reorganization Note will be
repaid by the Company out of the net proceeds from the Offering and such amount
will then be distributed to the limited partners of ARCLP in liquidation in
accordance with the limited partners' ARCLP contribution accounts. See "Risk
Factors -- Substantial Portion of the Proceeds of the Offering to Benefit
Existing Shareholders," "Use of Proceeds," and "Certain
Transactions -- Reorganization."

USE OF PROCEEDS

The net proceeds from the sale of the Common Stock offered hereby are
estimated to be approximately $39.4 million (approximately $45.5 million if the
Underwriters' over-allotment option is exercised in full), after deduction of
the underwriting discounts and commissions and estimated offering expenses
payable by the Company. The Company will use $21.875 million of the net proceeds
to repay the Reorganization Note. See "The Company -- Reorganization" and
"Certain Transactions -- Reorganization." The principal amount of the
Reorganization Note was established by ARCLP and the Company in connection with
the Reorganization based on a number of factors, including the value of the
assets contributed to the Company.

The Company intends to use the remaining $17.5 million of the net proceeds,
together with funding available under the REIT Facilities, any future bank
indebtedness, any construction and mortgage financings, and funds from other
sources for working capital purposes, including the development and construction
of free-standing assisted living residences and possible acquisitions of
businesses engaged in activities similar or complementary to the Company's
business, including the anticipated acquisition of a home health care agency
located in Corpus Christi, Texas. See "Business -- Recent and Pending
Acquisitions." The Company currently has seven communities undergoing expansions
and 21 assisted living residences under development. The estimated cost to
complete and lease-up the Company's existing expansion and development projects
ranges from $200.0 million to $230.0 million. The Company believes the remaining
net proceeds of the offering, funding available under the REIT Facilities,
future bank indebtedness, construction and mortgage financings, and funds from
other sources will be sufficient to fund the Company's current development
plans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and
"Business -- Development Activities."

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

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DIVIDEND POLICY AND PRIOR DISTRIBUTIONS

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

Prior to the Offering, the Predecessor and the Predecessor Entities have
made periodic distributions to their respective partners or shareholders in
accordance with their ownership interests therein. During 1995 and 1996, ARCLP
made or accrued for distributions of approximately $6.6 million and $7.1
million, respectively, to its partners, including approximately $30,000 and
$59,000, respectively, to the LLC. In addition, in 1996 ARCLP redeemed its
Preferred Partnership Interests for $10.0 million. See "Certain Transactions --
Redemption of Preferred Partnership Interests." In April 1997, ARCLP paid $2.0
million of the Tax Distribution to its partners and the remaining $500,000 will
be paid shortly. The entire $2.5 million of the Tax Distribution was accrued as
of March 31, 1997 and approximates the income taxes associated with ARCLP's
anticipated earnings in 1997 through the date of the Reorganization. In
addition, immediately following the consummation of the Offering, and in
connection with ARCLP's liquidation, the proceeds from the repayment of the
Reorganization Note will be distributed by ARCLP to its limited partners,
generally in accordance with their respective contribution accounts. See "The
Company -- Reorganization" and "Certain Transactions -- Reorganization."

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CAPITALIZATION

The following table sets forth (i) the actual capitalization of the
Predecessor at March 31, 1997, and (ii) the capitalization of the Company at
March 31, 1997 on a pro forma as adjusted basis to reflect (a) the
Reorganization (including a $13.5 million one-time charge to income resulting in
a reduction of shareholders' equity incurred at the time of the Reorganization
in connection with the conversion from a non-taxable to a taxable entity and the
resulting recognition of a deferred income tax liability for the differences
between the accounting and tax bases of the Company's assets and liabilities),
and (b) the issuance and sale of the 3,125,000 shares of Common Stock offered
hereby and the application of a portion of the estimated net proceeds to retire
the Reorganization Note, as if all such events had occurred on March 31, 1997.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Combined and
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-------------------------
COMPANY
PREDECESSOR -----------
----------- PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term
debt...................................................... $ 3,189 $ 3,189
======== ========
Long-term debt, less current portion........................ $154,379 $154,379
Partners'/shareholders' equity:
Partners' equity.......................................... 36,357 --
Preferred Stock, no par value; 5,000,000 shares
authorized, no shares issued and outstanding........... -- --
Common Stock, par value $.01 per share; 50,000,000 shares
authorized; 10,937,500 shares issued and outstanding,
as adjusted(1)......................................... -- 109
Additional paid-in capital................................ -- 40,244
-------- --------
Total partners'/shareholders' equity................... 36,357 40,353
-------- --------
Total capitalization................................... $190,736 $194,732
======== ========
</TABLE>

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

(1) Includes 7,812,500 shares of Common Stock issued in the Reorganization. Does
not include 635,000 shares of Common Stock reserved for issuance pursuant
to outstanding stock options under the Company's Stock Incentive Plan,
which options are exercisable at the initial public offering price. See
"Management -- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan"
and "Description of Capital Stock."

17
<PAGE> 18

DILUTION

The net tangible book value of the Company at March 31, 1997 was
approximately $36.4 million, or $3.88 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding, which, for purposes of these calculations, is presumed to be
9,375,000 shares (which reflects 7,812,500 shares issued in the Reorganization,
plus 1,562,500 shares, representing the value of the $21.875 million principal
amount of the Reorganization Note, based upon the initial public offering price
of $14.00 per share). After giving effect to (i) the Reorganization (including a
$13.5 million one-time charge to income resulting in a reduction of
shareholders' equity incurred at the time of the Reorganization in connection
with the conversion from a non-taxable to a taxable entity and the resulting
recognition of a deferred income tax liability for the differences between the
accounting and tax bases of the Company's assets and liabilities); (ii) the sale
of the 3,125,000 shares of Common Stock offered hereby, after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company; and (iii) the application of a portion of the estimated net
proceeds to retire the Reorganization Note, the net tangible book value of the
Company as of March 31, 1997 would have been approximately $40.4 million, or
$3.69 per share of Common Stock. This represents an immediate decrease in pro
forma net tangible book value per share of $0.19 to existing shareholders and an
immediate dilution of $10.31 per share to investors purchasing Common Stock in
the Offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price............................... $14.00
Net tangible book value prior to the Offering............. $3.88
Decrease in net tangible book value attributable to the
Reorganization......................................... (3.78)
Increase in net tangible book value attributable to new
investors.............................................. 3.59
-----
Pro forma net tangible book value after the Offering........ 3.69
------
Dilution to new investors................................... $10.31
======
</TABLE>

The following table summarizes the number of shares of Common Stock issued
by the Company, the total consideration paid to the Company, and the average
price per share paid by the existing shareholders and to be paid by the new
investors. For purposes of the total consideration and average price per share
paid by the existing shareholders, the Company has based such valuation on the
aggregate amount of the partners' cash contributions to the Predecessor and the
Predecessor Entities, without deducting distributions paid to such partners.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................... 7,812,500 71.4% $34,838,000 44.3% $ 4.46
New investors............................ 3,125,000 28.6% $43,750,000 55.7% $14.00
---------- ----- ----------- ------
Total.......................... 10,937,500 100.0% $78,588,000 100.0%
========== ===== =========== ======
</TABLE>

18
<PAGE> 19

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The accompanying Unaudited Pro Forma Consolidated Statements of Operations
for the three months ended March 31, 1996 and for the year ended December 31,
1996 reflect the pro forma effects of the Carriage Club Acquisitions and the
Sale-Leaseback Transactions and the application of a portion of the net proceeds
therefrom to retire debt, as if these transactions had occurred on January 1,
1996. The Unaudited Pro Forma Consolidated Statements of Operations for the
three months ended March 31, 1996 and for the year ended December 31, 1996 are
presented for illustrative purposes only and may not be indicative of the actual
results that would have been obtained if the transactions had occurred on the
dates indicated or that may be realized in the future. The pro forma information
should be read in conjunction with the historical financial statements of the
Predecessor and the historical combined financial statements of Carriage Club
and the notes thereto included elsewhere in this Prospectus. No unaudited pro
forma condensed combined financial information is presented as of March 31, 1997
or for the three months then ended because there were no transactions for which
pro forma financial information is required for that period.

19
<PAGE> 20

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CARRIAGE CLUB SALE-LEASEBACK
CARRIAGE CLUB ACQUISITIONS TRANSACTIONS
PREDECESSOR(A) ACQUISITIONS(B) ADJUSTMENTS(C) ADJUSTMENTS(D)
-------------- --------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Resident and health care revenue................ $ 73,878 $4,086 $ -- $ --
Management services revenue..................... 1,739 -- (160) --
-------- ------ -------- -------
Total revenues................................ 75,617 4,086 (160) --
Operating expenses:
Community operating expense..................... 46,960 2,498 (160) --
General and administrative...................... 6,200 -- -- --
Lease expense................................... -- -- -- 2,090
Depreciation and amortization................... 6,906 464 104 (1,201)
-------- ------ -------- -------
Total operating expenses...................... 60,066 2,962 (56) 889
-------- ------ -------- -------
Income (loss) from operations................. 15,551 1,124 (104) 889
Other income (expense):
Interest expense................................ (12,160) (833) (991) 1,388
Interest income................................. 434 21 -- --
Other........................................... 788 -- -- --
-------- ------ -------- -------
Other income (expense), net................... (10,938) (812) (991) 1,388
-------- ------ -------- -------
Income (loss) before income taxes and
extraordinary item.......................... 4,613 312 (1,095) 499
Income tax expense (benefit).................. (920) -- -- --
-------- ------ -------- -------
Income (loss) before extraordinary item....... $ 5,533 $ 312 $ (1,095) $ 499
======== ====== ======== =======
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item.............................. $ 4,613 $ 312 $ (1,095) $ 499
Pro forma income tax expense (benefit)(E)......... 820 119 (416) 189
-------- ------ -------- -------
Pro forma income (loss) before extraordinary
item............................................ 3,793 193 (679) 310
Preferred return on special redeemable preferred
limited partnership interests(F)................ (1,104) -- -- 780
-------- ------ -------- -------
Pro forma income (loss) before extraordinary item
available for distribution to partners and
shareholders.................................... $ 2,689 $ 193 $ (679) $ 1,090
======== ====== ======== =======
Pro forma per share data:
Income before extraordinary item available for
distribution to partners and
shareholders(G)............................... $ 0.29
========
Shares used in computing pro forma per share
data(H)....................................... 9,375
========
Pro forma as adjusted per share data:
Income before extraordinary item available for
distribution to partners and
shareholders(I)...............................
Shares used in computing pro forma as adjusted
per share data(J).............................

PRO FORMA
---------

<S> <C>
Revenues:
Resident and health care revenue................ $ 77,964
Management services revenue..................... 1,579
--------
Total revenues................................ 79,543
Operating expenses:
Community operating expense..................... 49,298
General and administrative...................... 6,200
Lease expense................................... 2,090
Depreciation and amortization................... 6,273
--------
Total operating expenses...................... 63,861
--------
Income (loss) from operations................. 15,682
Other income (expense):
Interest expense................................ (12,596)
Interest income................................. 455
Other........................................... 788
--------
Other income (expense), net................... (11,353)
--------
Income (loss) before income taxes and
extraordinary item.......................... 4,329
Income tax expense (benefit).................. (920)
--------
Income (loss) before extraordinary item....... $ 5,249
========
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item.............................. $ 4,329
Pro forma income tax expense (benefit)(E)......... 712
--------
Pro forma income (loss) before extraordinary
item............................................ 3,617
Preferred return on special redeemable preferred
limited partnership interests(F)................ (324)
--------
Pro forma income (loss) before extraordinary item
available for distribution to partners and
shareholders.................................... $ 3,293
========
Pro forma per share data:
Income before extraordinary item available for
distribution to partners and
shareholders(G)............................... $ 0.35
========
Shares used in computing pro forma per share
data(H)....................................... 9,375
========
Pro forma as adjusted per share data:
Income before extraordinary item available for
distribution to partners and
shareholders(I)............................... $ 0.30
========
Shares used in computing pro forma as adjusted
per share data(J)............................. 10,938
========
</TABLE>

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

(A) Reflects the historical consolidated statement of operations of the
Predecessor for the year ended December 31, 1996, including the operations
of Carriage Club for the period May 1, 1996 (the effective date of the
Carriage Club Acquisitions) through December 31, 1996.
(B) Reflects the historical combined statement of operations for Carriage Club
for the period January 1, 1996 through April 30, 1996.
(C) Includes the following adjustments relating to the Carriage Club
Acquisitions for the period January 1, 1996 through April 30, 1996: (i)
elimination of $160,000 in management fees paid to the Predecessor by
Carriage Club; (ii) additional depreciation expense of $104,000 attributable
to the increase in the carrying value of the acquired assets; and (iii)
additional interest costs of $991,000 associated with the financing of the
Carriage Club Acquisitions. Additional interest costs represent the
difference between the interest that would have been incurred by the Company
if the Company had acquired the Carriage Club properties on January 1, 1996,
and the actual interest cost incurred by the seller of these properties for
the period from January 1, 1996 through April 30, 1996.
(D) Includes the following adjustments relating to the Sale-Leaseback
Transactions: (i) elimination of $1.2 million of depreciation and
amortization expense on assets sold in the Sale-Leaseback Transactions; (ii)
lease expense of approximately $2.5 million, less $455,000 representing
amortization of the deferred gain on the Sale-Leaseback Transactions ($4.4
million over ten years); and (iii) elimination of $1.4 million of interest
expense on debt retired with a portion of the net proceeds from the
Sale-Leaseback Transactions.
(E) Reflects income tax expense that would have been recognized if the
Predecessor, the Predecessor Entities, and Carriage Club had been
corporations since January 1, 1996, filing a consolidated tax return.
(F) A total of $5.2 million of the Preferred Partnership Interests were redeemed
with a portion of the net proceeds from the Sale-Leaseback Transactions, and
therefore distributions with respect to this $5.2 million portion of the
Preferred Partnership Interests have been eliminated in the Unaudited Pro
Forma Consolidated Statement of Operations data.
(G) Income per share before extraordinary item available for distribution to
partners and shareholders is calculated after subtracting the return on the
Preferred Partnership Interests.
(H) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500
shares, representing the value of the $21.875 million principal amount of
the Reorganization Note (based upon the initial public offering price of
$14.00 per share).
(I) Does not reflect a $13.5 million ($1.23 per share) one-time charge to income
incurred at the time of the Reorganization in connection with the conversion
from a non-taxable to a taxable entity and the resulting recognition of a
deferred income tax liability for the differences between the accounting and
tax bases of the Company's assets and liabilities.
(J) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,125,000
shares offered hereby.

20
<PAGE> 21

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
CARRIAGE CLUB SALE-LEASEBACK
CARRIAGE CLUB ACQUISITIONS TRANSACTIONS
PREDECESSOR(A) ACQUISITIONS(B) ADJUSTMENTS(C) ADJUSTMENTS(D)
-------------- --------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Resident and health care revenue............... $15,803 $3,085 $ -- $ --
Management services revenue.................... 513 -- (120) --
------- ------ ------ -----
Total revenues............................... 16,316 3,085 (120) --
Operating expenses:
Community operating expense.................... 10,270 1,829 (120) --
General and administrative..................... 1,183 -- -- --
Lease expense.................................. -- -- -- 523
Depreciation and amortization.................. 1,390 347 79 (290)
------- ------ ------ -----
Total operating expenses..................... 12,843 2,176 (41) 233
------- ------ ------ -----
Income (loss) from operations................ 3,473 909 (79) (233)
------- ------ ------ -----
Other income (expense):
Interest expense............................... (1,894) (732) (743) 347
Interest income................................ 79 13 -- --
Other.......................................... (6) -- -- --
------- ------ ------ -----
Other income (expense), net.................. (1,821) (719) (743) 347
------- ------ ------ -----
Income (loss) before income taxes and
extraordinary item......................... 1,652 190 (822) 114
Income tax expense (benefit)................. -- -- -- --
------- ------ ------ -----
Income (loss) before extraordinary item...... $ 1,652 $ 190 $ (822) $ 114
======= ====== ====== =====
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item............................. $ 1,652 $ 190 $ (822) $ 114
Pro forma income tax expense (benefit)(E)........ 628 72 $ (312) 43
------- ------ ------ -----
Pro forma income (loss) before extraordinary
item........................................... 1,024 118 (510) 71
Preferred return on special redeemable preferred
limited partnership interests(F)............... (375) -- -- 195
------- ------ ------ -----
Pro forma income before extraordinary item
available for distribution to partners and
shareholders................................... $ 649 $ 118 $ (510) $ 266
======= ====== ====== =====
Pro forma per share data:
Income before extraordinary item available for
distribution to partners and
shareholders(G).............................. $ 0.07
=======
Shares used in computing pro forma per share
data(H)...................................... 9,375
=======
Pro forma as adjusted per share data:
Income before extraordinary item available for
distribution to partners and
shareholders(I)..............................
Shares used in computing pro forma as adjusted
per share data(J)............................

PRO FORMA
---------

<S> <C>
Revenues:
Resident and health care revenue............... $18,888
Management services revenue.................... 393
-------
Total revenues............................... 19,281
Operating expenses:
Community operating expense.................... 11,979
General and administrative..................... 1,183
Lease expense.................................. 523
Depreciation and amortization.................. 1,526
-------
Total operating expenses..................... 15,211
-------
Income (loss) from operations................ 4,070
-------
Other income (expense):
Interest expense............................... (3,022)
Interest income................................ 92
Other.......................................... (6)
-------
Other income (expense), net.................. (2,936)
-------
Income (loss) before income taxes and
extraordinary item......................... 1,134
Income tax expense (benefit)................. --
-------
Income (loss) before extraordinary item...... $ 1,134
=======
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item............................. $ 1,134
Pro forma income tax expense (benefit)(E)........ 431
-------
Pro forma income (loss) before extraordinary
item........................................... 703
Preferred return on special redeemable preferred
limited partnership interests(F)............... (180)
-------
Pro forma income before extraordinary item
available for distribution to partners and
shareholders................................... $ 523
=======
Pro forma per share data:
Income before extraordinary item available for
distribution to partners and
shareholders(G).............................. $ 0.06
=======
Shares used in computing pro forma per share
data(H)...................................... 9,375
=======
Pro forma as adjusted per share data:
Income before extraordinary item available for
distribution to partners and
shareholders(I).............................. $ 0.05
=======
Shares used in computing pro forma as adjusted
per share data(J)............................ 10,938
=======
</TABLE>

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

(A) Reflects the historical consolidated statement of operations of the
Predecessor for the three months ended March 31, 1996.
(B) Reflects the historical combined statement of operations for Carriage Club
for the period January 1, 1996 through March 31, 1996.
(C) Includes the following adjustments relating to the Carriage Club
Acquisitions for the period January 1, 1996 through March 31, 1996; (i)
elimination of $120,000 in management fees paid to the Predecessor by
Carriage Club; (ii) additional depreciation expense of $79,000 attributable
to the increase in the carrying value of the acquired assets; and (iii)
additional interest costs of $743,000 associated with the financing of the
Carriage Club Acquisitions. Additional interest costs represent the
difference between the interest that would have been incurred by the Company
if the Company had acquired the Carriage Club properties on January 1, 1996,
and the actual interest cost incurred by the seller of these properties for
the period from January 1, 1996 through March 31, 1996.
(D) Includes the following adjustments relating to the Sale-Leaseback
Transactions: (i) elimination of $290,000 of depreciation and amortization
expense on assets sold in the Sale-Leaseback Transactions; (ii) lease
expense of approximately $637,000, less $114,000 representing amortization
of the deferred gain on the Sale-Leaseback Transactions ($4.4 million over
ten years); and (iii) elimination of $347,000 of interest expense on debt
retired with a portion of the net proceeds from the Sale-Leaseback
Transactions.
(E) Reflects income tax expense that would have been recognized if the
Predecessor, the Predecessor Entities, and Carriage Club had been
corporations since January 1, 1996, filing a consolidated tax return.
(F) A total of $5.2 million of the Preferred Partnership Interests were redeemed
with a portion of the net proceeds from the Sale-Leaseback Transactions, and
therefore distributions with respect to this $5.2 million portion of the
Preferred Partnership Interests have been eliminated in the Unaudited Pro
Forma Consolidated Statement of Operations data.
(G) Income per share before extraordinary item available for distribution to
partners and shareholders is calculated after subtracting the return on the
Preferred Partnership Interests.
(H) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500
shares, representing the value of the $21.875 million principal amount of
the Reorganization Note (based upon the initial public offering price of
$14.00 per share).
(I) Does not reflect a $13.5 million ($1.23 per share) one-time charge to income
incurred at the time of the Reorganization in connection with the conversion
from a non-taxable to a taxable entity and the resulting recognition of a
deferred income tax liability for the differences between the accounting and
tax bases of the Company's assets and liabilities.
(J) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,125,000
shares offered hereby.

21
<PAGE> 22

SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA

The following table sets forth selected financial data and pro forma data
of the Company, the Predecessor, and the Predecessor Entities. The selected
financial data as of and for the years ended December 31, 1992, 1993, and 1994
and the three months ended March 31, 1995 are derived from the combined
financial statements of the Predecessor Entities. The selected financial data as
of and for the nine months ended December 31, 1995 and as of and for the year
ended December 31, 1996 are derived from the consolidated financial statements
of the Predecessor. The selected data as of and for the periods ended December
31, 1994, March 31, 1995, December 31, 1995, and December 31, 1996 are derived
from the combined and consolidated financial statements of the Predecessor,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The combined and consolidated
financial statements as of December 31, 1995 and 1996, and for the year ended
December 31, 1994, the three months ended March 31, 1995, the nine months ended
December 31, 1995, and the year ended December 31, 1996, and the report thereon,
are included elsewhere in this Prospectus. The selected statement of operations
and balance sheet data as of and for the three months ended March 31, 1996 and
as of and for the three months ended March 31, 1997 are derived from the
unaudited consolidated financial statements of the Predecessor. In the opinion
of the Company's management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for fiscal 1997. The information
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the combined and
consolidated financial statements of the Predecessor, the related notes, and the
independent auditors' report, which refers to a change in cost basis as a result
of a purchase business combination in connection with the 1995 Roll-Up.
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR
------------------------------------------- -------------------------------------

THREE MONTHS NINE MONTHS YEAR ENDED
YEARS ENDED DECEMBER 31, ENDED ENDED DECEMBER 31, 1996
--------------------------- MARCH 31, DECEMBER 31, ----------------------
1992 1993 1994 1995 1995 ACTUAL PRO FORMA(1)
------- ------- ------- ------------- ------------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and health care revenue........... $16,045 $23,162 $30,979 $11,761 $47,239 $73,878 $77,964
Management services revenue................ 1,774 2,752 2,362 595 1,524 1,739 1,579
------- ------- ------- ------- ------- ------- -------
Total revenues....................... 17,819 25,914 33,341 12,356 48,763 75,617 79,543
Operating expenses:
Community operating expense................ 11,329 16,401 21,780 8,035 30,750 46,960 49,298
Lease expense.............................. -- -- -- -- -- -- 2,090
General and administrative................. 2,656 3,290 3,455 1,108 3,446 6,200 6,200
Depreciation and amortization.............. 1,557 2,251 2,891 1,127 4,534 6,906 6,273
------- ------- ------- ------- ------- ------- -------
Total operating expenses................. 15,542 21,942 28,126 10,270 38,730 60,066 63,861
------- ------- ------- ------- ------- ------- -------
Income from operations................... 2,277 3,972 5,215 2,086 10,033 15,551 15,682
------- ------- ------- ------- ------- ------- -------
Other income (expense):
Interest expense........................... (2,914) (3,569) (5,354) (2,370) (7,930) (12,160) (12,596)
Interest income............................ 145 122 203 49 329 434 455
Other...................................... 39 189 98 (1,013)(2) 919 788 788
------- ------- ------- ------- ------- ------- -------
Other income (expense), net.............. (2,730) (3,258) (5,053) (3,334) (6,682) (10,938) (11,353)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item..................... (453) 714 162 (1,248) 3,351 4,613 4,329
Income tax expense (benefit)(3)............. -- -- -- 20 55 (920) (920)
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary item..... (453) 714 162 (1,268) 3,296 5,533 5,249
Extraordinary item(4)....................... -- -- -- -- -- (2,335) (2,335)
------- ------- ------- ------- ------- ------- -------
Net income (loss)........................... (453) 714 162 (1,268) 3,296 3,198 2,914
Preferred return on special redeemable
preferred limited partnership
interests(5)............................... -- -- -- -- (1,125) (1,104) (324)
------- ------- ------- ------- ------- ------- -------
Net income (loss) available for distribution
to partners and shareholders............... $ (453) $ 714 $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590
======= ======= ======= ======= ======= ======= =======
Distribution to partners, excluding
preferred distributions.................... $ 404 $ 5,708 $ 2,580 $ 1,400 $ 4,064 $ 6,035 $ 6,035
======= ======= ======= ======= ======= ======= =======

<CAPTION>
PREDECESSOR
----------------------------------
THREE
THREE MONTHS MONTHS
ENDED MARCH 31, 1996 ENDED
---------------------- MARCH 31,
ACTUAL PRO FORMA(1) 1997
------- ------------ ---------

<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and health care revenue........... $15,803 $18,888 $20,982
Management services revenue................ 513 393 528
------- ------- -------
Total revenues....................... 16,316 19,281 21,510
Operating expenses:
Community operating expense................ 10,270 11,979 13,399
Lease expense.............................. -- 523 528
General and administrative................. 1,183 1,183 1,886
Depreciation and amortization.............. 1,390 1,526 1,585
------- ------- -------
Total operating expenses................. 12,843 15,211 17,398
------- ------- -------
Income from operations................... 3,473 4,070 4,112
------- ------- -------
Other income (expense):
Interest expense........................... (1,894) (3,022) (3,257)
Interest income............................ 79 92 150
Other...................................... (6) (6) (30)
------- ------- -------
Other income (expense), net.............. (1,821) (2,936) (3,137)
------- ------- -------
Income (loss) before income taxes and
extraordinary item..................... 1,652 1,134 975
Income tax expense (benefit)(3)............. -- -- --
------- ------- -------
Income (loss) before extraordinary item..... 1,652 1,134 975
Extraordinary item(4)....................... (2,335) (2,335) --
------- ------- -------
Net income (loss)........................... (683) (1,201) 975
Preferred return on special redeemable
preferred limited partnership
interests(5)............................... (375) (180) --
------- ------- -------
Net income (loss) available for distribution
to partners and shareholders............... $(1,058) $(1,381) $ 975
======= ======= =======
Distribution to partners, excluding
preferred distributions.................... $ 1,040 $ 1,040 $ 2,500(6)
======= ======= =======
</TABLE>

22
<PAGE> 23

<TABLE>
<CAPTION>
PREDECESSOR
------------------------------------------------------------
YEAR ENDED THREE MONTHS THREE MONTHS
DECEMBER 31, 1996 ENDED MARCH 31, 1996 ENDED
--------------------- --------------------- MARCH 31,
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1) 1997
------ ------------ ------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA TAX DATA(7):
Income before income taxes and extraordinary item....... $4,613 $4,329 $1,652 $1,134 $ 975
Pro forma income tax expense............................ 820 712 628 431 370
------ ------ ------ ------ ------
Pro forma income before extraordinary item.............. 3,793 3,617 1,024 703 605
Preferred return on special redeemable preferred limited
partnership interests(5).............................. (1,104) (324) (375) (180) --
------ ------ ------ ------ ------
Pro forma income before extraordinary item available for
distribution to partners and shareholders............. $2,689 $3,293 $ 649 $ 523 $ 605
====== ====== ====== ======
Pro forma per share data:
Income before extraordinary item...................... $ 0.40 $ 0.39 $ 0.11 $ 0.07 $ 0.06
Preferred return on special redeemable preferred
limited partnership interests....................... (0.12) (0.03) (0.04) (0.02) --
------ ------ ------ ------ ------
Income before extraordinary item available for
distribution to partners and shareholders........... $ 0.29 $ 0.35 $ 0.07 $ 0.06 $ 0.06
====== ====== ====== ====== ======
Shares used in computing pro forma per share
data(8)............................................. 9,375 9,375 9,375 9,375 9,375
====== ====== ====== ====== ======
Pro forma as adjusted per share data(9):
Income before extraordinary item...................... $ 0.33 $ 0.06 $ 0.06
Preferred return on special redeemable preferred
limited partnership interests....................... 0.03 (0.02) --
------ ------ ------
Income before extraordinary item available for
distribution to partners and shareholders........... $ 0.30 $ 0.05 $ 0.06
====== ====== ======
Shares used in computing pro forma as adjusted per
share data.......................................... 10,938 10,938 10,938
====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31, 1997
-------------------------------------------------- ----------------------------
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR COMPANY
---------------------------- -------------------------------- ---------------
PRO FORMA,
1992 1993 1994 1995 1996 ACTUAL(10) AS ADJUSTED(11)
------- ------- -------- -------- -------- ---------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 2,186 $ 3,205 $ 2,894 $ 3,825 $ 3,222 $ 8,854 $ 23,866
Working capital (deficit)................ 1,545 2,529 3,168 (1,048) (14,289) 1,651 19,163
Total assets............................. 54,419 63,393 111,425 165,579 228,162 214,156 229,168
Long-term debt, including current
portion................................ 38,469 43,335 89,414 102,245 170,689 157,568 157,568
Partners' and shareholders' equity....... 11,937 15,042 12,823 51,823 37,882 36,357 40,353
</TABLE>

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

(1) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Carriage Club Acquisitions, and (b) the
Sale-Leaseback Transactions and the application of a portion of the net
proceeds therefrom to retire debt.
(2) Includes a one-time expense of $964,000 incurred in connection with the
1995 Roll-Up. See Note 11 to the Combined and Consolidated Financial
Statements.
(3) Provision for income taxes reflects income tax expense of only one of the
Predecessor Entities because the Predecessor and the other Predecessor
Entities were partnerships. No income tax expense is reflected for periods
prior to 1995 because of losses or the availability of NOLs. Both periods
in 1995 reflect a provision for alternative minimum taxes. In 1996, the
Company recorded an income tax benefit and a deferred tax asset of $920,000
because of the anticipated utilization of NOLs that will offset taxable
gains recognized from the Sale-Leaseback Transactions. See Note 12 to the
Combined and Consolidated Financial Statements.
(4) Amount represents loss on early extinguishment of debt. See Note 9 to the
Combined and Consolidated Financial Statements.
(5) In connection with the 1995 Roll-Up, $10.0 million of promissory notes were
exchanged for $10.0 million of Preferred Partnership Interests bearing a
15% cumulative distribution right. From October 1994 (when such notes were
created) through the 1995 Roll-Up, interest expense at 15% was recorded and
paid. Following the 1995 Roll-Up, the Company has paid preferred 15%
distributions to the holders of the Preferred Partnership Interests. From
January 1996 to June 1996, the Company paid $324,000 of distributions
(including $180,000 paid from January 1996 to March 1996) with respect to
$4.8 million of the Preferred Partnership Interests which were redeemed in
June 1996 and were not eliminated. The remaining $5.2 million of the
Preferred Partnership Interests were redeemed with a portion of the net
proceeds from the Sale-Leaseback Transactions, and therefore distributions
with respect to this $5.2 million portion of the Preferred Partnership
Interests have been eliminated in the Pro Forma Statement of Operations
data.
(6) Reflects the accrual of the Tax Distribution.
(7) Except for one of the Predecessor Entities, the Predecessor and the
Predecessor Entities, as partnerships, were exempt from U.S. Federal and
state income taxes. The pro forma financial data reflects the effect on
certain income statement data of income tax expense that would have been
recorded had the Predecessor and the other Predecessor Entities not been
exempt from paying such

23
<PAGE> 24

income taxes. Pro forma income tax expense has been calculated using
statutory U.S. Federal and state tax rates and gives effect to the
recognition in 1996 of the $920,000 deferred tax asset described in
footnote (4) above.
(8) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500
shares, representing the value of the $21.875 million principal amount of
the Reorganization Note (based upon the initial public offering price of
$14.00 per share).
(9) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Reorganization, and (b) the sale of the 3,125,000
shares of Common Stock offered hereby and the application of a portion of
the estimated net proceeds to retire the Reorganization Note, and, (c) for
the year ended December 31, 1996 data, the transactions described in
footnote (1) above. The pro forma as adjusted per share data does not give
effect to a non-recurring $13.5 million ($1.23 per share) charge to income
incurred at the time of the Reorganization in connection with the
conversion from a non-taxable to a taxable entity and the resulting
recognition of a deferred income tax liability for the differences between
the accounting and tax bases of the Company's assets and liabilities. See
Note 16 to the Combined and Consolidated Financial Statements.
(10) Gives effect to the accrual as of March 31, 1997 of the Tax Distribution,
of which $2.0 million was paid in April 1997 and the remaining $500,000
will be paid shortly.
(11) Gives effect to the following transactions as if they had occurred on March
31, 1997: (a) the payment of the Tax Distribution which had been accrued as
of March 31, 1997; (b) the Reorganization, including a $13.5 million charge
to income resulting in a reduction of shareholders' equity incurred at the
time of the Reorganization in connection with the conversion from a
non-taxable to a taxable entity and the resulting recognition of a deferred
income tax liability for the differences between the accounting and tax
bases of the Company's assets and liabilities; and (c) the sale of the
3,125,000 shares of Common Stock offered hereby and the application of a
portion of the estimated net proceeds to retire the Reorganization Note.

24
<PAGE> 25

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

OVERVIEW

The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly within a residential
setting. The Company currently operates 21 senior living communities in 12
states with an aggregate capacity for approximately 5,700 residents. The Company
currently owns 11 communities, leases three communities pursuant to long-term
leases, and manages seven communities pursuant to management agreements. The
Company's total revenues have grown from $17.8 million in 1992 to $75.6 million
in 1996, an average annual growth rate of 43.5%. During the same period, the
Company's income from operations has grown from $2.3 million to $15.6 million,
an average annual growth rate of 61.7%.

The Company and its predecessors have owned, operated, or managed senior
living communities since 1978. The Predecessor, ARCLP, was formed in February
1995 in connection with the 1995 Roll-Up. The 1995 Roll-Up, effective April 1,
1995, was accounted for as a purchase business combination by the Predecessor.
The Company was incorporated in February 1997 for purposes of effecting the
Reorganization and the Offering. See "The Company -- Reorganization." For the
purposes of the following discussion, amounts for the year ended December 31,
1995 represent the sum of the combined results of operations of the Predecessor
and Predecessor Entities for the period from January 1, 1995 through March 31,
1995 and the consolidated results of operations of the Predecessor for the
period from April 1, 1995 (the effective date of the 1995 Roll-Up) through
December 31, 1995. See Note 1 to the Combined and Consolidated Financial
Statements.

In its early history, the Company focused its efforts on providing contract
management, marketing, and development services primarily to third parties.
Beginning in 1990 and continuing through 1996, the Company embarked on a
strategy of acquiring senior living communities through the Predecessor Entities
and the Predecessor. During that period, the Company acquired 12 of the
communities it now owns or leases. From 1994 through 1996, the Company acquired
eight of these senior living communities, with an aggregate capacity for 2,212
residents, at a total cost of approximately $139.0 million. See Note 3 to the
Combined and Consolidated Financial Statements.

During the next three years, the Company intends to develop approximately
35 free-standing assisted living residences with an aggregate capacity for
approximately 2,900 residents at an aggregate estimated cost to complete and
lease-up such residences of approximately $250.0 million to $300.0 million. The
Company is currently constructing an $11.6 million expansion at one of its owned
communities and is constructing, on behalf of the lessor, a $14.0 million
expansion at one of its leased communities. In addition, the Company plans to
commence additional expansions at five of its owned communities, which are
expected to cost approximately $50.0 million to $60.0 million to complete and
lease-up. These seven expansion projects will add capacity to accommodate an
additional 615 residents. The development of assisted living residences
typically involves a substantial commitment of capital over a twelve month
construction period, during which no revenues are generated, followed by a
twelve month lease-up period. The Company anticipates that newly opened or
expanded communities will operate at a loss during a substantial portion of the
lease-up period. See " -- Liquidity and Capital Resources" and "Risk
Factors -- Losses from Newly Developed Residences and Acquisitions" and "Risk
Factors -- No Assurance as to Ability to Develop Additional Assisted Living
Residences." In addition to the expansion of its owned and leased communities,
the Company is currently managing the expansion of one of its managed
communities.

The Company's growth strategy also includes the acquisition of
free-standing assisted living residences and, to a lesser extent, other senior
living communities; home health care agencies; and other properties or
businesses that are complementary to the Company's operations and growth
strategy.

The Company's total revenues are comprised of (i) resident and health care
revenues, which include all resident and home health care agency fees, and (ii)
management services revenues, which include fees, net of reimbursements, for the
development, marketing, and management of facilities owned by third parties. The

25
<PAGE> 26

Company's resident and health care revenues are derived primarily from three
principal sources: (i) monthly service fees from independent and assisted living
residents, representing 75.0% and 71.4% of total revenues for the three months
ended March 31, 1997 and 1996, respectively, and 75.5%, 71.6%, and 61.9% of
total revenues for the years ended December 31, 1996, 1995, and 1994,
respectively; (ii) per diem charges from nursing patients, representing 13.1%
and 16.2% of total revenues for the three months ended March 31, 1997 and 1996,
respectively, and 13.7%, 17.2%, and 29.1% of total revenues for the years ended
December 31, 1996, 1995, and 1994, respectively; and (iii) per visit billings
from home health care patients and companion services clients, representing 9.4%
and 9.3% of total revenues for the three months ended March 31, 1997 and 1996,
respectively, and 8.5%, 7.7%, and 1.9% of total revenues for the years ended
December 31, 1996, 1995, and 1994, respectively. Management services revenues
represented 2.5% and 3.1% of total revenues for the three months ended March 31,
1997 and 1996, respectively, and 2.3%, 3.5%, and 7.1% of total revenues for the
years ended December 31, 1996, 1995, and 1994, respectively. Approximately 91.1%
and 90.1% of the Company's total revenues for the three months ended March 31,
1997 and 1996, respectively, and 92.4%, 91.2%, and 93.0% of the Company's total
revenues for the years ended December 31, 1996, 1995, and 1994, respectively,
were attributable to private pay sources, with the balance attributable to
Medicare (8.9% for the three months ended March 31, 1997 and 7.5% for the year
ended December 31, 1996), including Medicare-related private co-insurance, and
Medicaid (0.1% for the three months ended March 31, 1997 and the year ended
December 31, 1996).

The Company's operating expenses are comprised, in general, of (i)
community operating expense, which includes all operating expenses of the
Company's owned or leased facilities, including the expenses of its home health
care agencies; (ii) general and administrative expense, which includes all
corporate office overhead; and (iii) depreciation and amortization expense. As a
result of the Sale-Leaseback Transactions in January 1997, the Company is
incurring lease expense for periods after such date.

RESULTS OF OPERATIONS

The Company operates senior living communities and home health care
agencies under three general types of arrangements: fee ownership, leases, and
management agreements. Currently, the Company owns 11 senior living communities
and eight home health care agencies; leases three communities; and operates
seven communities pursuant to management agreements.

Ownership of senior living communities and home health care agencies
typically requires a larger capital investment than managed or leased
operations, but provides maximum control over operations and all growth in owned
community and agency revenues flows directly to the Company. The Company's lease
arrangements are typically for terms of ten to 15 years, include renewal
options, and provide for a contractually fixed rent, plus additional rent,
subject to certain limits, based upon the gross revenues of the community. The
Company's lease agreements also typically limit the Company's right to operate
other senior living communities within a limited geographic area adjacent to the
leased community during the term of the lease and for one year thereafter.
Leased communities require a longer commitment and a larger capital investment
by the Company than managed communities, but provide a more stable source of
revenue because of their longer terms and provide a greater opportunity for
long-term revenue growth.

The Company's management agreements are generally for terms of three to
five years, but may be canceled by the owner of the community, without cause, on
three to six months notice. Pursuant to the management agreements, the Company
is generally responsible for providing management personnel, marketing, nursing,
resident care and dietary services, accounting and data processing reports, and
other services for these communities at the owner's expense. The Company
receives a monthly fee for its services based on either a contractually fixed
amount or a percentage of revenues or income. Certain management agreements also
provide the Company with an incentive fee based on various performance goals.
The Company's current management agreements expire on various dates between June
1997 and July 2000.

26
<PAGE> 27

The following tables set forth, for the periods indicated, selected
Statement of Operations data in thousands of dollars and expressed as a
percentage of total revenues, and certain resident capacity and occupancy data.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
$ % $ % $ %
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Resident and health care revenue....................... $30,979 92.9% $59,000 96.5% $73,878 97.7%
Management services revenue............................ 2,362 7.1 2,119 3.5 1,739 2.3
------- ----- ------- ----- ------- -----
Total revenues................................ 33,341 100.0 61,119 100.0 75,617 100.0
Community operating expense............................ 21,780 65.3 38,785 63.5 46,960 62.1
Lease expense.......................................... -- -- -- -- -- --
General and administrative............................. 3,455 10.4 4,554 7.5 6,200 8.2
Depreciation and amortization.......................... 2,891 8.7 5,661 9.3 6,906 9.1
------- ----- ------- ----- ------- -----
Total operating expenses...................... 28,126 84.4 49,000 80.2 60,066 79.4
------- ----- ------- ----- ------- -----
Income from operations........................ 5,215 15.6 12,119 19.8 15,551 20.6
Interest expense....................................... (5,354) (16.0) (10,300) (16.9) (12,160) (16.1)
Interest income........................................ 203 0.6 378 0.6 434 0.6
Other.................................................. 98 0.3 (94) (0.1) 788 1.0
------- ----- ------- ----- ------- -----
Other income (expense), net.......................... (5,053) (15.1) (10,016) (16.4) (10,938) (14.5)
------- ----- ------- ----- ------- -----
Income before income taxes and extraordinary item.... 162 0.5 2,103 3.4 4,613 6.1
Income tax expense (benefit)........................... -- -- 75 (0.1) (920) 1.2
------- ----- ------- ----- ------- -----
Income before extraordinary item....................... 162 0.5 2,028 3.3 5,533 7.3
Extraordinary item..................................... -- -- -- -- 2,335 3.1
------- ----- ------- ----- ------- -----
Net income............................................. $ 162 0.5% $ 2,028 3.3% $ 3,198 4.2%
======= ===== ======= ===== ======= =====
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1996 1997
--------------- ---------------
$ % $ %
------- ----- ------- -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Resident and health care revenue............................ $15,803 96.9% $20,982 97.5%
Management services revenue................................. 513 3.1 528 2.5
------- ----- ------- -----
Total revenues..................................... 16,316 100.0 21,510 100.0
Community operating expense................................. 10,270 62.9 13,399 62.3
Lease expense............................................... -- -- 528 2.5
General and administrative.................................. 1,183 7.3 1,886 8.8
Depreciation and amortization............................... 1,390 8.5 1,585 7.4
------- ----- ------- -----
Total operating expenses........................... 12,843 78.7 17,398 80.9
------- ----- ------- -----
Income from operations............................. 3,473 21.3 4,112 19.1
Interest expense............................................ (1,894) (11.6) (3,257) (15.1)
Interest income............................................. 79 0.5 150 0.7
Other....................................................... (6) -- (30) (0.1)
------- ----- ------- -----
Other income (expense), net............................... (1,821) (11.2) 3,137 14.6
------- ----- ------- -----
Income before income taxes and extraordinary item......... 1,652 10.1 975 4.5
Income tax expense (benefit)................................ -- -- -- --
------- ----- ------- -----
Income before extraordinary item............................ 1,652 10.1 975 4.5
Extraordinary item.......................................... (2,335) (14.3) -- --
------- ----- ------- -----
Net income (loss)........................................... $ (683) (4.2)% $ 975 4.5%
======= ===== ======= =====
</TABLE>

27
<PAGE> 28

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------- ----------------------------------
1994 1995 1996 1996 1997
--------------- ---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
End of period capacity:
Owned.......................... 2,141 2,594 3,369 2,584 2,912
Leased......................... -- -- -- -- 483
Managed........................ 3,315 3,008 2,159 3,005 2,159
----- ----- ----- ----- -----
Total.................... 5,456 5,602 5,528 5,589 5,554
===== ===== ===== ===== =====
Average occupancy rate:
Owned.......................... 89% 93% 94% 93% 94%
Leased......................... -- -- -- -- 95
Managed........................ 93 91 91 91 92
----- ----- ----- ----- -----
Total.................... 90% 92% 92% 92% 94%
===== ===== ===== ===== =====
End period occupancy rate:
Owned.......................... 91% 94% 96% 93% 94%
Leased......................... -- -- -- -- 95
Managed........................ 96 91 92 91 93
----- ----- ----- ----- -----
Total.................... 94% 92% 94% 92% 94%
===== ===== ===== ===== =====
Stabilized average occupancy
rate(1):)
Owned.......................... 89% 93% 94% 93% 96%
Leased......................... -- -- -- -- 95
Managed........................ 93 95 95 95 95
----- ----- ----- ----- -----
Total.................... 91% 94% 95% 92% 96%
===== ===== ===== ===== =====
</TABLE>

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

(1) Excludes the effect of new communities or expansions of the Company's
existing communities, including: (i) the opening of a managed community in
1995 with a capacity for 242 residents; (ii) the opening of two expansions
of owned communities in mid-1996 with an aggregate additional capacity for
151 residents; and (iii) the opening of a managed community in mid-1996 with
a capacity for 75 residents. These openings resulted in decreased average
occupancy rates for the periods noted.

28
<PAGE> 29

The following table sets forth certain selected financial and operating
data on a Same Facility basis. For purposes of the following discussion, "Same
Facility basis" refers to communities that were owned and leased by the Company
throughout each of the periods being compared. Revenues on a Same Facility basis
do not include any management services revenues.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
----------------- ----------------- -----------------
1994 1995 % CHANGE 1995 1996 % CHANGE 1996 1997 % CHANGE
------- ------- -------- ------- ------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Monthly/per diem
service fees........ $26,384 $29,040 10.1% $46,398 $48,888 5.4% $14,280 $15,222 6.6%
Home health and
companion services
revenue............. 627 2,699 330.5% 2,699 3,789 40.4% 1,524 1,960 28.6%
------- ------- ------- ------- ------- -------
Resident and health
care revenue...... 27,011 31,739 17.5% 49,097 52,677 7.3% 15,804 17,182 8.7%
Community operating
expense............. 19,212 21,795 13.4% 32,854 34,314 4.4% 10,324 11,191 8.4%
------- ------- ------- ------- ------- -------
Resident income from
operations(1)..... $ 7,799 $ 9,944 27.5% $16,243 $18,363 13.1% $ 5,480 $ 5,991 9.3%
======= ======= ======= ======= ======= =======
Resident income from
operations
margin(1)(2)...... 28.9% 31.3% 33.1% 34.9% 34.7% 34.9%
OTHER DATA:
Average occupancy
rate(3)............. 88% 91% 92% 94% 93% 96%
Average monthly
revenue per occupied
unit(4)............. $ 2,322 $ 2,467 6.2% $ 2,217 $ 2,295 3.5% $ 2,215 $ 2,289 3.3%
Average monthly
expense per occupied
unit(5)............. 1,639 1,665 1.6% 1,465 1,475 0.7% 1,412 1,446 2.4%
</TABLE>

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

(1) "Resident income from operations" and "Resident income from operations
margin" are not measures of performance determined in accordance with
generally accepted accounting principles. This information is included
because the Company believes it is useful for investors in measuring trends
in operating cash flow and community performance on a Same Facility basis.
Resident income from operations reflects resident and health care income
from operations on a Same Facility basis before depreciation and
amortization and lease expense. These excluded items are significant
components in understanding and assessing the operating performance of the
Company as a whole. The following table reconciles resident income from
operations and income from operations as determined in accordance with
generally accepted accounting principles on a Same Facility basis:

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
---------------- ------------------ ----------------
1994 1995 1995 1996 1996 1997
------ ------ ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Resident income from operations.............. $7,799 $9,944 $16,243 $18,363 $5,480 $5,991
Lease expense.............................. -- -- -- -- -- 528
Depreciation and amortization.............. 2,533 3,090 4,648 4,332 1,300 1,100
------ ------ ------- ------- ------ ------
Income from operations....................... $5,266 $6,854 $11,595 $14,031 $4,180 $4,363
====== ====== ======= ======= ====== ======
Income from operations margin................ 19.5% 21.6% 23.6% 26.6% 26.4% 25.4%
</TABLE>

This information should be considered in conjunction with the historical and
pro forma financial statements of the Company included elsewhere in this
Prospectus.
(2) "Resident income from operations margin" represents "Resident income from
operations" as a percentage of "Resident and health care revenue."
(3) Average occupancy rate is based on the ratio of occupied apartments to
available apartments expressed on a monthly basis for independent and
assisted living residences, and occupied beds to available beds on a per
diem basis for nursing beds.
(4) Average monthly revenue per occupied unit is total annual resident and
health care revenues, excluding home health care agency and companion
services fees, divided by total occupied apartments and nursing beds,
expressed on a monthly basis.
(5) Average monthly expense per unit is total annual community operating
expenses, excluding home health care agency and companion services expenses,
divided by total occupied apartments and nursing beds, expressed on a
monthly basis.

29
<PAGE> 30

THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996

Revenues. Total revenues were $21.5 million for the three months ended
March 31, 1997 compared to $16.3 million for the three months ended March 31,
1996, representing an increase of $5.2 million, or 31.8%. Resident and health
care revenues increased by $5.2 million and management services revenues
increased by $15,000. Of the increase in resident and health care revenues, $3.8
million, or 73.1%, was attributable to revenues derived from two senior living
communities acquired in May 1996, with the remaining $1.4 million, or 26.9%, of
such increase attributable to Same Facility growth.

Revenues attributable to Same Facilities were $17.2 million for the three
months ended March 31, 1997, representing an increase of $1.4 million, or 8.7%,
over the same period in 1996. Home health care agency and companion services
fees on a Same Facility basis increased by $436,000, or 28.6%, over the prior
period. Monthly/per diem service fee revenue on a Same Facility basis increased
$942,000, or 6.6%, over the three months ended March 31, 1996. Of this increase,
3.2% was due primarily to rate increases and 3.4% was due to higher occupancy.
Same Facility average occupancy rates increased from 93% for the three months
ended March 31, 1996 to 96% for the three months ended March 31, 1997. Same
Facility end of period occupancy rates increased from 93% at March 31, 1996 to
96% at March 31, 1997.

Community Operating Expense. Community operating expense increased to
$13.4 million for the three months ended March 31, 1997, as compared to $10.3
million for the three months ended March 31, 1996, representing an increase of
$3.1 million, or 30.5%. Of the increase in community operating expense, $2.3
million, or 72.3%, was attributable to expenses from acquired senior living
communities, and 27.7% of this increase was attributable to Same Facility
operating expenses, which increased by $867,000, or 8.4%, over the prior period.
Of such increase, $353,000 was attributable to increases in home health care
agency and companion services expenses. Same Facility operating expenses,
exclusive of home health care agency and companion services expenses, increased
5.6% for the three months ended March 31, 1997 as compared to the comparable
period in the prior year. Community operating expense as a percentage of
resident and health care revenues declined to 63.9% for the three months ended
March 31, 1997, from 65.0% for the three months ended March 31, 1996. Same
Facility community operating expense as a percentage of Same Facility resident
and health care revenues declined to 65.1% for the three months ended March 31,
1997 from 65.3% in the comparable period in the prior year, primarily due to
improved economies of scale resulting from higher occupancy.

General and Administrative. General and administrative expense increased
to $1.9 million for the three months ended March 31, 1997, as compared to $1.2
million for the three months ended March 31, 1996, representing an increase of
$703,000, or 59.4%. Of this increase, $539,000 was due to payroll cost increases
related to salary increases and the hiring of additional staff in the corporate
office, including staff to manage the Company's home health agencies. The
remaining increase of approximately $164,000 resulted primarily from development
activity related to the Company's growth plans. General and administrative
expense as a percentage of total revenues increased to 8.8% for the three months
ended March 31, 1997, from 7.3% for the comparable period in the prior year.

Lease Expense. The Company incurred lease expense of $528,000 for the
three months ended March 31, 1997, as a result of the Sale-Leaseback
Transactions in January 1997. The Company did not incur lease expense prior to
the Sale-Leaseback Transactions.

Depreciation and Amortization. Depreciation and amortization expense
increased to $1.6 million for the three months ended March 31, 1997, from $1.4
million for the three months ended March 31, 1996, representing an increase of
$195,000, or 14.0%. This increase was primarily the result of depreciation
associated with acquisitions and amortization of related financing costs. Same
Facility depreciation and amortization expense decreased to $1.1 million for the
three months ended March 31, 1997 from $1.3 million for the three months ended
March 31, 1996, as a result of the Sale-Leaseback Transactions effected in
January 1997. This decrease was offset in part by the increased lease expense
described in the preceding paragraph.

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Other Income (Expense). Interest expense increased to $3.3 million in the
three months ended March 31, 1997, from $1.9 million for the three months ended
March 31, 1996, representing an increase of $1.4 million, or 72.0%. The increase
in interest expense was a result of indebtedness incurred in connection with the
acquisition of two senior living communities in May 1996 offset in part by a
reduction in indebtedness of $14.6 million in connection with the Sale-Leaseback
Transactions. Interest expense, as a percentage of total revenues, increased to
15.1% for the three months ended March 31, 1997 from 11.6% for the comparable
period in the prior year.

Extraordinary Loss. During the three months ended March 31, 1996, the
Company wrote off $2.3 million of financing costs in connection with the
refinancing of $62.1 million of mortgage financing.

Net Income. As a result of the foregoing factors, net income increased to
$975,000 for the three months ended March 31, 1997 from a loss of $683,000 for
the comparable period in the prior year. Before the extraordinary item described
above, net income for the three months ended March 31, 1996 was $1.7 million.

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

Revenues. Total revenues were $75.6 million in 1996 compared to $61.1
million in 1995, representing an increase of $14.5 million, or 23.7%. Resident
and health care revenues increased by $14.9 million, which was offset, in part,
by a decrease in management services revenues of $380,000. Of the increase in
resident and health care revenues, $11.3 million, or 75.9%, was attributable to
revenues derived from acquired senior living communities, with the remaining
$3.6 million, or 24.1%, of such increase attributable to Same Facility growth.
During 1995 and 1996, the Company acquired four senior living communities that
the Company had previously managed, resulting in a decrease in management
services revenues in 1996 to $1.7 million, as compared to $2.1 million in 1995.

Revenues attributable to Same Facilities were $52.7 million in 1996,
representing an increase of $3.6 million, or 7.3%, over 1995. Home health care
agency and companion services fees on a Same Facility basis increased by $1.1
million, or 40.4%, over 1995. Monthly/per diem service fee revenue on a Same
Facility basis increased $2.5 million, or 5.4%, over 1995. Of this increase,
3.3% was due primarily to rate increases and 2.1% was due to higher occupancy.
Same Facility average occupancy rates increased from 92% in 1995 to 94% in 1996.
Same Facility end of year occupancy rates increased from 93% in 1995 to 96% in
1996.

Community Operating Expense. Community operating expense increased to
$47.0 million in 1996, as compared to $38.8 million in 1995, representing an
increase of $8.2 million, or 21.1%. Of the increase in community operating
expense, $6.7 million, or 82.0%, was attributable to expenses from acquired
senior living communities, and 18.0% of this increase was attributable to Same
Facility operating expenses, which increased by $1.5 million, or 4.4%, over
1995. Of such increase, $695,000 was attributable to increases in home health
care agency and companion services expenses. Same Facility operating expenses,
exclusive of home health care agency and companion services expenses, increased
2.5% in 1996 as compared to 1995. Community operating expense as a percentage of
resident and health care revenues declined to 63.6% in 1996 from 65.7% in 1995.
Same Facility community operating expense as a percentage of Same Facility
resident and health care revenues declined to 65.1% in 1996 from 66.9% in 1995,
primarily due to improved economies of scale resulting from higher occupancy.

General and Administrative. General and administrative expense increased
to $6.2 million in 1996, as compared to $4.6 million in 1995, representing an
increase of $1.6 million, or 36.1%. General and administrative expense as a
percentage of total revenues increased to 8.2% in 1996 from 7.5% in 1995. Of
this increase in general and administrative expense, $546,000 was directly
related to the creation of a new operating department by the Company in 1996 to
manage the Company's home health care agencies, which had previously been
managed by a third party. The remaining increase of approximately $1.1 million
resulted from continued investments in infrastructure necessary to support the
Company's growth, including the incurrence of costs related to personnel
training, the expansion of the development services department, the upgrade of
management information systems, and the centralization of the Company's
accounting staff and functions.

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Depreciation and Amortization. Depreciation and amortization expense
increased to $6.9 million in 1996 from $5.7 million in 1995, representing an
increase of $1.2 million, or 22.0%. This increase was primarily the result of
depreciation associated with acquisitions and amortization of related financing
costs, offset in part by a decrease in amortization resulting from the write-off
of certain financing costs. As a result of the Sale-Leaseback Transactions
effected in January 1997, the Company expects Same Facility depreciation and
amortization expense to decrease in the future, which decrease will be offset,
in part, by increased lease expense.

Other Income (Expense). Interest expense increased to $12.2 million in
1996 from $10.3 million in 1995, representing an increase of $1.9 million, or
18.1%. The increase in interest expense was related to indebtedness incurred in
connection with the acquisition of senior living communities. Interest expense,
as a percentage of total revenues, declined to 16.1% in 1996 from 16.9% in 1995.
Interest income increased to $434,000 in 1996 from $378,000 in 1995. The Company
had other income of $788,000 in 1996, including a gain on the sale of assets of
$874,000, compared to other expense of $94,000 in 1995. The 1995 other expense
included: (i) $981,000 of nonrecurring expense related to the 1995 Roll-Up; (ii)
a gain on the sale of assets of $1.1 million; and (iii) other non-operating
expenses of $256,000. As a result of the Sale-Leaseback Transactions, the
Company expects Same Facility interest expense will decrease in the future,
which decrease will be offset, in part, by increased lease expense.

Income Tax Expense (Benefit). At December 31, 1996, the Company had NOLs
of approximately $5.4 million. In 1996, the Company recognized an income tax
benefit of $920,000 because of the anticipated utilization of such net operating
loss carryforwards to offset taxable gains related to the Sale-Leaseback
Transactions. The provision for income taxes reflects income tax expense of only
one of the Predecessor Entities, because the Predecessor and the other
Predecessor Entities were partnerships.

Extraordinary Loss. In 1996, the Company wrote off $2.3 million of
financing costs in connection with the refinancing of $62.1 million of mortgage
financing.

Net Income. As a result of the foregoing factors, net income increased
to $3.2 million ($5.5 million before extraordinary item) in 1996 from $2.0
million in 1995.

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

Revenues. Total revenues were $61.1 million in 1995 compared to $33.3
million in 1994, representing an increase of $27.8 million, or 83.3%. Resident
and health care revenues increased by $28.0 million, which was offset, in part,
by a decrease in management services revenues of $243,000. Of the increase in
resident and health care revenues, $23.3 million, or 83.1%, was attributable to
revenues derived from acquired senior living communities, with the remaining
$4.7 million, or 16.9%, of such increase attributable to Same Facility growth.
During 1994 and 1995, the Company acquired six senior living communities, three
of which had been previously managed by the Company, resulting in a decrease in
management services revenues in 1995 to $2.1 million, as compared to $2.4
million in 1994.

Revenues attributable to Same Facilities were $31.7 million in 1995,
representing an increase of $4.7 million, or 17.5%, over 1994. Home health care
agency and companion services fees on a Same Facility basis increased by $2.1
million, or 330.5%, over 1994. Monthly/per diem service fee revenue on a Same
Facility basis increased $2.6 million, or 10.1%, over 1994. Of this increase,
7.1% was due primarily to rate increases and 3.0% was due to higher occupancy.
Same Facility average occupancy rates increased from 88% in 1994 to 91% in 1995.
Same Facility end of year occupancy rates increased from 90% in 1994 to 92% in
1995.

Community Operating Expense. Community operating expense increased to
$38.8 million in 1995, as compared to $21.8 million in 1994, representing an
increase of $17.0 million, or 78%. Of the increase in community operating
expense, $14.4 million, or 84.8%, was attributable to operating expenses from
acquired senior living communities, and 15.2% of this increase was attributable
to Same Facility operating expenses, which increased by $2.6 million, or 13.4%,
over 1994. Of such increase, $1.6 million was attributable to increases in home
health care agency and companion services expenses. Same Facility operating
expenses, exclusive of home health care agency and companion services expenses,
increased 5.2% in 1995 as compared

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to 1994. Community operating expense as a percentage of resident and health care
revenues declined to 65.7% in 1995 from 70.3% in 1994. Same Facility community
operating expense as a percentage of Same Facility resident and health care
revenues increased to 71% in 1995 from 69% in 1994.

General and Administrative. General and administrative expense increased
to $4.6 million in 1995, as compared to $3.5 million in 1994, representing an
increase of $1.1 million, or 31.8%. General and administrative expense as a
percentage of total revenues decreased to 7.5% in 1995 from 10.4% in 1994. The
majority of the increase resulted from costs incurred in connection with
increased personnel costs incurred to support the Company's growth, including
costs associated with the upgrade of management information systems and the
centralization of the Company's accounting staff and functions.

Depreciation and Amortization. Depreciation and amortization expense
increased to $5.7 million in 1995 from $2.9 million in 1994, representing an
increase of $2.8 million, or 95.8%. This increase was primarily the result of
depreciation associated with acquisitions and amortization of related financing
costs.

Other Income (Expense). Interest expense increased to $10.3 million in
1995 from $5.4 million in 1994, representing an increase of $4.9 million, or
92.4%. The increase in interest expense was related to indebtedness incurred in
connection with the acquisition of senior living communities. Interest expense,
as a percentage of total revenues, increased to 16.9% in 1995 from 16.1% in
1994. Interest income increased to $378,000 in 1995 from $203,000 in 1994. The
Company had other expense of $94,000 in 1995 compared to other income of $98,000
in 1994, primarily as a result of $981,000 of nonrecurring expenses related to
the 1995 Roll-Up, and $313,000 of other expenses associated with a 1995
acquisition, which was offset, in part, by a $1.1 million gain on sale of
assets.

Net Income. As a result of the foregoing factors, net income increased to
$2.0 million in 1995 from $162,000 in 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company has traditionally financed its activities from net proceeds
from private placements of equity interests, long-term mortgage borrowing, and
cash flows from operations. At March 31, 1997, the Company had $157.6 million of
indebtedness outstanding, including $146.1 million payable to General Electric
Capital Corporation ("GECC"), with fixed maturities ranging from December 31,
2001 to April 30, 2003. The Company has the capacity to borrow up to an
additional $15.9 million from GECC to finance future acquisitions or expansions.
The Company also maintains a $2.5 million secured line of credit with a bank
that is available for working capital and to secure various debt instruments. At
March 31, 1997, approximately $1.6 million of this line of credit had been used
to obtain letters of credit. The Company also maintains a $5.0 million line of
credit with a bank that is available for land acquisitions. At March 31, 1997,
$825,000 was outstanding under this line of credit.

Except for the Company's $2.5 million line of credit, each of the Company's
debt agreements contain restrictive covenants that generally relate to the use,
operation, and disposition of the community or communities that serve as
collateral for the indebtedness thereunder, and prohibit the further encumbrance
of such community or communities without the consent of the applicable lender.
Additionally, substantially all of such indebtedness is cross-defaulted. The
Company does not believe such restrictions are material to its business because
the Company does not intend to further encumber its owned properties and does
not believe the covenants relating to the use, operation, and disposition of its
communities materially limit its operations.

The Company's $2.5 million line of credit, under which $1.6 million was
outstanding as of March 31, 1997, contains covenants prohibiting, among other
things, the incurrence of additional debt or liens on the Company's assets, the
acquisition or disposition of properties or businesses owned by the Company, and
a change in the management of the Company. Such credit agreement also contains
financial covenants that require the Company to maintain certain prescribed debt
service coverage, liquidity, and capital expenditure reserve levels. The Company
does not believe that such covenants materially limit its operations because the
Company believes that, if necessary, it will have sufficient resources to repay
such indebtedness to obtain relief from such covenants.

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All of the Company's owned communities are subject to mortgages. Except for
the Company's Remington at Corpus Christi and Richmond Place communities, each
of the Company's owned communities serves as blanket collateral for the
indebtedness payable to GECC described above. The Remington at Corpus Christi
community is subject to a $4.7 million mortgage in favor of NHI. See
"Business -- Recent and Pending Acquisitions." The Richmond Place community is
the subject of an approximately $8.0 million revenue bond financing, which is
supported by an approximately $8.0 million letter of credit that is secured by a
mortgage on the community.

As of March 31, 1997, approximately 72.8% of the Company's indebtedness
bore interest at fixed rates, with a weighted average interest rate of 8.5%. The
Company's variable rate indebtedness carried an average rate of 7.5% as of March
31, 1997. Less than 11% of the Company's currently outstanding indebtedness
matures before December 31, 2002. The Sale-Leaseback Transactions resulted in
minimum annual lease obligations of $2.5 million, beginning in 1997. The Company
expects to service current outstanding indebtedness and lease obligations with
internally generated funds.

At March 31, 1997, the Company was obligated to pay annual rental
obligations under long-term leases of approximately $2.5 million. As of March
31, 1997, the Company's existing debt and lease agreements required aggregate
annual payments for the years ended December 31, 1997, 1998, 1999, 2000, and
2001, assuming no change in the Company's average interest cost (8.2% at March
31, 1997), ranging from $19.1 million to $21.3 million. In addition, the Company
intends to incur significant additional indebtedness and lease obligations and
therefore expects its annual debt service and lease payment obligations for such
periods to be significantly greater than the amounts set forth in the preceding
sentence.

The Company has entered into non-binding letters of intent with respect to
the REIT Facilities pursuant to which NHP and NHI, at the Company's request and
upon satisfaction of certain conditions, would develop, construct, or acquire up
to $110.0 million and $100.0 million, respectively, of senior living communities
and lease the communities to the Company.

Net cash provided by operating activities was $11.7 million, $9.0 million,
and $3.5 million for the fiscal years ended December 31, 1996, 1995, and 1994,
respectively, and $1.6 million and $3.3 million for the three months ended March
31, 1997 and 1996, respectively. Unrestricted cash balances were $3.2 million,
$3.8 million, and $2.9 million at December 31, 1996, 1995, and 1994,
respectively. As of March 31, 1997, unrestricted cash balances were $8.9
million.

Net cash used by investing activities totaled $67.6 million, $11.0 million,
and $46.3 million for the fiscal years ended December 31, 1996, 1995, and 1994,
respectively. Over this period, the Company acquired an aggregate of $139.0
million of senior living community assets, and made capital expenditures in an
aggregate amount of $10.9 million. During the same period, the Company sold an
aggregate of $2.8 million of assets. Net cash provided by investing activities
was $24.0 million for the three months ended March 31, 1997, as compared to net
cash used of $746,000 for the three months ended March 31, 1996. During the
three months ended March 31, 1997, the Company sold $27.0 million of assets in
the Sale-Leaseback Transactions and made $3.3 million of capital expenditures at
certain of its owned communities.

Net cash provided by financing activities was $55.3 million, $2.9 million,
and $42.6 million for the fiscal years ended December 31, 1996, 1995, and 1994,
respectively. Proceeds from the issuance of long-term debt was $73.9 million,
$26.7 million, and $49.0 million in 1996, 1995, and 1994, respectively,
including $23.5 million of debt assumed by the Company pursuant to acquisitions
in 1995. The Company also raised $11.0 million in a private placement of equity
in 1995. The Company retired debt in the amount of $5.5 million, $4.3 million,
and $2.5 million in 1996, 1995, and 1994, respectively; made or accrued cash
distributions to its partners of $7.1 million, $6.6 million, and $2.6 million in
1996, 1995, and 1994, respectively; and redeemed all of the outstanding
Preferred Partnership Interests for $10.0 million in 1996. Net cash used by
financing activities was $20.0 million and $973,000 for the three months ended
March 31, 1997 and 1996, respectively. During the three months ended March 31,
1997, the Company repaid $14.6 million of indebtedness with a portion of the
proceeds from the Sale-Leaseback Transactions and made $959,000 of principal
payments on its long-term debt. The Company paid $2.0 million of the Tax
Distribution to its partners in April 1997 and the remaining $500,000 will be
paid shortly. The entire $2.5 million of the Tax Distribution was accrued as of

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March 31, 1997 and approximates the income taxes associated with the
Predecessor's anticipated earnings in 1997 through the date of the
Reorganization. Following the Reorganization and conversion from partnership to
corporate form, the Company does not anticipate declaring or paying cash
dividends on the Common Stock in the foreseeable future. The Company intends to
retain future earnings to finance the operation and expansion of the Company's
business. See "Dividend Policy and Prior Distributions."

In January 1997, the Company effected the Sale-Leaseback Transactions with
respect to its Holley Court Terrace and Trinity Towers senior living communities
and realized net cash proceeds therefrom of $27.6 million. Of such proceeds,
$14.6 million were used to retire indebtedness and $5.2 million were used to
redeem the Predecessor's outstanding Preferred Partnership Interests (which
redemption had been accrued as of December 31, 1996). The Sale-Leaseback
Transactions resulted in a gain of approximately $4.4 million, which will be
recognized over the ten-year initial term of the lease.

In May 1997, the Company acquired an assisted living residence in Tarpon
Springs, Florida. The purchase price for the residence was $4.4 million and was
financed primarily through a $3.5 million mortgage loan provided by a bank.

In May 1997, the Company acquired the Remington at Corpus Christi community
and acquired a long-term leasehold in the Remington at Victoria community. The
purchase price for the Corpus Christi community was approximately $5.8 million,
and the Company financed the acquisition primarily through a $4.7 million
mortgage loan provided by NHI. The purchase price for the Victoria community
leasehold was approximately $1.1 million. The lease provides for annual lease
obligations of approximately $468,000.

The Company is currently constructing an $11.6 million expansion at one of
its owned communities. The Company has a construction loan commitment from a
bank, as well as a permanent loan commitment from a mortgage lender to fund the
costs of construction. The Company also plans to expand certain of its other
owned communities; to open home health care agencies at certain of its owned
and/or leased communities that do not currently operate home health care
agencies; to develop new assisted living residences; and to acquire assisted
living residences and selected senior living and health care services assets.

Capital expenditures planned for 1997 total approximately $55.0 million. Of
this amount, the Company anticipates that approximately $25.0 million will be
used for the development of approximately 21 free-standing assisted living
residences; approximately $27.0 million will be used for the expansion of
existing communities; and approximately $3.0 million will be used for renovation
and replacement of equipment at existing communities. The Company estimates that
capital expenditures for the development of additional free-standing assisted
living residences in 1998 will range from approximately $25.0 million to $30.0
million.

The Company expects that its current cash and the net proceeds from the
Offering, together with cash flow from operations, the REIT Facilities, and the
proceeds of borrowings available to it under existing credit arrangements, will
be sufficient to meet its operating requirements and to fund its anticipated
growth for at least the next 12 to 18 months. The Company expects to use a wide
variety of financing sources to fund its future growth, including public and
private debt and equity, conventional mortgage financing, and unsecured bank
financing, among other sources. There can be no assurance that financing from
such sources will be available in the future or, if available, that such
financing will be available on terms acceptable to the Company.

DEFERRED TAX LIABILITY

The Company incurred a one-time $13.5 million ($1.23 per share) charge to
income resulting in a reduction of shareholders' equity at the time of the
Reorganization in connection with the conversion from a non-taxable to a taxable
entity and the resulting recognition of a deferred income tax liability for the
differences between the accounting and tax bases of the Company's assets and
liabilities.

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IMPACT OF INFLATION

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

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BUSINESS

OVERVIEW AND HISTORY

The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly, including
independent living, assisted living, skilled nursing, and home health care
services. Established in 1978, the Company believes it ranks among the leading
operators in the senior living and health care services industry. Currently, the
Company operates 21 senior living communities in 12 states, consisting of 11
owned communities, three leased communities, and seven managed communities, with
an aggregate capacity for approximately 5,700 residents. The Company also owns
and operates eight home health care agencies. At March 31, 1997, the Company's
owned communities had an occupancy rate of 94%, its leased communities had an
occupancy rate of 95%, and its managed communities had an occupancy rate of 93%.
For the year ended December 31, 1996 and the three months ended March 31, 1997,
revenues attributable to the Company's senior living communities accounted for
91.5% and 90.5%, respectively, of the Company's total revenues, and revenues
attributable to the Company's home health care agencies accounted for 6.2% and
7.0%, respectively, of the Company's total revenues. Approximately 92.4% of the
Company's total revenues for the year ended December 31, 1996 and approximately
91.1% of the Company's total revenues for the three months ended March 31, 1997
were derived from private pay sources.

GROWTH STRATEGY

The Company believes that the fragmented nature of the senior living
industry and the limited capital resources available to many small, private
operators provide a unique opportunity for the Company to expand its existing
base of senior living operations. The Company believes that its existing senior
living communities 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:

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Develop New Assisted Living Residences

The Company has implemented an aggressive growth plan to expand primarily
through the development and construction of new assisted living residences,
including special living units and programs for residents with Alzheimer's and
other forms of dementia. The Company intends to develop and market a significant
number of its newly developed assisted living residences under the tradename
"Homewood Residence." See "-- Trademarks." The Company's primary strategy is to
develop a cluster of residences within a particular geographic service area and
thereby achieve regional density. In this regard, the Company believes that its
existing senior living communities and its extensive knowledge of the local
markets in which the Company operates provide the Company with a strong platform
from which to expand its operations. In addition, the Company believes that
through clustering its residences it can maximize operational, marketing, and
management efficiencies while achieving economies of scale. The Company believes
that regional density also provides strengthened local presence, community
familiarity, and reputation, and will enhance the Company's opportunities in the
evolving managed care environment. The Company currently is developing 21 free-
standing assisted living residences, with an estimated aggregate capacity for
1,826 residents. See "Business -- Development Activities."

The Company follows a disciplined development strategy that includes the
following sequential components: (i) a market demographic analysis is conducted
by the Company to assess and confirm the relative strength of a potential
market; (ii) cohesive neighborhoods and submarkets are identified within the
market; (iii) within each neighborhood and submarket, competitive projects are
identified and assessed as to their market niche, program of services and
pricing, physical condition, and likely financial condition; (iv) based on the
prior three steps, a determination is then made as to whether to participate in
the market by acquisition or development; (v) if the Company elects to develop
within the market, the Company then determines which submarkets to serve,
selects a specific design type for each submarket and determines the number of
assisted living units and dementia care units to develop; and (vi) specific
sites are analyzed, whereby the Company considers a number of factors including
site visibility, location within a submarket, the specific neighborhoods which
can be served from the site, probability of achieving zoning approvals and the
proximity of the site to the Company's other assisted living residences and
senior living communities. Architectural design and hands-on construction
functions are usually performed by outside architects and contractors with whom
the Company has an historical relationship. The Company expects that the average
construction time for a typical assisted living residence will be approximately
10 to 12 months. Once construction is completed, the Company estimates that it
will take approximately 12 months on average for the assisted living residence
to achieve a stabilized level of occupancy.

The Company's senior management and development staff have extensive
experience in the development of senior living communities, including assisted
living residences, real estate acquisition, engineering, general construction,
and project management. The Company's development team has the demonstrated
ability to target potential markets, perform appropriate market and demographic
studies, identify zoning and development issues, and determine the appropriate
size and configuration of residences to be developed.

Expand Existing Facilities

The Company plans to expand certain of its existing communities to include
additional assisted living residences (including special programs and living
units for residents with Alzheimer's and other forms of dementia), and skilled
nursing beds. The Company currently has three expansion projects under
construction (including one managed community) and five expansion projects under
development, representing an aggregate increase in capacity to accommodate an
additional 704 residents. The expansion of existing senior living communities
allows the Company to create operating efficiencies and capitalize on its local
presence, community familiarity, and reputation in markets in which the Company
currently operates.

Pursue Strategic Acquisitions

The Company intends to continue to pursue single or portfolio acquisitions
of assisted living residences and, to a lesser extent, other senior living and
long-term care communities. Through strategic acquisitions, the

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Company plans to enter new markets or acquire communities in existing markets as
a means to increase market share, augment existing clusters, strengthen its
ability to provide a broad range of care, and create operating efficiencies. The
Company believes that the current fragmentation of the industry, combined with
the Company's financial resources and extensive contacts within the industry,
should provide it with the opportunity to consider a number of potential
acquisition opportunities. In reviewing acquisition opportunities, the Company
will consider, among other things, geographic location, competitive climate,
reputation and quality of management and residences, and the need for renovation
or improvement of the residences.

Develop and Acquire Additional Home Health Care Agencies

The Company intends to expand its home health care services by developing,
acquiring, and managing new home health care agencies and expanding its range of
existing home health care services. The Company currently anticipates that its
home health care agencies will be based at the Company's communities, and will
serve both the Company's communities and the surrounding area. The Company
believes that the expansion of its home health care services will enhance its
ability to provide a broad range of health care services, increase its market
visibility, and augment the creation of senior living networks in targeted
areas. The Company currently operates eight home health care agencies, five of
which are in their initial year of operation. The Company has also entered into
a letter of intent to acquire an additional home health care agency in Corpus
Christi, Texas and intends to commence operations at five additional home health
care agencies during 1997.

Expand Referral Networks and Strategic Alliances

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

Pursue Additional Third-Party Management Opportunities

Although the Company intends to focus its efforts primarily on development
and acquisition activities, it may in certain instances pursue third-party
management opportunities as a means to enter new markets or expand its presence,
market knowledge, and influence in a targeted market. The Company currently
manages seven communities with an aggregate capacity for 2,159 residents
pursuant to management contracts. Furthermore, the Company intends to continue
its consulting and contract activities on a selective basis.

OPERATING STRATEGY

The Company's operating strategy is to provide high quality health care
services 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.

Continue to 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 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.

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<PAGE> 40

Offer Services Across a Range of Pricing Options

The Company is continually expanding its range of personal, health care,
and support services to meet the evolving needs of its residents. The Company
has developed several different care plans and residence designs which may, in
each instance, be customized to serve the upper income and moderate 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 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 also seeks to maintain and improve occupancy rates by (i)
retaining residents as they "age in place" by emphasizing quality and breadth of
care and service; (ii) attracting new residents through marketing programs
directed towards family decision makers, namely adult children, and prospective
residents; and (iii) actively seeking referrals from hospitals, rehabilitation
hospitals, physicians' clinics, home health care agencies, and other acute and
sub-acute health care providers in the markets served by the Company.

Improve Operating Efficiencies

The Company will seek to improve operating efficiencies at its communities
by continuing to actively monitor and manage operating costs. By concentrating
residences within selected geographic regions, the Company believes it will be
able to achieve operating efficiencies through economies of scale and reduced
corporate overhead, and provide more effective management supervision and
financial controls.

Emphasize Employee Training

The Company devotes special attention to the hiring, screening, training,
and supervising of its employees and caregivers to ensure that quality standards
are achieved. During 1997, the Company expects to spend in excess of $700,000 on
personnel training and development of on-site field personnel. In 1995, the
Company, together with Dr. Frist, founded The Frist Center at Belmont University
in Nashville, Tennessee. The Frist Center is a non-profit foundation providing
training, education, and career services for management and front line personnel
involved in the senior living and health care services industry. The Company
works closely with The Frist Center and the Company's employees actively
participate in the training programs, seminars, and classes sponsored by The
Frist Center. In addition, professional training programs designed to be
delivered on-site by The Frist Center staff have been and are being developed by
the Company and The Frist Center. The Company believes its commitment to and
emphasis on employee training differentiates the Company from many of its
competitors.

CARE AND SERVICES PROGRAMS

The Company provides a wide array of senior living and health care services
to the elderly at its communities, including independent living, assisted living
(with special programs and living units for residents with Alzheimer's and other
forms of dementia), skilled nursing, and home health care services. By offering
a variety of services and involving 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 all services to every resident without
regard to need, preference, or choice.

Independent Living Services

The Company provides independent living services to seniors who do not yet
need assistance or support with the activities of daily life ("ADLs"), but who
prefer the physical and psychological comfort of a residential community that
offers health care and other services. The Company currently owns 10
communities, leases three communities, and manages an additional five
communities which provide independent living services, with an aggregate
capacity for 2,298 residents, 434 residents, and 1,491 residents, respectively.

40
<PAGE> 41

Independent living services provided by the Company include daily meals,
transportation, social and recreational activities, laundry, housekeeping,
security, and health care monitoring. The Company also fosters the wellness of
its residents by offering health screenings such as blood pressure checks,
periodic special services such as influenza inoculations, chronic disease
management (such as diabetes with its attendant blood glucose monitoring),
dietary and similar programs, as well as ongoing exercise and fitness classes.
Classes are given by health care professionals to keep residents informed about
health and disease management. Subject to applicable government regulation,
personal care and medical services are available to independent living residents
through either community staff or through the Company's or independent home
health care agencies. The Company's independent living residents pay a fee
ranging from $1,150 to $4,105 per month, in general depending on the specific
community, program of services, size of the units, and amenities offered. The
Company's contracts with its independent living residents are generally for a
term of one year and are terminable by the resident upon 60 days' notice.

Assisted Living and Memory Impaired Services

The Company offers a wide range of assisted living care and services 24
hours per day, including personal care services, support services, and
supplemental services, at all of its owned and leased communities and at six
managed communities. 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 residences, and in consultation with the resident and
the resident's family and medical consultants, each resident is assessed to
determine his or her health status, including functional abilities, and need for
personal care services, and completes a lifestyles assessment to determine the
resident's preferences. From these assessments, a care plan is developed for
each resident to ensure that all staff members who render care meet the specific
needs and preferences of each resident where possible. Each resident's care plan
is reviewed periodically to determine when a change in care is needed.

The Company has adopted a philosophy of assisted living care that allows a
resident to maintain a dignified independent lifestyle. Residents and their
families are encouraged to be partners in their care and to take as much
responsibility for their well being as possible. The basic type 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,
monitoring or assistance with medications, and confusion management.

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 $1,500 to $2,100, depending upon apartment 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 $1,800 to $2,700, depending upon the apartment 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.

41
<PAGE> 42

- Level III provides for the highest level of care and service, for which
the Company generally charges a monthly fee per resident ranging from
$2,400 to $3,100, depending upon the apartment size and the project design
type. Typically, Level III residents are either very frail or impaired and
utilize many of the Company's services on a regular basis.

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

The Company provides traditional skilled nursing services in three
communities owned by the Company, one community leased by the Company, and five
communities managed by the Company, with an aggregate capacity for 253 residents
at the Company's owned communities, 60 residents at the Company's leased
community, and 393 residents at the Company's managed communities. In addition,
the Company has communities under development or expansion which will add
estimated additional capacity of 393 skilled nursing beds. In its skilled
nursing facilities, the Company provides traditional long-term care through
24-hour a day skilled nursing care by registered nurses, licensed practical
nurses, and certified nursing aides. The Company also offers a range of
sub-acute care services in certain of its communities. Sub-acute care is
generally short-term, goal-oriented rehabilitation care intended for individuals
who have a specific illness, injury or disease, but who do not require many of
the services provided in an acute care hospital. Sub-acute care is typically
rendered immediately after, or in lieu of, acute hospitalization in order to
treat such specific medical conditions.

Home Health Care

The Company provides home health care services to residents at certain of
its senior living communities and the surrounding areas through home health care
agencies based at certain of its existing senior living communities. The
services and products that the Company provides through its home health care
agencies include (i) general and specialty nursing services to individuals with
acute illnesses, long-term chronic health conditions, permanent disabilities,
terminal illnesses or post-procedural needs; (ii) therapy services consisting
of, among other things, physical, occupational, speech, and medical social
services; (iii) personal care services and assistance with ADLs; (iv) hospice
care for persons in the final phases of incurable disease; (v) respiratory,
monitoring, medical equipment services, and medical supplies to patients; and
(vi) a comprehensive range of home infusion and enteral therapies. The Company
intends to expand its home health care services to additional senior living
communities and to develop, acquire, or manage home health care service
businesses at other communities. In addition, the Company will make available to
residents certain physician, dentistry, podiatry, and other health related
services that will be offered by third-party providers. The Company may elect to
provide these services directly or through participation in managed care
networks or in joint ventures with other providers. The Company currently
operates eight home health care agencies, five of which are in their initial
year of operation.

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<PAGE> 43

OPERATING COMMUNITIES AND HOME HEALTH CARE AGENCIES

The table below sets forth certain information with respect to the senior
living communities and home health care agencies currently operated by the
Company.

<TABLE>
<CAPTION>
AVERAGE OCCUPANCY
RESIDENT CAPACITY(1) COMMENCEMENT 1996 RATE AT
------------------------- OF OCCUPANCY MARCH 31,
COMMUNITY LOCATION IL AL SN TOTAL OPERATIONS(2) RATE 1997
- --------- -------- ----- --- --- ----- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED(3):
Broadway Plaza....................... Ft. Worth, TX 252 40 122 414 Apr-92 94% 90%(4)
Carriage Club of Charlotte(5)........ Charlotte, NC 363 54 42 459 May-96 91(6) 91(6)
Carriage Club of Jacksonville(5)..... Jacksonville, FL 292 60 -- 352 May-96 89(6) 88(6)
The Hampton at Post Oak.............. Houston, TX 162 21 -- 183 Oct-94 94 95
Heritage Club........................ Denver, CO 220 35 -- 255 Feb-95 100 99
Parkplace............................ Denver, CO 195 48 -- 243 Oct-94 99 96
Remington at Corpus Christi(7)....... Corpus Christi, TX -- 90 -- 90 May-97 N/A N/A
Richmond Place....................... Lexington, KY 204 4 -- 208 Apr-95 98 98
Santa Catalina Villas................ Tucson, AZ 197 15 -- 212 Jun-94 90 94
The Summit at Westlake Hills......... Austin, TX 167 30 89 286 Apr-92 98 99
Westlake Village..................... Cleveland, OH 246 54 -- 300 Oct-94 94 94
----- --- --- ----- --- ---
Subtotal/Average................. 2,298 451 253 3,002 94% 94%

LEASED:
Holley Court Terrace(8).............. Oak Park, IL 179 17 -- 196 Jul-93 81% 94%
Remington at Victoria(9)............. Victoria, TX 60 30 -- 90 May-97 N/A N/A
Trinity Towers(8).................... Corpus Christi, TX 195 32 60 287 Jan-90 94 96
----- --- --- ----- --- ---
Subtotal/Average................. 434 79 60 573 89% 95%

MANAGED(10):)
Burcham Hills........................ East Lansing, MI 138 71 133 342 Nov-78 92% 89%
Meadowood............................ Worcester, PA 355 51 59 465 Oct-89 94 95
Parklane West........................ San Antonio, TX -- 17 124 141 Oct-94 86 90
Reeds Landing........................ Springfield, MA 148 54 40 242 Aug-95 65(11) 91(11)
USAA Towers.......................... San Antonio, TX 505 -- -- 505 Oct-94 100 100
Weinberg Village..................... Tampa, FL -- 75 -- 75 May-96 25 59
Williamsburg Landing................. Williamsburg, VA 345 7 37 389 Sept-85 98 97
----- --- --- ----- --- ---
Subtotal/Average................. 1,491 275 393 2,159 89% 93%
----- --- --- ----- --- ---
Grand Total/Average.............. 4,223 805 702 5,734 92% 94%
===== === === ===== === ===
</TABLE>

<TABLE>
<CAPTION>
COMMENCEMENT
OF
HOME HEALTH CARE AGENCIES(12):) LOCATION OPERATIONS
- ------------------------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Broadway Plaza..................... Fort Worth, TX June 1994
Carriage Club of Charlotte......... Charlotte, NC October 1996
The Hampton at Post Oak............ Houston, TX February 1997
Heritage Club...................... Denver, CO October 1996
Holley Court Terrace............... Oak Park, IL May 1994
Parkplace.......................... Denver, CO February 1997
Richmond Place..................... Lexington, KY June 1990
Westlake Village................... Westlake, OH January 1997
</TABLE>

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

(1) Independent living residences (IL), assisted living residences (including
areas dedicated to residents with Alzheimer's and other forms of dementia)
(AL), and skilled nursing beds (SN).
(2) Indicates the date on which the Company acquired each of its owned and
leased communities, or commenced operating its managed communities. The
Company operated certain of its communities pursuant to management
agreements prior to acquiring the communities. The Company operated the
following communities pursuant to management agreements for the period
indicated prior to the acquisition of such communities by the Company:
Carriage Club of Charlotte - July 1988 to May 1996; Carriage Club of
Jacksonville - January 1990 to May 1996; Heritage Club - April 1988 to
February 1995; Holley Court Terrace -- April 1992 to July 1993; Richmond
Place - October 1983 to April 1995; Santa Catalina Villas - November 1991
to June 1994; and Trinity Towers -- November 1986 to November 1990.
(3) Each of the Company's owned communities is subject to a mortgage lien. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(4) Broadway Plaza's skilled nursing facility contains a sub-acute unit.
Sub-acute units generally experience shorter lengths of stay and
corresponding higher fluctuations in occupancy rates. Excluding the skilled
nursing facility, Broadway Plaza's occupancy rate at March 31, 1997, was
99%.
(5) GECC has certain rights with respect to the Carriage Club communities,
including the right to receive 30% of the net cash flows generated by the
Carriage Club communities and 30% of any proceeds from the sale or
refinancing of the Carriage Club communities in excess of certain defined
amounts. In addition, GECC has a right of first offer with respect to any
proposed sale of the Carriage Club communities by the Company.

43
<PAGE> 44

(6) Communities at which expansions opened in 1996, which resulted in decreased
occupancy rates for the period. Excluding the effect of the expansions, the
average 1996 occupancy rate and the occupancy rate at March 31, 1997 would
have been 97% and 97%, respectively, at Carriage Club of Charlotte and 91%
and 93%, respectively, at Carriage Club of Jacksonville.
(7) The Company acquired the Remington at Corpus Christi community in May 1997.
See " -- Recent and Pending Acquisitions."
(8) Leased pursuant to an operating lease with an initial term of ten years
expiring December 31, 2006, with renewal options for up to three additional
ten year terms, provided that both leases are extended concurrently. The
Company pays contractually fixed rent, plus additional rent, subject to
certain limits, based upon the gross revenues of the community. Without the
lessor's consent, the Company may not operate any other type of senior care
facility within three miles of either of the premises during the term of
the leases and for one year thereafter.
(9) The Company acquired a long-term leasehold in the Remington at Victoria
facility in May 1997. See " -- Recent and Pending Acquisitions." The
Company leases the community pursuant to an operating lease expiring in
July 2011, with renewal options for up to two additional ten year terms.
The Company pays contractually fixed rent, plus additional rent, subject to
certain limits, based upon the gross revenues of the community. Without the
lessor's consent, the Company may not operate any other type of senior care
facility within the county in which the community is located during the
term of the lease and for two years thereafter.
(10) The Company's management agreements are generally for terms of three to
five years, but may be canceled by the owner of the community, without
cause, on three to six months' notice. Pursuant to the management
agreements, the Company is generally responsible for providing management
personnel, marketing, nursing, resident care and dietary services,
accounting and data processing reports, and other services for these
communities at the owner's expense and receives a monthly fee for its
services based either on a contractually fixed amount or a percentage of
revenues or income. Certain management agreements also provide the Company
with an incentive fee based on various performance goals. The Company's
existing management agreements expire at various times between June 1997
and July 2000. None of the communities managed by the Company is owned by
an affiliate of the Company.
(11) Reeds Landing is a life care community. Its fill-up rate has been
consistent with the feasibility projection for its bond financing, and the
fill-up rate of life care communities generally.
(12) Each of the home health care agencies is owned by the Company and is based
at one of the Company's senior living communities.

RECENT AND PENDING ACQUISITIONS

In May 1997, the Company completed the acquisition of an assisted living
facility located in Tarpon Springs, Florida with capacity for 60 residents. The
purchase price for the facility was $4.4 million and was financed primarily
through a $3.5 million mortgage loan provided by a bank. The Tarpon Springs
facility is completed and will commence operations upon receipt of required
licenses. The Company expects to obtain such required licenses in July 1997.

In May 1997, the Company completed the acquisition of the Remington at
Corpus Christi community, which is located in Corpus Christi, Texas and has
capacity for 90 residents, and acquired a long-term leasehold in the Remington
at Victoria community, which is located in Victoria, Texas and has capacity for
90 residents. The purchase price for the Corpus Christi community was
approximately $5.8 million, and the Company financed the acquisition primarily
through a $4.7 million mortgage loan provided by NHI. The purchase price for the
Victoria, Texas leasehold was approximately $1.1 million. The landlord under the
Remington at Victoria lease is Healthcare Properties Investors, Inc., a health
care real estate investment trust, and the lease provides for annual rental
obligations of approximately $468,000.

The Company has entered into a non-binding letter of intent to acquire a
home health care agency located in Corpus Christi, Texas for a purchase price of
approximately $1.0 million. Subject to the completion of additional due
diligence, the Company expects to complete the acquisition in the second quarter
of 1997. In the event that the Company consummates such acquisition, the Company
currently intends to pay the purchase price from the net proceeds from the
Offering.

44
<PAGE> 45

DEVELOPMENT ACTIVITIES

The table below summarizes information regarding the expansion of certain
of the Company's existing senior living communities and the residences and home
health care agencies currently under development.

<TABLE>
<CAPTION>
ADDITIONAL RESIDENT CAPACITY
SCHEDULED -----------------------------
COMMUNITIES COMPLETION IL AL SN TOTAL STATUS(1)
- ----------- ---------- ---- ------ ---- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
EXPANSION PROJECTS:
Santa Catalina Village, Tucson, AZ.................. 12/97 20 70 42 132 Construction
Williamsburg Landing, Williamsburg, VA(2)........... 12/97 10 58 21 89 Construction
Trinity Towers, Corpus Christi, TX.................. 3/98 27 68 16 111 Construction
Richmond Place, Lexington, KY....................... 4/98 -- 73 -- 73 Development
Carriage Club of Charlotte, Charlotte, NC........... 7/98 -- 30 -- 30 Development
Carriage Club of Jacksonville, Jacksonville, FL..... 10/98 -- 15 60 75 Development
The Hampton at Post Oak, Houston, TX................ 11/98 -- 15 76 91 Development
Westlake Village, Cleveland, Ohio................... 6/99 -- 15 88 103 Development
-- ----- --- -----
Subtotal................................... 57 344 303 704
-- ----- --- -----
DEVELOPMENT PROJECTS:
Tarpon Springs, FL(3)............................... 7/97 -- 64 -- 64 Licensure
Lady Lake, FL(4).................................... 11/97 -- 55 -- 55 Construction
Halls, TN(4)........................................ 1/98 -- 55 -- 55 Construction
Pearland, TX........................................ 2/98 -- 82 -- 82 Development
Spring Shadow, TX................................... 4/98 -- 67 -- 67 Development
Houston, TX (Willowchase)........................... 4/98 -- 67 -- 67 Development
Houston, TX (Northwest)............................. 4/98 -- 95 -- 95 Development
Knoxville, TN (Deane Hill)(4)....................... 4/98 -- 108 -- 108 Development
Marietta, GA........................................ 4/98 -- 60 -- 60 Development
Lakeway, TX......................................... 5/98 -- 70 -- 70 Development
Houston, TX (West).................................. 7/98 -- 85 -- 85 Development
Nashville, TN (West)................................ 8/98 -- 90 -- 90 Development
Tampa, FL(4)........................................ 8/98 -- 90 -- 90 Development
St. Petersburg, FL.................................. 9/98 -- 100 -- 100 Development
Aurora, CO.......................................... 10/98 -- 95 -- 95 Development
Lakewood, CO........................................ 10/98 -- 93 -- 93 Development
Del Ray Beach, FL................................... 10/98 -- 80 -- 80 Development
Greenwood Village, CO............................... 11/98 -- 85 90 175 Development
Austin, TX.......................................... 1/99 -- 95 -- 95 Development
Nashville, TN (Central)............................. 3/99 -- 115 -- 115 Development
Houston, TX (West University)....................... 7/99 -- 85 -- 85 Development
-- ----- --- -----
Subtotal................................... -- 1,736 90 1,826
-- ----- --- -----
Grand Total................................ 57 2,080 393 2,530
== ===== === =====
</TABLE>

<TABLE>
<CAPTION>
ANTICIPATED COMMENCEMENT
HOME HEALTH CARE AGENCIES LOCATION OF OPERATIONS
- ------------------------- -------- ------------------------
<S> <C> <C>
Carriage Club Jacksonville(5)........................... Jacksonville, FL(6) June 1997
Hale County(7).......................................... Greensboro, AL June 1997
The Summit at Westlake Hills(5)......................... Austin, TX(6) June 1997
Meadowood(7)............................................ Worcester, PA(6) July 1997
Air Force Village(7).................................... San Antonio, TX August 1997
Santa Catalina Villas(5)................................ Tucson, AZ(6) January 1998
</TABLE>

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

(1) "Development" means that development activities, such as site surveys,
preparation of architectural plans, or initiation of zoning processes, have
commenced (but construction has not commenced). "Construction" means that
construction activities, such as ground-breaking activities, exterior
construction, or interior build-out, have commenced. "Licensure" means that
the facility is completed and will open upon receipt of required licenses.
(2) Williamsburg Landing is a managed community. The Company is providing full
development services related to the expansion for the owner.
(3) The Company acquired the Tarpon Springs facility in May 1997. See
" -- Recent and Pending Acquisitions."
(4) Being developed by joint ventures in which the Company owns a 50% interest.
(5) Owned by the Company.
(6) Based at one of the Company's senior living communities.
(7) To be managed by the Company for an unaffiliated third party.

45
<PAGE> 46

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

The Company believes that its designs meet the desire of many of its
residents to move into a new residence that approximates, as nearly as possible,
the comfort of their prior home. The Company also believes that its designs
achieve several other objectives, including (i) lessening the trauma of change
for residents and their families, (ii) facilitating resident mobility and
caregiver access, (iii) enhancing operating efficiencies, (iv) enhancing the
Company's ability to match its products to targeted markets, and (v)
differentiating the Company from its competitors. The Company intends to develop
and market a significant number of its newly developed assisted living
residences under the trade name "Homewood Residence." See " -- Trademarks."

The Company intends to develop new assisted living residences by using a
combination of in-house development personnel and experienced third-party
project managers and by acquiring newly constructed residences from developers
under "turnkey" purchase and sale agreements. To the extent the Company acquires
newly developed residences from a developer on a "turnkey" basis, it intends to
enter into a purchase and sale agreement whereby the Company, subject to
construction of the residence to the Company's designs and specifications and
satisfaction of typical purchase and sale contingencies for the Company's
benefit, will commit to purchase the residence upon completion at an agreed upon
price.

The Company has also entered into contractual arrangements with
established, regional real estate development contractors pursuant to which such
developers will provide assistance in the development process. These
arrangements are intended to enable the Company to develop and construct
additional assisted living residences while reducing the investment of, and
associated risk to, the Company. The Company's development contractors provide
construction management experience, knowledge of local state and building codes
and zoning laws, and assistance with site locations. As a result, the Company's
development staff is able to evaluate and direct overall development activity
more efficiently.

The Company intends to enter into development and management agreements
with one or more developers which provide that the Company will manage nine
assisted living residences to be developed using the Company's residence designs
and grant the Company an option to purchase the residences. In addition, the
Company has entered into joint venture arrangements with development partners to
develop assisted living residences and may enter into additional joint ventures
in the future.

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 Brentwood (Nashville), Tennessee. 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 and food service functions, (v) coordinating
marketing functions, and (vi) providing strategic direction. In addition,
financing, development, construction and acquisition activities, including
feasibility and market studies, residence design, development, and construction
management, are conducted by the Company's corporate office.

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 operations teams headed by the Company's Regional Vice Presidents who
are accountable for the resident

46
<PAGE> 47

satisfaction and financial performance of the communities in their region. The
Company's assisted living residences operational activities are directed by the
Senior Director for Assisted Living Operations who is responsible, together with
the appropriate Regional Vice President, for the opening and operation of the
Company's assisted living residences.

Community-Based Management

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

A residence manager manages the day-to-day operations at each assisted
living residence. While the residence managers have many of the same operational
responsibilities as the Company's executive directors, their primary
responsibility is to oversee resident care. For its assisted living residences,
the Company has adopted the concept of universal workers whereby each employee's
responsibilities span a number of traditional job descriptions. For example, an
assisted living residence employee may, during the course of a day, provide
housekeeping, food service, activities, and assistance with ADLs services to
residents. As a result, and because the Company's senior living communities
located near assisted living residences provide certain support personnel and
services on an on-going basis, each assisted living residence employs fewer
associates. On-site care managers and residents' assistants provide most of the
actual resident care in conjunction with a small support team consisting of a
housekeeper, a maintenance helper, an administrative coordinator, and a small
dining service team. In most assisted living residences, the residence manager
is also a licensed nurse.

The Company actively recruits personnel to maintain adequate staffing
levels at its existing communities as well as new staff for new or acquired
communities prior to opening. The Company has adopted comprehensive recruiting
and screening programs for management positions that utilize personnel
profiling, corporate office interviews, and drug screening company-wide. The
Company offers system-wide training and orientation for its front line
employees, department level managers, and executive staff at the community level
through a combination of Company-sponsored seminars and conferences and through
its contract for training services with The Frist Center.

Home Health Management

The Company centralizes all home health financial and clinical data through
an electronic data collection system. This data warehouse allows corporate
regional directors to identify emerging trends, establish critical pathways, and
develop and monitor cost and utilization controls. All accounting functions
including claims submission and processing are performed at the corporate
office.

The Company's centralized approach allows its home health care agencies to
achieve a more efficient delivery of care. Each community-based agency is
operated under the auspices of the community's executive director and under the
direct control of an agency director. This director and his or her team of
nurses, personal care aides, physical therapists, speech therapists,
occupational therapists, and social workers focus on assessing the health care
needs of residents in the Company's senior living or assisted living
communities, as well as clients in the surrounding market.

Quality Assurance

The Company's quality assurance program is designed to achieve and maintain
a high degree of resident and family satisfaction with the care and services the
Company provides. The Company coordinates the implementation of its quality
assurance program at each of its communities through its corporate office. The
Company encourages resident and family participation and seeks feedback from
families and residents through surveys conducted on a regular basis. In
addition, inspections of each community are conducted

47
<PAGE> 48

regularly by corporate staff. These inspections, performed periodically, review
all aspects of operations, care, and services provided, and the overall
appearance and cleanliness of the community.

Marketing

The Company's marketing efforts are implemented on a regional and local
level, all under the supervision of the corporate marketing staff, and are
intended to create awareness of the Company and its services among prospective
residents, their families, professional referral sources, and other key decision
makers. The corporate marketing staff conducts regional and state-wide surveys
of age- and income-qualified seniors to ensure that the Company understands the
needs and demands of that marketplace. To further both market awareness of the
Company by prospective residents and to more accurately assess the needs and
demands of seniors in that market, the Company periodically conducts regional
focus groups. Corporate office personnel develop the overall marketing
strategies for each community, produce all marketing materials, maintain
marketing databases, oversee direct mailings, place all media advertising, and
assist community personnel in the initial development and continuing refinement
of marketing plans for each community.

Before opening a new assisted living residence, the Company makes referral
source contacts and conducts marketing programs such as lead-generating media
consisting of direct mail, telemarketing follow-up, and print media advertising.
These public awareness campaigns usually begin with the start of construction
and intensify several months before the opening of the residence. An on-site
marketing person is at the residence approximately six months prior to the
opening of the residence and is supported by the Company's corporate marketing
department.

Once the residence opens, the Company believes that satisfied residents and
their families are the most important referral sources. Accordingly, the Company
believes that its emphasis on high-quality services and resident satisfaction
will result in a strong referral base for its existing communities. In addition,
the Company focuses on enhancing the reputation of the communities and the
services provided among potential referral sources, such as hospitals, home
health care agencies, physicians, therapy companies, and other health care
professionals.

INDUSTRY BACKGROUND

The senior living and health care services industry encompasses a broad and
diverse range of living accommodations and health care services that are
provided primarily to persons 75 years of age or older. For the elderly who
require limited services, care in their own or family members' homes or in
independent living residences or retirement centers, supplemented at times by
home health care, offers a viable option. For the elderly who are interested in
a community housing option, most independent living residences and retirement
centers typically offer a basic services package limited to meals, housekeeping,
and laundry. 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. Assisted living residents usually enter a residence
when other living accommodations no longer provide the level of care required by
the individual. Typically, assisted living represents a combination of housing
and 24-hour a day personal support services designed to aid elderly residents
with ADLs. 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 forms of dementia. 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.

Estimates of annual expenditures in the assisted living sector of the
senior living and health care services industry for 1996 range from $12.0
billion to $14.0 billion and include facilities ranging from "board and care"
(generally 12 or fewer residents with little or no services) to full-service
assisted living residences such as those operated by the Company. The assisted
living sector is highly fragmented and characterized by numerous small
operators. Moreover, the scope of assisted living services varies substantially
from one operator to another. Many smaller assisted living providers do not
operate in purpose-built residences, do not

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<PAGE> 49

have professional training for staff, and provide only limited assistance with
low-level care activities. The Company believes that few assisted living
operators provide the required comprehensive range of assisted living services,
such as dementia care and other services designed to permit residents to "age in
place" within the community as they develop further physical or cognitive
frailties.

The Company believes there will continue to be significant growth
opportunities in the senior living market for providing health care and other
services to the elderly, particularly in the assisted living segment of the
market. The Company believes that a number of demographic, regulatory, and other
trends will contribute to the continued growth in the assisted living market,
the Company's targeted market for future development and expansion, including
the following:

Consumer Preference

The Company believes that assisted living is increasingly becoming the
setting preferred by prospective residents and their families for the care of
the frail elderly. Assisted 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.

Demographics

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

Restricted Supply of Nursing Beds

The majority of states in the United States have adopted CON or similar
statutes generally requiring that, prior to the addition of new beds, the
addition of new services, or the making of certain capital expenditures, a state
agency must determine that a need exists for the new beds or the proposed
activities. The Company believes that this CON 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 sub-acute patients
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 residences 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
reasonable charges, and managed care organizations (such as health maintenance
organizations) are

49
<PAGE> 50

attempting to limit the 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 annual cost per patient
for skilled nursing care averages approximately $40,000, in contrast to the
annual per patient cost for assisted living care of approximately $26,000.

Senior Affluence

The average net worth of senior citizens is higher than non-senior
citizens, primarily 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 middle- to upper-income
seniors who have, either directly or indirectly through familial support, the
financial resources to pay for senior living communities, including an assisted
living alternative to traditional long-term care.

Reduced Reliance on Family Care

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

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 devotes significant resources to monitoring legal and
regulatory developments on local and national levels.

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

Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommending of, a particular provider of
health care items or services. The Medicare/Medicaid anti-kickback law has been
broadly interpreted to apply to certain contractual relationships between health
care

50
<PAGE> 51

providers and sources of patient referral. Similar state laws, which vary from
state to state, are sometimes vague and seldom have been interpreted by courts
or regulatory agencies. Violation of these laws can result in loss of licensure,
civil and criminal penalties, and exclusion of health care providers or
suppliers from participation in the Medicare and Medicaid program. There can be
no assurance that such laws will be interpreted in a manner consistent with the
practices of the Company.

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 which also may require modifications to existing and planned
properties to permit access to the properties by disabled persons. While the
Company believes that its communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.

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

The Company 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
environment changes. 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 and health care services industry is highly competitive,
and the Company expects that all segments of the industry will become
increasingly competitive in the future. Although there are a number of
substantial companies active in the senior living and health care industry, the
industry continues to be very fragmented and characterized by numerous small
operators. The Company believes that the primary competitive factors in the
senior living and health care services industry are (i) reputation for and
commitment to a high quality of care; (ii) quality of support services offered
(such as home health care and food services); (iii) price of services; (iv)
physical appearance and amenities associated with the communities; and (v)
location. The Company competes with other companies providing independent
living, assisted living, skilled nursing, home health care, and other similar
service and care alternatives, some of whom may have greater financial resources
than the Company. Because seniors tend to choose senior living communities near
their homes, the Company's principal competitors are other senior living and
long-term care communities in the same geographic areas as the Company's
communities. The Company also competes with other health

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<PAGE> 52

care businesses with respect to attracting and retaining nurses, technicians,
aides, and other high quality professional and non-professional employees and
managers.

TRADEMARKS

The Company has registered its corporate logo with the United States Patent
and Trademark Office. The Company intends to develop and market a significant
number of new free-standing assisted living residences under the tradename
"Homewood Residence." The Company has filed an application with the United
States Patent and Trademark Office to register the "Homewood Residence"
tradename and logo, but there can be no assurance that such registration will be
granted or that the Company will be able to use such tradename.

INSURANCE AND LEGAL PROCEEDINGS

The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the senior living and health care
services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs. The Company
currently maintains property, liability, and professional medical malpractice
insurance policies for the Company's owned and certain of its managed
communities under a master insurance program in amounts and with such coverages
and deductibles which the Company believes are within normal industry standards
based upon the nature and risks of the Company's business. The Company also has
an umbrella excess liability protection policy in the amount of $15.0 million
per location. There can be no assurance that a claim in excess of the Company's
insurance will not arise. A claim against the Company not covered by, or in
excess of, the Company's insurance could have a material adverse effect upon the
Company. In addition, the Company's insurance policies must be renewed annually.
There can be no assurance that the Company will be able to obtain liability
insurance in the future or that, if such insurance is available, it will be
available on acceptable terms.

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.

The Company currently is not party to any legal proceeding that it believes
would have a material adverse effect on its business, financial condition, or
results of operations.

EMPLOYEES

The Company employs approximately 2,160 persons, of which approximately
1,350 are full-time employees (approximately 50 of whom are located at the
Company's corporate offices) and 810 are part-time employees. In addition, there
are approximately 535 full-time employees and 455 part-time employees who are
employed by the owners of communities managed by the Company who are under the
direction and supervision of the Company. None of the Company's employees is
currently represented by a labor union and the Company is not aware of any union
organizing activity among its employees. The Company believes that its
relationship with its employees is good.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information concerning the directors
and executive officers of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
W.E. Sheriff.............................. 54 Chairman and Chief Executive Officer
Christopher J. Coates..................... 46 President and Chief Operating Officer
George T. Hicks........................... 39 Executive Vice President -- Finance, Chief
Financial Officer, Treasurer, and Secretary
H. Todd Kaestner.......................... 41 Executive Vice President -- Corporate Development
James T. Money............................ 49 Executive Vice President -- Development Services
Tom G. Downs.............................. 51 Senior Vice President -- Operations
Lee A. McKnight........................... 51 Senior Vice President -- Marketing
H. Lee Barfield II........................ 50 Director
Jack O. Bovender, Jr...................... 51 Director
Frank M. Bumstead......................... 54 Director
Robin G. Costa............................ 30 Director
Clarence Edmonds.......................... 63 Director
John A. Morris, Jr., M.D.................. 50 Director
Daniel K. O'Connell....................... 68 Director
Nadine C. Smith........................... 39 Director
Lawrence J. Stuesser...................... 54 Director
</TABLE>

W.E. Sheriff has served as Chairman and Chief Executive Officer of the
Company and its predecessors since April 1984. From 1973 to 1984, Mr. Sheriff
served in various capacities for Ryder System, Inc., including as president and
chief executive officer of its Truckstops of America division. Mr. Sheriff 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 board of the National Association for Senior Living Industries, and as a
member of the American Association of Homes and Services for the Aging and the
American Senior Housing Association.

Christopher J. Coates has served as President and Chief Operating Officer
of the Company and its predecessors since January 1993. From 1988 to 1993, Mr.
Coates served as chairman of National Retirement Company ("NRC"), a senior
living management company acquired by a subsidiary of the Company in 1992. From
1985 to 1988, Mr. Coates was senior director of the Retirement Housing Division
of Radice Corporation, following that company's purchase in 1985 of National
Retirement Consultants, a company formed by Mr. Coates. Mr. Coates is chairman
of the board of directors of the American Senior Housing Association.

George T. Hicks, a certified public accountant, has served as the Executive
Vice President -- Finance, Chief Financial Officer, Treasurer, and Secretary
since September 1993. Mr. Hicks has served in various capacities for the
Company's predecessors since 1985, including Vice President -- Finance and
Treasurer from November 1989 to September 1993.

H. Todd Kaestner has served as Executive Vice President -- Corporate
Development since September 1993. Mr. Kaestner has served in various capacities
for the Company's predecessors since 1985, including Vice President -
Development from 1988 to 1993 and Chief Financial Officer from 1985 to 1988.

James T. Money has served as Executive Vice President -- Development
Services since September 1993. Mr. Money has served in various capacities for
the Company's predecessors since 1978, including Vice President -- Development
from 1985 to 1993. Mr. Money is a member of the board of directors and the
executive committee of the National Association for Senior Living Industries.

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<PAGE> 54

Tom G. Downs has served as Senior Vice President -- Operations since 1989.
Mr. Downs has served in various capacities for the Company's predecessors since
1979.

Lee A. McKnight has served as Senior Vice President -- Marketing since
September 1991. Mr. McKnight has served in various capacities for the Company's
predecessors since 1979.

H. Lee Barfield II has served as a director of the Company since its
inception, as a member of ARCLP's limited partners committee since its formation
in 1995, and as director of various of the Company's predecessors since 1978.
Mr. Barfield is a member in the law firm of Bass, Berry & Sims PLC, the
Company's outside general counsel, and has served in various capacities for that
firm since 1974.

Jack O. Bovender, Jr. has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since September
1996. Until his retirement in March 1994, Mr. Bovender worked for Hospital
Corporation of America for over 18 years in various capacities, including
Executive Vice President and Chief Operating Officer. Mr. Bovender is a director
of Response Oncology, Inc., a physician practice management company specializing
in oncology, and a director of Quorum Health Group, Inc., a hospital management
company.

Frank M. Bumstead has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since June 1995.
Since 1989, Mr. Bumstead has been president and a principal shareholder of
Flood, Bumstead, McCready & McCarthy, Inc., a business management firm that
represents, among others, artists, songwriters, and producers in the music
industry. Since 1993, Mr. Bumstead has also served as the chairman and chief
executive officer of FBMS Financial, Inc., an investment advisor registered
under the Investment Company Act of 1940. Mr. Bumstead is vice chairman and a
director of Response Oncology, Inc., a physician practice management company
specializing in oncology, and a director of Nashville Country Club, Inc., an
owner and operator of restaurants and hotels. Mr. Bumstead also serves as a
director, secretary, and treasurer of Imprint Records, Inc., a music recording
company.

Robin G. Costa has served as a director of the Company since its inception
and as a member of ARCLP's limited partners committee since October 1996. Since
1994, Ms. Costa has served as chief operating officer of Maddox Companies, a
group of over 40 entities involved in oil and gas exploration, real estate
development and investment, and other investments. Ms. Costa has served in
various capacities for the Maddox Companies since 1985, including as Secretary
and Treasurer from 1992 to 1994.

Clarence Edmonds has served as a director of the Company since its
inception, as a member of ARCLP's limited partners committee since June 1995,
and as a director of various of the Company's predecessors since 1987. Mr.
Edmonds has served in various capacities, including vice president and
treasurer, of Massey Company, an investment services firm, since 1969.

John A. Morris, Jr., M.D. has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since June 1995.
Dr. Morris has served in varying capacities of the medical profession since
1977, and is currently a Professor of Surgery and the Director of the Division
of Trauma and Surgical Critical Care at the Vanderbilt University School of
Medicine, the Medical Director of the Life Flight Air Ambulance Program at
Vanderbilt University Hospital, and an Associate in the Department of Health
Policy and Management at the Johns Hopkins University. Dr. Morris is also
chairman of the board of Sirrom Capital Corporation, a small business investment
company.

Daniel K. O'Connell has served as a director of the Company since its
inception, as a member of ARCLP's limited partners committee since June 1995,
and as a director of various of the Company's predecessors since 1985. Until his
retirement in 1990, Mr. O'Connell worked for Ryder System, Inc. for over 25
years in various capacities, including legal counsel and chief financial
officer.

Nadine C. Smith has served as a director of the Company since its inception
and as a member of ARCLP's limited partners committee since June 1995. Since
1990, Ms. Smith has been managing general partner of NC Smith & Co., a financial
and management consulting firm. Ms. Smith is also a director of UTI Energy
Corp., an oil services company.

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<PAGE> 55

Lawrence J. Stuesser has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since June 1995.
Since June 1996, Mr. Stuesser has been the president and chief executive officer
and a director of Computer People, Inc., an information technology professional
services and staffing company. From August 1993 to May 1996, Mr. Stuesser was a
private investor and independent business consultant. From January 1991 to July
1993, Mr. Stuesser was chairman and chief executive officer of Kimberly Quality
Care, Inc., a home health care services company. Mr. Stuesser is chairman of the
board of Curative Health Services Inc., a disease management company in the
chronic wound care market, and a director of IntegraMed America, Inc., an owner
and operator of clinical ambulatory care facilities.

The Company's Board of Directors, currently consisting of ten members, is
divided into three classes of as nearly equal size as possible. At each annual
meeting of shareholders, directors constituting one class are elected for a
three-year term. The terms of Messrs. Bovender, O'Connell, and Stuesser will
expire at the 1998 Annual Meeting of Shareholders, the terms of Messrs. Bumstead
and Edmonds and Ms. Smith will expire at the 1999 Annual Meeting of
Shareholders, and the terms of Messrs. Sheriff, Barfield, and Morris and Ms.
Costa will expire at the 2000 Annual Meeting of Shareholders. See "Description
of Capital Stock -- Certain Provisions of the Charter, Bylaws, and Tennessee
Law." Executive officers serve at the discretion of the Board of Directors.

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

Executive Committee. The Executive Committee is authorized generally
to act on behalf of the Board of Directors between scheduled meetings,
subject to certain limitations established by the Board of Directors and
applicable corporate law. The Executive Committee currently consists of
Messrs. Bovender, Bumstead, Morris, and Sheriff.

Audit Committee. The Audit Committee makes recommendations to the
Board of Directors with respect to the Company's financial statements and
the appointment of independent accountants, reviews significant audit and
accounting policies and practices, meets with the Company's independent
accountants concerning, among other things, the scope of audits and
reports, and reviews the performance of the overall accounting and
financial controls of the Company. The Audit Committee currently consists
of Messrs. Barfield and Edmonds and Ms. Costa.

Compensation Committee. The Compensation Committee has the
responsibility for reviewing and approving salaries, bonuses, and other
compensation and benefits of executive officers, advising management
regarding benefits and other terms and conditions of compensation, and
administering the Company's stock incentive, employee stock purchase,
401(k), and other executive compensation plans. See "-- Compensation
Pursuant to Plans." The Compensation Committee currently consists of
Messrs. O'Connell and Stuesser and Ms. Smith.

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<PAGE> 56

EXECUTIVE COMPENSATION

The following table sets forth the total compensation paid or accrued by
ARCLP on behalf of the Chief Executive Officer and the four other most highly
paid executive officers (collectively, the "Named Executive Officers") for the
year ended December 31, 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
----------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($)
--------------------------- ---------- --------- ----------------
<S> <C> <C> <C>
W.E. Sheriff.......................................... 212,400 30,515 84,000(2)
Chairman and Chief Executive Officer
Christopher J. Coates................................. 153,400 22,038 11,033(3)
President and Chief Operating Officer
George T. Hicks....................................... 100,300 14,410 7,214(3)
Executive Vice President -- Finance, Chief Financial
Officer, Treasurer and Secretary
H. Todd Kaestner...................................... 106,200 15,257 7,637(3)
Executive Vice President -- Corporate Development
James T. Money........................................ 100,300 14,410 7,214(3)
Executive Vice President -- Development Services
</TABLE>

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

(1) Does not include amounts distributed by the LLC to its members, including
Named Executive Officers. In 1996, ARCLP distributed to the LLC an
aggregate of approximately $59,000 and the LLC distributed approximately
$13,561 to Mr. Sheriff, $9,686 to Mr. Coates, and $7,749 to each of Messrs.
Hicks, Kaestner, and Money in accordance with their ownership interests in
the LLC.
(2) Reflects insurance premiums paid by the Company for insurance policies
benefiting Mr. Sheriff.
(3) Reflects contributions by the Company under the Company's Section 162 Plan.
See "-- Compensation Pursuant to Plans -- Section 162 Plan."

DIRECTOR COMPENSATION

Directors who are employees of the Company do not receive additional
compensation for serving as directors of the Company. Non-employee directors are
entitled to an annual retainer of $12,000 payable, in arrears, on the date of
each annual meeting of shareholders, commencing with the 1998 Annual Meeting of
Shareholders. Non-employee directors are also entitled to a fee of $500 for each
board meeting attended by such director, and $250 for each committee meeting
attended by such director that is not on the same day as a meeting of the Board
of Directors. All directors are entitled to reimbursement for their actual
out-of-pocket expenses incurred in connection with attending meetings. In
addition, non-employee directors receive options to purchase shares of Common
Stock in accordance with the provisions of the 1997 Stock Incentive Plan. See
"-- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan."

COMPENSATION PURSUANT TO PLANS

1997 Stock Incentive Plan

The Company has adopted a stock incentive plan (the "Stock Incentive Plan")
that will become effective upon the consummation of the Offering. The Stock
Incentive Plan was approved by the Board of Directors and shareholder of the
Company in February 1997. Under the Stock Incentive Plan, the Compensation
Committee has the authority to grant to key employees and consultants of the
Company, and the Board of Directors has the authority to grant to directors who
are not employed by the Company ("Outside Directors"), the following types of
awards: (1) stock options; (2) stock appreciation rights; (3) restricted stock;
and/or (4) other stock-based awards. Pursuant to the Stock Incentive Plan,
1,093,750 shares of Common Stock have been reserved and will be available for
issuance, which may include authorized and unissued shares or treasury shares.
The number of shares reserved and available for issuance pursuant to the Stock
Incentive Plan will, upon the consummation of any Equity Issuance (as defined in
the Plan), increase

56
<PAGE> 57

automatically by 10% of the number of shares of Common Stock issued in such
Equity Issuance; provided, however, that Incentive Stock Options ("ISOs") may
not be issued after 1,093,750 shares of Common Stock have been issued under the
Stock Incentive Plan. The maximum number of shares of Common Stock for which
awards may be made under the Stock Incentive Plan to any officer of the Company
or other person whose compensation may be subject to the limitations on
deductibility under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), is 200,000 during any single year. As of the date hereof,
and subject to the consummation of the Offering, options to purchase 635,000
shares of Common Stock, exercisable at the initial public offering price, have
been awarded to 105 key employees, directors, and consultants of the Company.
Any shares as to which an option or other award expires, lapses unexpired, or is
forfeited, terminated, or canceled may become subject to a new option or other
award. The Stock Incentive Plan will terminate on, and no award may be granted
later than, the tenth anniversary of the date of adoption of the Stock Incentive
Plan, but the exercise date of awards granted prior to such tenth anniversary
may extend beyond that date.

The Stock Incentive Plan provides for automatic grants of non-qualified
stock options to purchase shares of Common Stock to Outside Directors. Options
to purchase 9,000 shares of Common Stock have been automatically granted to each
person serving as an Outside Director as of the consummation of the Offering at
an exercise price equal to the initial public offering price. If any person who
was not previously a member of the Board of Directors is elected or appointed an
Outside Director following the consummation of the Offering but prior to the
date of the Annual Meeting of Shareholders of the Company in the year 2000, such
Outside Director will automatically be granted an option to purchase 7,000
shares of Common Stock if such Outside Director's service begins prior to the
second anniversary of the Offering and 5,000 shares of Common Stock if such
Outside Director's service begins after the second anniversary of the Offering.
The Board of Directors may, in its discretion, increase or decrease the number
of shares subject to such option to reflect the extent to which such Outside
Director's expected service may exceed two years or may be less than one year.
Such options shall vest with respect to 5,000 shares on the date of the first
annual meeting of shareholders following the date of grant, 2,000 shares on the
date of the second annual meeting of shareholders following the date of grant,
and any remaining shares on the date of the third annual meeting of shareholders
following the date of grant.

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

ISOs and non-qualified stock options may be granted for such number of
shares as the Board or Compensation Committee may determine and may be granted
alone, in conjunction with, or in tandem with other awards under the Stock
Incentive Plan or cash awards outside the Stock Incentive Plan. A stock option
will be exercisable at such times and subject to such terms and conditions as
the Compensation Committee will determine. In the case of an ISO, however, the
term will be no more than ten years after the date of grant (five years in the
case of ISOs for certain 10% shareholders). The option price for an ISO will not
be less than 100% (110% in the case of certain 10% shareholders) of the fair
market value of the Common Stock as of the date of grant and for any
non-qualified stock option will not be less than 50% of the fair market value as
of the date of grant. ISOs granted under the Stock Incentive Plan may not be
transferred or assigned other than by will or by the laws of descent and
distribution. Non-qualified stock options and stock appreciation rights may

57
<PAGE> 58

not be transferred or assigned without the prior written consent of the
Compensation Committee, other than (i) transfers by the optionee to a member of
his or her immediate family or a trust for the benefit of the optionee or a
member of his or her immediate family, or (ii) transfers by will or by the laws
of descent and distribution.

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

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

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

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

Employee Stock Purchase Plan

The Company has adopted an employee stock purchase plan (the "Stock
Purchase Plan") that will become effective on the later of July 1, 1997 or the
consummation of the Offering. The Stock Purchase Plan was approved by the Board
of Directors and shareholder of the Company in February 1997. An aggregate of
250,000 shares of Common Stock has been reserved for issuance pursuant to the
Stock Purchase Plan. Under the Stock Purchase Plan, employees, including
executive officers, who have been employed by the Company continuously for at
least one year are eligible, as of the first day of any option period (January 1
through June 30, or July 1 through December 31) (an "Option Period"), to
contribute on an after-tax basis up to 15% of their base pay per pay period
through payroll deductions and/or a single lump-sum contribution per Option
Period to be used to purchase shares of Common Stock. Notwithstanding the
foregoing, no employee who is a 5% or greater shareholder of the Company's
voting stock is eligible to participate in the Stock Purchase Plan. On the last
trading day of each Option Period (the "Exercise Date"), the amount contributed
by each participant over the course of the Option Period will be used to
purchase shares of Common Stock at a

58
<PAGE> 59

purchase price per share equal to the lesser of (a) 85% of the closing market
price of the Common Stock on the Exercise Date, or (b) 85% of the closing market
price of the Common Stock on the first trading date of such Option Period. The
Stock Purchase Plan is intended to qualify for favorable tax treatment under
Section 423 of the Code.

401(k) Plan

Employees of the Company participate in a savings plan (the "401(k) Plan")
which is qualified under Sections 401(a) and 401(k) of the Code. To be eligible,
an employee must have been employed by the Company for at least three months.
The 401(k) Plan permits employees to make voluntary contributions up to
specified limits. Additional contributions may be made by the Company at its
discretion, which contributions vest ratably over a five-year period.

Section 162 Plan

The Company maintains a non-qualified deferred compensation plan which
allows employees who are "highly compensated" under IRS guidelines to make
after-tax contributions to an investment account established in such employee's
name. Additional contributions may be made by the Company at its discretion. All
contributions to the Section 162 Plan are subject to the claims of the Company's
creditors. Approximately 45 employees are eligible to participate in the Section
162 Plan, which is administered by the Compensation Committee. In 1995 and 1996,
the Company contributed approximately $99,000 and $274,000, respectively, to the
Section 162 Plan.

Officers' Incentive Compensation Plan

The officers of the Company participate in an Officers' Incentive
Compensation Plan which provides contingent incentive compensation. The plan
provides for a single annual incentive compensation payment in the amount of up
to 60% of an officer's base salary dependent upon the degree to which the
Company achieves its operational and financial objectives, or up to a maximum
total of 100%, contingent upon the degree to which the Company exceeds its
objectives.

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Tennessee Business Corporation Act ("TBCA") provides that a corporation
may indemnify any of its directors and officers against liability incurred in
connection with a proceeding if (i) such person acted in good faith, (ii) the
director or officer reasonably believed, in the case of conduct in an official
capacity, that such conduct was in the corporation's best interests, or, in all
other cases, that such conduct was not opposed to the best interests of the
corporation, and (iii) in connection with any criminal proceeding, the director
or officer had no reasonable cause to believe his or her conduct was unlawful.
In actions brought by or in the right of the corporation, however, the TBCA
provides that no indemnification may be made if the director or officer was
adjudged liable to the corporation. The TBCA also provides that in connection
with any proceeding charging improper personal benefit to a director or officer,
no indemnification may be made if such director or officer is adjudged liable on
the basis that such personal benefit was improperly received. In cases where the
director or officer is wholly successful, on the merits or otherwise, in the
defense of any proceeding instigated because of his or her status as a director
or officer of a corporation, the TBCA mandates that the corporation indemnify
the director or officer against reasonable expenses incurred in the proceeding.
Notwithstanding the foregoing, the TBCA provides that a court of competent
jurisdiction, upon application, may order that a director or officer be
indemnified for reasonable expenses if, in consideration of all relevant
circumstances, the court determines that such individual is fairly and
reasonably entitled to indemnification, even if such director or officer (i) was
adjudged liable to the corporation in a proceeding by or in right of the
corporation, (ii) was adjudged liable on the basis that personal benefit was
improperly received, or (iii) breached his or her duty of care to the
corporation.

The Company's Charter provides that to the fullest extent permitted by
Tennessee law no director shall be personally liable to the Company or its
shareholders for monetary damages for breach of any fiduciary duty

59
<PAGE> 60

as a director. Under the TBCA, this charter provision relieves the Company's
directors of personal liability to the Company or its shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability arising
from a judgment or other final adjudication establishing (i) any breach of the
director's duty of loyalty, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, or (iii) any
unlawful distributions. In addition, the Company's Charter and Bylaws provide
that each director and officer of the Company shall be indemnified by the
Company to the fullest extent allowed by Tennessee law.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee, consisting of Messrs. O'Connell and Stuesser
and Ms. Smith, each an Outside Director, was established in February 1997. Prior
to the Offering, the Company's executive officers were compensated as employees
of ARCLP and compensation decisions were made by ARCLP's compensation committee,
which was comprised in 1996 of the persons who now constitute the Company's
Compensation Committee. No executive officer of the Company served during 1996
as a member of a compensation committee or as a director of any entity of which
any of the Company's directors or members of ARCLP's limited partners committee
serves as an executive officer.

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<PAGE> 61

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock after giving effect to the
Reorganization with respect to (i) each of the Named Executive Officers, (ii)
each of the Company's directors, (iii) each person known by the Company to own
beneficially more than 5% of the Common Stock, and (iv) all directors and
executive officers of the Company as a group, both before and after giving
effect to the Offering. Under the rules of the Securities and Exchange
Commission (the "Commission"), a person is deemed to be a "beneficial owner" of
a security if he or she has or shares the power to vote or direct the voting of
such security or the power to dispose of or direct the disposition of such
security. Accordingly, more than one person may be deemed to be a beneficial
owner of the same security. Shares of Common Stock subject to options held by
the directors and executive officers that are not exercisable within 60 days of
the date hereof are not, in accordance with beneficial ownership rules
promulgated by the Commission, deemed outstanding for the purpose of computing
such director's or executive officer's beneficial ownership.

<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
---- --------------------- -------- --------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS:
W.E. Sheriff........................................... 1,670,353(1)(2) 21.4% 15.3%
Christopher J. Coates.................................. 242,603(3) 3.1 2.2
George T. Hicks........................................ 170,259(4) 2.2 1.6
H. Todd Kaestner....................................... 180,244(5) 2.3 1.6
James T. Money......................................... 175,252(6) 2.2 1.6
DIRECTORS:
H. Lee Barfield II..................................... 602,661(7)(8) 7.7 5.5
Jack O. Bovender, Jr................................... -- -- --
Frank M. Bumstead...................................... -- -- --
Robin G. Costa......................................... 1,372,037(9)(10) 17.6 12.5
Clarence Edmonds....................................... 360,907(11) 4.6 3.3
John A. Morris, Jr., M.D............................... 358,490(12) 4.6 3.3
Daniel K. O'Connell.................................... 10,285 * *
Nadine C. Smith........................................ 29,956 * *
Lawrence J. Stuesser................................... 67,547(13) * *
OTHER 5% SHAREHOLDERS:
American Retirement Communities, LLC................... 1,350,000(14) 17.3 12.3
Dan Maddox............................................. 1,420,259(9)(15) 18.2 13.0
DMAR Limited Partnership............................... 1,372,037(16) 17.6 12.5
Mary Louise Frist Barfield............................. 602,661(17)(18) 7.7 5.5
Robert A. Frist, M.D................................... 573,872(19)(20) 7.3 5.2
All directors and executive officers as a group (16
persons)............................................. 4,542,497 58.1% 41.5%
</TABLE>

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

* Less than 1%.
(1) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027.
(2) Includes 320,353 shares beneficially owned by a family limited partnership
in which Mr. Sheriff is a general partner and 1,350,000 shares beneficially
owned by the LLC. See Note 14. Mr. Sheriff is Chief Manager and a member of
the LLC. Mr. Sheriff disclaims beneficial ownership of the shares owned by
the LLC except to the extent of the 294,698 shares as to which he holds a
pecuniary interest.
(3) Includes 210,499 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I, L.P. ("Sylvester I") as to which Mr.
Coates holds a pecuniary interest.
(4) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I as to which Mr. Hicks holds a pecuniary
interest.
(5) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I as to which Mr. Kaestner holds a
pecuniary interest.
(6) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I as to which Mr. Money holds a pecuniary
interest.

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<PAGE> 62

(7) Address: 2700 First American Center, Nashville, Tennessee 37238.
(8) Includes 457,857 shares beneficially owned by Mr. Barfield's wife, Mary
Louise Frist Barfield. See Note 18. Mr. Barfield is the brother-in-law of
Robert A. Frist.
(9) Address: 3833 Cleghorn Avenue, Suite 400, Nashville, Tennessee 37215.
(10) All shares are beneficially owned by DMAR Limited Partnership ("DMAR"). Ms.
Costa is a Vice President of Margaret Energy, Inc., the general partner of
DMAR. See Note 15.
(11) Includes 335,888 shares beneficially owned by The Jack C. Massey Foundation
("The Massey Foundation"), of which Mr. Edmonds serves as a co-trustee, and
25,019 shares beneficially owned by Mr. Edmonds' wife. Mr. Edmonds
disclaims beneficial ownership of his wife's shares.
(12) All shares are beneficially owned by partnerships owned and controlled by
Dr. Morris, his brother Alfred Morris, and members of Dr. Morris' family.
(13) All shares are beneficially owned by B&W Development Centers ("B&W"), of
which Mr. Stuesser is a director and 50% shareholder.
(14) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027. The
members of the LLC include the Named Executive Officers and other members
of management of the Company. See Notes 2, 3, 4, 5, and 6.
(15) Includes 1,372,037 shares beneficially owned by DMAR. See Notes 10 and 16.
(16) The partners in DMAR include corporations and trusts owned by, or for the
benefit of, Mr. Maddox and his wife.
(17) Address: c/o H. Lee Barfield II, 2700 First American Center, Nashville,
Tennessee 37238.
(18) Includes 144,804 shares beneficially owned by Mrs. Barfield's husband, H.
Lee Barfield II, and an aggregate of 169,084 shares beneficially owned by
trusts for the benefit of Mrs. Barfield's children, of which Mrs. Barfield
serves as trustee. See Note 8. Mrs. Barfield is the sister of Robert A.
Frist.
(19) Address: 1326 Page Road, Nashville, Tennessee 37205.
(20) Includes 22,569 shares beneficially owned by Dr. Frist's wife. Does not
include an aggregate of 191,554 shares beneficially owned by Dr. Frist's
children who are 18 years of age or older. Dr. Frist is the brother of Mary
Louise Barfield Frist and the brother-in-law of H. Lee Barfield II.

CERTAIN TRANSACTIONS

TRANSACTIONS IN 1994 AND 1995 PRIOR TO THE 1995 ROLL-UP

Partnership Distributions

Prior to the 1995 Roll-Up, certain of the Predecessor Entities made
distributions in the ordinary course of business to their respective equity
owners, generally in accordance with such persons' relative equity interests,
including certain of the Company's directors and Named Executive Officers (all
of whom may be deemed to be the "founders" of the Company). During 1994, the
following directors and Named Executive Officers of the Company received
aggregate distributions, directly or indirectly, from various of the Predecessor
Entities in the following amounts: W.E. Sheriff -- $33,000; H. Lee Barfield and
Mary Louise Frist Barfield -- $310,000; and Lawrence J. Stuesser -- $15,000. In
1995 through the effective date of the 1995 Roll-Up, the following directors and
Named Executive Officers of the Company received aggregate distributions,
directly or indirectly, from various of the Predecessor Entities in the
following amounts: W.E. Sheriff -- $32,000; H. Lee Barfield and Mary Louise
Frist Barfield -- $100,000; Clarence Edmonds -- $7,000; John A. Morris, Jr. --
$66,000; and Lawrence J. Stuesser -- $4,000.

Management Fees

Prior to the 1995 Roll-Up, ARC Management Corporation ("ARCM"), a
wholly-owned subsidiary of American Retirement Corporation II ("ARCII") (one of
the Predecessor Entities), provided community management services to certain of
the other Predecessor Entities (Fort Austin Limited Partnership, Trinity Towers
Limited Partnership, and Holley Court Terrace, L.P.) and was paid a management
fee pursuant to the terms of management agreements between ARCM and such
Predecessor Entities. During 1994 and the first three months of 1995, Fort
Austin Limited Partnership paid ARCM aggregate management fees of approximately
$1.1 million and $423,000, respectively; Trinity Towers Limited Partnership paid
ARCM aggregate management fees of approximately $266,000 and $71,000,
respectively; and Holley Court Terrace, L.P. paid ARCM aggregate management fees
of approximately $95,000 and $31,000, respectively. Certain of the Company's
directors and Named Executive Officers were equity owners in ARCII and the other

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<PAGE> 63

Predecessor Entities and, consequently, had an indirect interest in such
payments. Such directors' and Named Executive Officers' respective ownership
interests in the Predecessor Entities were as follows:

<TABLE>
<CAPTION>
OWNERSHIP PERCENTAGE
---------------------------------------------------------
FORT AUSTIN
TRINITY TOWERS HOLLEY COURT LIMITED
NAME ARCII LIMITED PARTNERSHIP TERRACE, L.P. PARTNERSHIP
- ---- ----- ------------------- ------------- -----------
<S> <C> <C> <C> <C>
W.E. Sheriff............................ 7.7 6.7 2.8 --
Christopher J. Coates................... -- -- 0.3 --
George T. Hicks......................... -- -- 0.3 --
H. Todd Kaestner........................ -- -- 0.3 --
James T. Money.......................... -- -- 0.3 --
H. Lee Barfield and Mary Louise Frist
Barfield.............................. 5.3 5.4 9.4 8.4
Clarence Edmonds........................ -- 1.7 -- --
John A. Morris, Jr., M.D................ -- 16.7 0.6 --
Lawrence J. Stuesser.................... -- -- -- 0.1
</TABLE>

Additionally, ARCII owned 50.0% of Trinity Towers Limited Partnership, 20.1% of
Holley Court Terrace, L.P., and 32.0% of Fort Austin Limited Partnership.

Fees Paid to Directors

In February 1995, ARCII paid a fee of $15,000 to Messrs. Edmonds and
O'Connell and a fee of $30,000 to Ms. Smith, in each case as compensation for
services rendered as members of a special committee of ARCII's Board of
Directors. In February 1995, ARCII paid Ms. Smith a fee of $165,000 for
consulting and other services rendered to ARCII during the period from April
1993 through February 1995 in connection with certain transactions involving
ARCII, which fee had previously been deferred by agreement between Ms. Smith and
ARCII.

FORMATION OF ARCLP; THE 1995 ROLL-UP

ARCLP was formed in February 1995 in anticipation of the 1995 Roll-Up of
the Predecessor Entities. In connection with the formation of ARCLP, certain
directors and Named Executive Officers of the Company contributed cash to ARCLP
in the following amounts in return for corresponding limited partnership
interests in ARCLP: W. E. Sheriff -- $800,000; Christopher J.
Coates -- $100,000; H. Lee Barfield and Mary Louise Frist Barfield -- $1.0
million; John A. Morris, Jr. -- $2.0 million; and Lawrence J.
Stuesser -- $250,000. In addition, the LLC was organized in connection with the
formation of ARCLP and serves as its general partner. The members of the LLC
include each of the Named Executive Officers and certain other members of
management of the Company, who received their respective LLC interests in
exchange for services rendered to ARCII. Messrs. Sheriff and Coates have LLC
membership interests of approximately 21.8% and 15.6%, respectively, and Messrs.
Kaestner, Money, and Hicks have LLC membership interests of approximately 14.5%
each.

As a result of the 1995 Roll-Up, ARCLP issued partnership interests to the
partners and shareholders of the Predecessor Entities in exchange for their
equity interests in the Predecessor Entities and thereby became the owner,
directly or indirectly, of all of the assets of the Predecessor Entities. As a
result of the 1995 Roll-Up and the equity exchanges related thereto, certain of
the Company's directors and Named Executive Officers received the following
limited partnership percentages in ARCLP: W. E. Sheriff -- 3.7%; Christopher J.
Coates -- 0.3%; George T. Hicks -- 0.03%; H. Todd Kaestner -- 0.4%; James T.
Money -- 0.1%; H. Lee Barfield and Mary Louise Frist Barfield -- 7.3%; Clarence
Edmonds -- 0.4%; John A. Morris, Jr., M.D. -- 2.4%; Daniel J. O'Connell -- 0.2%;
and Lawrence J. Stuesser -- 0.5%.

REDEMPTION OF PREFERRED PARTNERSHIP INTERESTS

In connection with the 1995 Roll-Up, partners in certain of the Predecessor
Entities exchanged promissory notes for the Preferred Partnership Interests. In
1996, the Company redeemed the Preferred Partnership Interests for an aggregate
amount of $10.0 million. In connection with the redemption of the

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<PAGE> 64

Preferred Partnership Interests, certain executive officers, directors, and
certain other limited partners who will be greater than five percent (5%)
beneficial owners of the Common Stock (including, unless otherwise noted, their
immediate family members and affiliates) received the following amounts in
payment for the redemption of their Preferred Partnership Interests: H. Lee
Barfield II and Mary Louise Frist Barfield -- $1.12 million (does not include
amounts distributed to Robert A. Frist or an aggregate of $780,000 distributed
to Mrs. Barfield's sister and trusts for the benefit of Mr. and Mrs. Barfield's
nephews); Lawrence J. Stuesser -- $150,000 (distributed to B&W); DMAR -- $2.16
million; Robert A. Frist -- $1.57 million (does not include an aggregate of
$1.24 million distributed to Dr. Frist's children who are 18 years of age or
older; amounts distributed to H. Lee Barfield II and Mary Louise Frist Barfield,
or an aggregate of $780,000 distributed to Dr. Frist's sister and trusts for the
benefit of Dr. Frist's nephews); and Dan Maddox -- $2.34 million (includes $2.16
million distributed to DMAR and $180,000 distributed to a partnership in which
Mr. Maddox was a principal; does not include $240,000 distributed to a
partnership controlled by Mr. Maddox's son).

REORGANIZATION

In connection with the Reorganization, the Company issued an aggregate of
7,812,500 shares of Common Stock and the Reorganization Note to ARCLP. Following
the Reorganization, ARCLP distributed 1,350,000 shares of Common Stock to the
LLC, as general partner of ARCLP, and an aggregate of 6,462,500 shares of Common
Stock to the limited partners of ARCLP, generally in accordance with the limited
partners' ARCLP contribution accounts. In addition, ARCLP will distribute, in
liquidation, proceeds from the repayment of the Reorganization Note to the
limited partners of ARCLP, generally in accordance with the limited partners'
contribution accounts.

In connection with the Reorganization, certain executive officers,
directors, and other limited partners of ARCLP who will beneficially own more
than 5% of the Common Stock (and, in each case, their immediate family members
and affiliates), received shares of Common Stock and will receive proceeds from
the Reorganization Note as set forth in the table below.

<TABLE>
<CAPTION>
NUMBER OF SHARES PROCEEDS FROM THE
NAME OF COMMON STOCK(1) REORGANIZATION NOTE($)
---- ------------------ ----------------------
<S> <C> <C>
W.E. Sheriff......................................... 1,670,353 1,084,371.49(2)
Christopher J. Coates................................ 242,603(3) 108,666.34(4)
George T. Hicks...................................... 170,259(3) 6,293.82(4)
H. Todd Kaestner..................................... 180,244(3) 40,093.44(4)
James T. Money....................................... 175,252(3) 23,193.63(4)
H. Lee Barfield II................................... 602,661(5) 2,039,949.38(6)
Robin G. Costa....................................... 1,372,037 4,644,227.96(7)
Clarence Edmonds..................................... 360,907 1,221,640.38(8)
John A. Morris, Jr., M.D............................. 358,490 1,213,458.23(9)
Daniel K. O'Connell.................................. 10,285 34,813.61
Nadine C. Smith...................................... 29,956 101,398.86
Lawrence J. Stuesser................................. 67,547 228,639.84(10)
American Retirement Communities, LLC................. 1,350,000 --
Dan Maddox........................................... 1,420,259(11) 4,807,455.82(12)
DMAR Limited Partnership............................. 1,372,037 4,644,227.96
The Jack C. Massey Foundation........................ 335,888 1,136,953.90
Mary Louise Frist Barfield........................... 602,661(13) 2,039,949.38(14)
Robert A. Frist, M.D................................. 573,872(15) 1,942,507.25(16)
</TABLE>

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

(1) See Notes to "Principal Shareholders" for certain beneficial ownership
information.
(2) Amounts to be distributed to a family limited partnership in which Mr.
Sheriff is a general partner.
(3) Does not include shares to be distributed to other members of the LLC or
other partners in Sylvester I.
(4) Includes $6,293.82 which represents such person's pro rata portion of
amounts to be distributed to Sylvester I.
(5) Does not include shares to be distributed to Robert A. Frist or an
aggregate of 841,555 shares to be distributed to Mr. Barfield's
father-in-law, sister-in-law, and trusts for the benefit of Mr. Barfield's
brother-in-law and nephews.
(6) Includes $977,470.45 to be distributed to Mr. Barfield's wife, Mary Louise
Frist Barfield, and an aggregate of $572,330.52 to be distributed to trusts
for the benefit of Mr. Barfield's children, of which Mrs. Barfield serves
as trustee. See Note 12. Does not include amounts to be distributed to
Robert A. Frist and his wife, and children; Mr. Barfield's brother-in-law;
or an aggregate of $2,848,592.12 to be distributed to Mr. Barfield's
father-in-law, sister-in-law, and trusts for the benefit of Mr. Barfield's
brother-in-law and nephews.

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<PAGE> 65

(7) All amounts to be distributed to DMAR. Ms. Costa is a Vice President of
Margaret Energy, Inc., the general partner of DMAR.
(8) Includes $1,136,953.90 to be distributed to The Massey Foundation and
$84,686.48 to be distributed to Mr. Edmonds' wife.
(9) All amounts to be distributed to partnerships owned and controlled by Dr.
Morris, his brother Alfred Morris, and members of Dr. Morris' family.
(10) Amounts to be received by B&W, of which Mr. Stuesser is a director and 50%
shareholder.
(11) Does not include an aggregate of 158,939 shares to be distributed to Mr.
Maddox's son.
(12) Includes $4,644,227.96 to be distributed to DMAR. Does not include an
aggregate of $443,495.52 to be distributed to Mr. Maddox's son.
(13) Does not include shares to be distributed to Robert A. Frist or an
aggregate of 841,555 shares to be distributed to Ms. Barfield's father,
sister, and trusts for the benefit of Ms. Barfield's brother and nephews.
(14) Includes $490,148.41 to be distributed to Mrs. Barfield's husband, H. Lee
Barfield II, and an aggregate of $572,330.52 to be distributed to trusts
for the benefit of Mrs. Barfield's children, of which Mrs. Barfield serves
as trustee. See Note 5. Does not include amounts to be distributed to
Robert A. Frist and his wife, and children; Mrs. Barfield's brother; or an
aggregate of $2,848,592.12 to be distributed to Ms. Barfield's father,
sister, and trusts for the benefit of Ms. Barfield's brother and nephews.
(15) Does not include shares to be distributed to H. Lee Barfield II or Mary
Louise Frist Barfield, or an aggregate of 841,555 shares to be distributed
to Dr. Frist's father, sister, or trusts for the benefit of Dr. Frist's
brother and nephews.
(16) Includes $76,393.06 to be distributed to Dr. Frist's wife. Does not include
an aggregate of $648,394.62 to be distributed to Dr. Frist's children who
are 18 years of age or older. Dr. Frist is the brother of Mary Louise Frist
Barfield and the brother-in-law of H. Lee Barfield II. Does not include
amounts to be distributed to H. Lee Barfield II or Mary Louise Frist
Barfield and trusts for the benefit of their children, or an aggregate of
$2,848,592.12 to be distributed to Dr. Frist's father, sister, and trusts
for the benefit of Dr. Frist's brother and nephews.

PROPOSED DEVELOPMENT AGREEMENT

The Company intends to enter into a management agreement with Jim Maddox,
the son of Dan Maddox, a significant shareholder of the Company, to manage up to
nine assisted living residences to be owned by an affiliate of Jim Maddox. Any
such management agreement will provide for the payment of management fees to the
Company based on a percentage of each facility's gross revenues and will require
the Company to pay operating deficits above a specified amount. The management
agreement will also provide the Company with the option to purchase the subject
facilities.

POLICY OF THE BOARD OF DIRECTORS

The Board of Directors has adopted a policy providing that any transaction
between the Company and any of its directors, officers, or principal
shareholders or affiliates thereof must be on terms no less favorable to the
Company than can be obtained from unaffiliated parties. Management believes that
prior and proposed transactions have complied with this policy.

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<PAGE> 66

DESCRIPTION OF CAPITAL STOCK

The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $.01 per share, and 5,000,000 shares of preferred stock, no par value per
share (the "Preferred Stock"). Upon consummation of the Offering, 10,937,500
shares of Common Stock will be issued and outstanding, no shares of Preferred
Stock will be outstanding, and 635,000 shares of Common Stock will be reserved
for issuance pursuant to outstanding stock options under the Stock Incentive
Plan.

COMMON STOCK

The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and are not entitled to cumulative voting
in the election of directors, which means that the holders of a majority of the
shares voting for the election of directors can elect all of the directors then
standing for election by the holders of Common Stock. The holders of Common
Stock are entitled to share ratably in such dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion out of
funds legally available therefor. See "Dividend Policy and Prior Distributions."
The holders of Common Stock are entitled to share ratably in any assets
remaining after satisfaction of all prior claims upon liquidation of the
Company. The Company's Charter gives holders of Common Stock no preemptive or
other subscription or conversion rights, and there are no redemption provisions
with respect to such shares. All outstanding shares of Common Stock are, and the
shares offered hereby will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to, and may be adversely affected by, the rights of holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future.

PREFERRED STOCK

The authorized Preferred Stock may be issued from time to time in one or
more designated series or classes. The Board of Directors may issue shares of
Preferred Stock without approval of the shareholders, except as may be required
by applicable law or by the rules of the NYSE. The Board of Directors is also
authorized to establish the voting, dividend, redemption, conversion,
liquidation, and other relative provisions as may be provided in a particular
series or class. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things, adversely affect the voting power of the holders of Common Stock
and, under certain circumstances, make it more difficult for a third party to
acquire, or discourage a third party from acquiring, a majority of the
outstanding voting stock of the Company. The Company has no present intention to
issue any series or class of Preferred Stock.

The Common Stock has been approved for listing on the NYSE. The current
rules of the NYSE effectively preclude the listing on the NYSE of any securities
of an issuer which has issued securities or taken other corporate action that
would have the effect of nullifying, restricting, or disparately reducing the
per share voting rights of holders of an outstanding class or classes of
securities registered under Section 12 of the Exchange Act. The Company does not
intend to issue any additional shares of stock that would make the Common Stock
ineligible for continued listing or cause the Common Stock to be delisted from
the NYSE.

CERTAIN PROVISIONS OF THE CHARTER, BYLAWS, AND TENNESSEE LAW

General

The provisions of the Charter, the Bylaws, and Tennessee statutory law
described in this section may delay or make more difficult acquisitions or
changes of control of the Company that are not approved by the Board of
Directors. Such provisions have been implemented to enable the Company,
particularly (but not exclusively) in the initial years of its existence as an
independent, publicly-owned company, to develop its business in a manner that
will foster its long-term growth without the disruption of the threat of a
takeover not deemed by the Board of Directors to be in the best interests of the
Company and its shareholders.

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<PAGE> 67

Directors

The Bylaws provide that the number of directors shall be no fewer than
three nor more than fifteen, with the exact number to be established by the
Board of Directors and subject to change from time to time as determined by the
Board of Directors. Vacancies on the Board of Directors (including vacancies
created by an increase in the number of directors) may be filled by the Board of
Directors, acting by a majority of the remaining directors then in office, or by
a plurality of the votes cast by the shareholders at a meeting at which a quorum
is present. Officers are elected annually by and serve at the pleasure of the
Board of Directors.

The Charter and Bylaws provide that the Board of Directors is divided into
three classes of as nearly equal size as possible, and the term of office of
each class expires in consecutive years so that each year only one class is
elected. The Charter also provides that directors may be removed only for cause
and only by (i) the affirmative vote of the holders of a majority of the voting
power of all the shares of the Company's capital stock then entitled to vote in
the election of directors, voting together as a single class, unless the vote of
a special voting group is otherwise required by law, or (ii) the affirmative
vote of a majority of the entire Board of Directors then in office. The overall
effect of these provisions in the Company's Charter and Bylaws may be to render
more difficult a change in control of the Company or the removal of incumbent
management.

Advance Notice for Shareholder Proposals or Making Nominations at Meetings

The Bylaws establish an advance notice procedure for shareholder proposals
to be brought before a meeting of shareholders of the Company and for
nominations by shareholders of candidates for election as directors at an annual
meeting or a special meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of shareholders as has been brought before the meeting by, or at the
direction of, the Board of Directors, or by a shareholder who has given to the
Secretary of the Company timely written notice, in proper form, of the
shareholder's intention to bring that business before the meeting. The presiding
officer at such meeting has the authority to make such determinations. Only
persons who are selected and recommended by the Board of Directors, or the
committee of the Board of Directors designated to make nominations, or who are
nominated by a shareholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors of the Company.

To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not later than 120
days in advance of the anniversary date of the Company's proxy statement for the
previous year's annual meeting or, in the case of special meetings, at the close
of business on the tenth day following the date on which notice of such meeting
is first given to shareholders.

The notice of any shareholder proposal or nomination for election as
director must set forth various information required under the Bylaws. The
person submitting the notice of nomination and any person acting in concert with
such person must provide, among other things, the name and address under which
they appear on the Company's books (if they so appear) and the class and number
of shares of the Company's capital stock that are beneficially owned by them.

Amendment of the Bylaws and Charter

The Bylaws provide that a majority of the members of the Board of Directors
who are present at any regular or special meeting or, subject to greater voting
requirements imposed by the Charter, the holders of a majority of the voting
power of all shares of the Company's capital stock represented at regular or
special meeting have the power to amend, alter, change, or repeal the Bylaws.

Any proposal to amend, alter, change, or repeal provisions of the Charter
relating to staggered terms for directors, and limitations on the ability of
shareholders to call a shareholders' meeting or to remove directors require
approval by the affirmative vote of both a majority of the members of the Board
of Directors then in office and the holders of three-fourths of the voting power
of all of the shares of the Company's capital stock entitled to vote on the
amendments. Other amendments to the Charter require the affirmative vote of both
a

67
<PAGE> 68

majority of the members of the Board of Directors then in office and the holders
of a majority of the voting power of all of the shares of the Company's capital
stock entitled to vote on the amendments, with shareholders entitled to
dissenters' rights as a result of the Charter amendment voting together as a
single class. Shareholders entitled to dissenters' rights as a result of a
Charter amendment are those whose rights would be materially and adversely
affected because the amendment (i) alters or abolishes a preferential right of
the shares; (ii) creates, alters, or abolishes a right in respect of redemption;
(iii) alters or abolishes a preemptive right; (iv) excludes or limits the right
of the shares to vote on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or other securities with
similar voting rights; or (v) reduces the number of shares held by such holder
to a fraction if the fractional share is to be acquired for cash. In general,
however, under the TBCA no shareholder is entitled to dissenters' rights if the
security he or she holds is listed on a national securities exchange, such as
the NYSE.

ANTI-TAKEOVER LEGISLATION

The Tennessee Business Combination Act (the "Combination Act") provides,
among other things, that any corporation to which the Combination Act applies,
including the Company, shall not engage in any "business combination" with an
"interested shareholder" for a period of five years following the date that such
shareholder became an interested shareholder unless prior to such date the board
of directors of the corporation approved either the business combination or the
transaction which resulted in the shareholder becoming an interested
shareholder. The Combination Act defines "business combination," generally, to
mean any: (i) merger or consolidation; (ii) share exchange; (iii) sale, lease,
exchange, mortgage, pledge, or other transfer (in one transaction or a series of
transactions) of assets representing 10% or more of (A) the market value of
consolidated assets, (B) the market value of the corporation's outstanding
shares or (C) the corporation's consolidated net income; (iv) issuance or
transfer of shares from the corporation to the interested shareholder; (v) plan
of liquidation; (vi) transaction in which the interested shareholder's
proportionate share of the outstanding shares of any class of securities is
increased; or (vii) financing arrangements pursuant to which the interested
shareholder, directly or indirectly, receives a benefit except proportionately
as a shareholder. The Combination Act defines "interested shareholder,"
generally, to mean any person who is the beneficial owner, either directly or
indirectly, of 10% or more of any class or series of the outstanding voting
stock, or any affiliate or associate of the corporation who has been the
beneficial owner, either directly or indirectly, of 10% or more of the voting
power of any class or series of the corporation's stock at any time within the
five year period preceding the date in question. Consummation of a business
combination that is subject to the five-year moratorium is permitted after such
period if the transaction (i) complies with all applicable charter and bylaw
requirements and applicable Tennessee law and (ii) is approved by at least
two-thirds of the outstanding voting stock not beneficially owned by the
interested shareholder, or when the transaction meets certain fair price
criteria. The fair price criteria include, among others, the requirement that
the per share consideration received in any such business combination by each of
the shareholders is equal to the highest of (i) the highest per share price paid
by the interested shareholder during the preceding five-year period for shares
of the same class or series plus interest thereon from such date at a treasury
bill rate less the aggregate amount of any cash dividends paid and the market
value of any dividends paid other than in cash since such earliest date, up to
the amount of such interest, (ii) the highest preferential amount, if any, such
class or series is entitled to receive on liquidation, or (iii) the market value
of the shares on either the date the business combination is announced or the
date when the interested shareholder reaches the 10% threshold, whichever is
higher, plus interest thereon less dividends as noted above.

The Tennessee Control Share Acquisition Act (the "Acquisition Act")
prohibits certain shareholders from exercising in excess of 20% of the voting
power in a corporation acquired in a "control share acquisition," as defined in
the Acquisition Act, unless such voting rights have been previously approved by
the disinterested shareholders of the corporation. The Company has elected not
to make the Acquisition Act applicable to the Company. No assurance can be given
that such election, which must be expressed in a charter or bylaw amendment,
will not be made in the future.

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<PAGE> 69

The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company
from purchasing or agreeing to purchase any of its securities, at a price in
excess of fair market value, from a holder of 3% or more of any class of such
securities who has beneficially owned such securities for less than two years,
unless such purchase has been approved by the affirmative vote of a majority of
the outstanding shares of each class of voting stock issued by the Company or
the Company makes an offer of at least equal value per share to all holders of
shares of such class.

The effect of the Combination Act, the Acquisition Act, and the Greenmail
Act may be to render more difficult a change of control of the Company.

REGISTRATION RIGHTS

Beneficial holders of an aggregate of 7,812,500 shares of Common Stock have
contractual rights with respect to the registration of the sale of such shares
("Registrable Shares"). Beginning one year after the date hereof (the "IPO
Date"), holders of Registrable Shares that may not otherwise be sold pursuant to
Rule 144 of the Securities Act will be entitled to two demand registrations upon
the written demand to the Company to register the sale of 25% or more of the
Registrable Shares; provided, however, that in no event will any holder of
Registrable Shares participating in such demand registrations be permitted to
sell in excess of 20% of such holder's Registrable Shares. In addition, until
the second anniversary of the IPO Date, holders of Registrable Shares that may
not otherwise be sold pursuant to Rule 144 of the Securities Act may require the
Company to include all or a portion of such holder's Registrable Shares in a
registration statement filed by the Company for its own account for cash,
provided, among other conditions, that the managing underwriter (if any) of such
offering has the right, subject to certain conditions, to limit the number of
Registrable Shares included in such registration statement. In general, all
fees, costs, and expenses of such registrations (other than the underwriting
commissions, dealers' fees, brokers' fees and concessions applicable to Common
Stock) will be borne by the Company.

TRANSFER AGENT AND REGISTRAR

American Stock Transfer and Trust Company, New York, New York is the
transfer agent and registrar for the Common Stock.

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<PAGE> 70

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has not been any public market for securities
of the Company. No prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares of Common Stock
for sale will have on the market price prevailing from time to time. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions described below lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.

Upon completion of the Offering, the Company will have outstanding
10,937,500 shares of Common Stock (11,406,250 shares if the underwriters'
over-allotment option is exercised in full). Of these shares, the 3,125,000
shares of Common Stock sold in the Offering will be freely tradeable without
restriction or limitation under the Securities Act, except to the extent such
shares are subject to the agreement with the representatives of the Underwriters
described below, and except for any shares purchased by "affiliates," as that
term is defined under the Securities Act, of the Company. The remaining
7,812,500 shares will be "restricted securities" within the meaning of Rule 144
adopted under the Securities Act (the "Restricted Shares"). The Restricted
Shares were issued by the Company in the Reorganization in reliance upon an
exemption from registration under the Securities Act and none of such shares may
be sold in the public market, except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act. The beneficial holders of all of the Restricted Shares have demand and
piggyback registration rights with respect to the sale of such shares. See
"Description of Capital Stock -- Registration Rights."

In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least a one-year period (as computed under Rule 144) is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock (109,375
shares after giving effect to the Offering), and (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks immediately preceding
the date on which the notice of sale is filed with the Commission. Sales under
Rule 144 are also subject to certain provisions relating to the manner and
notice of sale and the availability of current public information about the
Company. A shareholder who is not an affiliate of the Company at any time during
the 90 days immediately preceding a sale, and who has beneficially owned his or
her shares for at least two years (as computed under Rule 144), is entitled to
sell such shares under Rule 144(k) without regard to the volume, manner and
notice of sale, and availability of public information limitations described
above. Shares properly sold in reliance upon Rule 144 to persons who are not
affiliates are thereafter freely tradeable without restrictions or registration
under the Securities Act.

The Company, the directors and executive officers of the Company (who in
the aggregate beneficially own 4,542,497 shares of Common Stock), and certain
holders of 5% or more of the shares of Common Stock outstanding after the
Offering have agreed with the Underwriters that, for a period of 180 days
following the Offering (the "Lock-up Period"), they will not offer to sell,
sell, contract to sell, grant an option to purchase or otherwise dispose (or
announce any offer, sale, grant of any option or other distribution) of any
shares of Common Stock or any securities convertible into or exchangeable for
shares of Common Stock without the prior written consent of NatWest Securities
Limited (except that the Company may grant options to purchase or award shares
of Common Stock under the Stock Incentive Plan and the Stock Purchase Plan and
issue privately placed shares in connection with acquisitions). See "Principal
Shareholders" and "Management -- Compensation Pursuant to Plans."

As soon as practicable following the consummation of the Offering, the
Company intends to file a registration statement under the Securities Act to
register shares of Common Stock issuable pursuant to the Stock Incentive Plan
and the Stock Purchase Plan. See "Management -- Compensation Pursuant to Plans."
Shares of Common Stock issued pursuant to the Stock Incentive Plan and the Stock
Purchase Plan after the effective date of such registration statement will be
available for sale in the open market, subject to the Lock-up Period, if
applicable.

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<PAGE> 71

UNDERWRITING

The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth opposite their
names below.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
NatWest Securities Limited.................................. 1,041,668
Equitable Securities Corporation............................ 1,041,666
McDonald & Company Securities, Inc.......................... 1,041,666
----------------
Total............................................. 3,125,000
================
</TABLE>

The Underwriters are obligated to purchase all the shares of Common Stock
offered hereby, if any such shares are purchased.

The Underwriters propose to offer the shares directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus, and to certain securities dealers at such price less a concession
not in excess of $0.58 per share of Common Stock. Such dealers may re-allow a
concession not in excess of $0.10 per share of Common Stock to certain other
brokers and dealers. After the public offering, the per share price and such
concessions may be changed by the Underwriters. The Underwriters have informed
the Company that they do not intend to confirm sales of shares of Common Stock
to any accounts over which they exercise discretionary authority.

The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the federal securities laws, or will contribute to payments that the
Underwriters may be required to make in respect thereof.

The Company has granted an option to the Underwriters, exercisable for 30
days from the date of this Prospectus, to purchase up to 468,750 additional
shares of Common Stock at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in the sale
of the shares of Common Stock offered hereby.

NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any Common Stock within the United States,
its territories or possessions or to persons who are citizens thereof or
residents therein. The Underwriting Agreement does not limit the sale of the
Common Stock offered hereby outside of the United States.

NatWest Securities Limited has further represented and agreed that (a) it
has not offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing, or disposing of investments
(whether as principal or agent) for the purposes of their businesses or
otherwise in circumstances that have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the
"Act"); (b) it has complied and will comply with all applicable provisions of
the Act with respect to anything done by it in relation to the shares of Common
Stock in, from, or otherwise involving the United Kingdom; and (c) it has only
issued or passed on and will only issue or pass on, in the United Kingdom, any
document that consists of or any part of listing particulars, supplementary
listing particulars, or any other document required or permitted to be published
by listing rules under Part IV of the Act, to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom the document may
otherwise be lawfully issued or passed on.

Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock has been determined
by negotiation between the Company and the Underwriters. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market and general economic conditions, were the history of, and
prospects for, the industry in which the Company operates, the ability of the
Company's management, the Company's past and present operations, the

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<PAGE> 72

Company's historical results of operations, the Company's earnings prospects,
the prices of similar securities of comparable companies, and other relative
factors. There can be no assurance, however, that the price at which the Common
Stock will sell in the public market after the Offering will not be lower than
the price at which it is being sold by the Underwriters. The Representatives, on
behalf of the Underwriters, have agreed to undertake to sell the Common Stock in
such a manner as to ensure that the distribution standards of the NYSE will be
met. See "Risk Factors -- Absence of Prior Public Trading Market."

The Company, the directors and executive officers of the Company, and
certain holders of 5% or more of the shares of Common Stock outstanding after
the Offering have agreed with the Underwriters that, for a period of 180 days
following the Offering, they will not offer to sell, sell, contract to sell,
grant an option to purchase or otherwise dispose (or announce any offer, sale,
grant of any option or other distribution) of any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock without
the prior written consent of NatWest Securities Limited (except that the Company
may grant options to purchase or award shares of Common Stock under the Stock
Incentive Plan and the Stock Purchase Plan and issue privately placed shares in
connection with acquisitions). See "Principal Shareholders" and
"Management -- Compensation Pursuant to Plans."

The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions, and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specific maximum. Syndicate covering transactions involve purchases of the
securities in the open market after the distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the Representatives to
reclaim a selling concession from a syndicate member when the securities
originally sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions, and penalty bids may cause the price of the
securities to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the NYSE or otherwise and,
if commenced, may be discontinued at any time.

At the request of the Company, up to 300,000 shares of Common Stock have
been reserved for sale in the Offering to certain individuals, including
directors and employees of the Company, members of their families, and other
persons having business relationships with the Company. The price of such shares
to such persons will be the initial public offering price set forth on the cover
of this prospectus. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase such reserved
shares. Any reserved shares not purchased will be offered by the Underwriters to
the general public on the same basis as the other shares offered hereby.

72
<PAGE> 73

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Bass, Berry & Sims PLC, Nashville, Tennessee. H. Lee
Barfield II, a member of Bass, Berry & Sims PLC, is a director of the Company.
Mr. Barfield and his wife and children beneficially own 602,661 shares of Common
Stock, and will receive approximately $2.0 million pursuant to ARCLP's
liquidation and distribution of the repayment of the Reorganization Note. See
"The Company -- Reorganization," "Principal Shareholders," and "Certain
Transactions -- Reorganization." Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Stroock & Stroock & Lavan
LLP, New York, New York.

EXPERTS

The Predecessor Entities' and the Predecessor's Combined and Consolidated
Financial Statements and schedule as of December 31, 1995 and 1996, and for the
year ended December 31, 1994, the three months ended March 31, 1995, the nine
months ended December 31, 1995, and the year ended December 31, 1996, and the
combined financial statements of Carriage Club for the four months ended April
30, 1996 have been included herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP covering the Predecessor Entities'
and the Predecessor's Combined and Consolidated Financial Statements refers to a
change in cost basis as a result of a purchase business combination.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 (herein, together with all amendments thereto, called the "Registration
Statement"), of which this Prospectus constitutes a part, under the Securities
Act and the rules and regulations promulgated thereunder, with respect to the
Common Stock offered hereby. This Prospectus omits certain information contained
in the Registration Statement, and reference is made to the Registration
Statement, including the exhibits thereto, for further information with respect
to the Company and the securities offered hereby. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents; when any such document is an exhibit to the Registration Statement,
each such statement is qualified in its entirety by reference to the copy of
such document filed with the Commission. The Registration Statement and the
exhibits and schedules thereto may be reviewed without charge at the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the New York Regional Office located at Seven World Trade Center,
13th Floor, New York, New York 10048, and at the Chicago Regional Office located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained, upon payment of the fee prescribed by the Commission,
at the Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a web site that contains reports, proxy statements, and
other information regarding registrants, including the Company. The address of
the Commission's web site is http://www.sec.gov.

The Company intends to furnish its shareholders with annual reports
containing financial statements audited by the Company's independent public
accountants.

73
<PAGE> 74

AMERICAN RETIREMENT COMMUNITIES, L.P.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
American Retirement Communities, L.P.
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets -- December 31, 1995, and 1996,
and March 31, 1997 (unaudited)............................ F-3
Combined Statements of Operations -- Year Ended December 31,
1994 and Three Months Ended March 31, 1995 and
Consolidated Statements of Operations -- Nine Months Ended
December 31, 1995, Year Ended December 31, 1996, Three
Months Ended March 31, 1996 (unaudited), and Three Months
Ended March 31, 1997 (unaudited).......................... F-4
Combined Statements of Partners'/Shareholders'
Equity -- Year Ended December 31, 1994 and Three Months
Ended March 31, 1995 and Consolidated Statements of
Partners' Equity -- Nine Months Ended December 31, 1995,
Year Ended December 31, 1996, and Three Months Ended March
31, 1997 (unaudited)...................................... F-6
Combined Statements of Cash Flows -- Year Ended December 31,
1994 and Three Months Ended March 31, 1995 and
Consolidated Statements of Cash Flows -- Nine Months Ended
December 31, 1995, Year Ended December 31, 1996, Three
Months Ended March 31, 1996 (unaudited), and Three Months
Ended March 31, 1997 (unaudited).......................... F-7
Notes to Combined and Consolidated Financial Statements..... F-9
Carriage Club of Charlotte, Limited Partnership and Carriage
Club of Jacksonville, Limited Partnership
Independent Auditors' Report................................ F-22
Combined Statement of Operations -- Four Months Ended April
30, 1996.................................................. F-23
Combined Statement of Partners' Equity -- Four Months Ended
April 30, 1996............................................ F-23
Combined Statement of Cash Flows -- Four Months Ended April
30, 1996.................................................. F-24
Notes to Combined Financial Statements...................... F-25
</TABLE>

F-1
<PAGE> 75

INDEPENDENT AUDITORS' REPORT

The Partners
American Retirement Communities, L.P.:

We have audited the accompanying consolidated balance sheets of American
Retirement Communities, L.P. and consolidated subsidiaries (the Predecessor) as
of December 31, 1995 and 1996, and the related consolidated statements of
operations, changes in partners' equity, and cash flows for the period April 1,
1995 through December 31, 1995 and for the year ended December 31, 1996
(Predecessor periods), and the related combined statements of operations,
changes in partners'/shareholders' equity, and cash flows of American Retirement
Corporation and combined entities (Predecessor Entities) for the year ended
December 31, 1994 and for the period from January 1, 1995 through March 31, 1995
(Predecessor Entities periods). These combined and consolidated financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined and consolidated
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 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 provide a reasonable basis for our opinion.

In our opinion, the aforementioned Predecessor consolidated financial
statements present fairly, in all material respects, the financial position of
American Retirement Communities, L.P. and consolidated entities as of December
31, 1995 and 1996, and the results of their operations and their cash flows for
the Predecessor periods, in conformity with generally accepted accounting
principles. Further, in our opinion, the aforementioned Predecessor Entities
combined financial statements present fairly, in all material respects, the
results of operations and cash flows of American Retirement Corporation and
combined entities for the Predecessor Entities periods, in conformity with
generally accepted accounting principles.

As discussed in note 1 to the combined and consolidated financial
statements, effective April 1, 1995, an exchange of common stock or partnership
interests for limited partnership interests in American Retirement Communities,
L.P. was accounted for as a purchase business combination (the Roll-up). As a
result of the Roll-up, net assets not previously owned by the acquirer were
recorded at fair value. Accordingly, consolidated financial information for
periods after the Roll-up is presented on a different cost basis than that for
periods before the Roll-up and, therefore, is not comparable.

KPMG PEAT MARWICK LLP

Nashville, Tennessee
January 22, 1997

F-2
<PAGE> 76

AMERICAN RETIREMENT COMMUNITIES, L.P.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 3,825 $ 3,222 $ 8,854
Assets limited as to use (note 5)...................... 2,411 1,022 975
Resident and health care receivables, less allowance
for doubtful accounts of $78 in 1995 and $108 in
1996................................................ 1,585 2,782 3,301
Management services receivables........................ 876 565 804
Inventory.............................................. 324 420 405
Prepaid expenses....................................... 233 340 1,002
Deferred income taxes (note 12)........................ -- 920 920
-------- -------- --------
Total current assets................................ 9,254 9,271 16,261
Assets limited as to use, excluding amounts classified as
current (note 5)....................................... 3,532 3,607 3,514
Land, buildings and equipment, net (notes 6, 9, and
15).................................................... 149,082 213,124 192,302
Marketable securities (note 4)........................... 102 52 52
Other assets (note 7).................................... 3,609 2,108 2,027
-------- -------- --------
Total assets................................... $165,579 $228,162 $214,156
======== ======== ========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 9)............. $ 1,800 $ 8,053 $ 3,189
Accounts payable....................................... 2,615 2,441 3,553
Redemption payable (note 10)........................... -- 5,195 --
Accrued expenses (note 8).............................. 4,442 6,239 5,368
Accrued partner distributions.......................... 1,445 1,632 2,500
-------- -------- --------
Total current liabilities........................... 10,302 23,560 14,610
Tenant deposits.......................................... 2,748 3,850 4,278
Long-term debt, excluding current portion (note 9)....... 100,445 162,636 154,379
Deferred gain on sale-leaseback transactions (note 15)... -- -- 4,302
Other long-term liabilities.............................. 261 234 230
-------- -------- --------
Total liabilities................................... 113,756 190,280 177,799
Partners' equity:
Special redeemable preferred partnership interests
(note 10)........................................... 10,000 -- --
Other general and limited partners' interests.......... 41,823 37,882 36,357
-------- -------- --------
Total partners' equity.............................. 51,823 37,882 36,357
-------- -------- --------
Commitments and contingencies (notes 13 and 14)
Total liabilities and partners' equity......... $165,579 $228,162 $214,156
======== ======== ========
</TABLE>

See accompanying notes to combined and consolidated financial statements.

F-3
<PAGE> 77

AMERICAN RETIREMENT COMMUNITIES, L.P.

COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
--------------------------- ---------------------------------------------------------
YEAR THREE MONTHS NINE MONTHS YEAR THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1994 1995 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and health care
revenue.................... $30,979 $11,761 $47,239 $ 73,878 $15,803 $20,982
Management services
revenue.................... 2,362 595 1,524 1,739 513 528
------- ------- ------- -------- ------- -------
Total revenues............. 33,341 12,356 48,763 75,617 16,316 21,510
Expenses:
Community operating
expenses................... 21,780 8,035 30,750 46,960 10,270 13,399
Lease expense................ -- -- -- -- -- 528
General and administrative... 3,455 1,108 3,446 6,200 1,183 1,886
Depreciation and
amortization............... 2,891 1,127 4,534 6,906 1,390 1,585
------- ------- ------- -------- ------- -------
Total operating expenses... 28,126 10,270 38,730 60,066 12,843 17,398
------- ------- ------- -------- ------- -------
Income from operations..... 5,215 2,086 10,033 15,551 3,473 4,112
------- ------- ------- -------- ------- -------
Other income (expense):
Interest expense............. (5,354) (2,370) (7,930) (12,160) (1,894) (3,257)
Interest income.............. 203 49 329 434 79 150
Other (note 11).............. 98 (1,013) 919 788 (6) (30)
------- ------- ------- -------- ------- -------
Other income (expense),
net...................... (5,053) (3,334) (6,682) (10,938) (1,821) (3,137)
------- ------- ------- -------- ------- -------
Income (loss) before income
taxes and extraordinary
item..................... 162 (1,248) 3,351 4,613 1,652 975
Income tax expense (benefit)
(note 12).................... -- 20 55 (920) -- --
------- ------- ------- -------- ------- -------
Income (loss) before
extraordinary item....... 162 (1,268) 3,296 5,533 1,652 975
Extraordinary loss on
extinguishment of debt (note
9)........................... -- -- -- (2,335) (2,335) --
------- ------- ------- -------- ------- -------
Net income (loss).......... 162 (1,268) 3,296 3,198 (683) 975
Preferred return on special
redeemable preferred limited
partnership interests (note
10).......................... -- -- 1,125 1,104 375 --
------- ------- ------- -------- ------- -------
Net income (loss) available
for distribution to
partners and
shareholders............. $ 162 $(1,268) $ 2,171 $ 2,094 $(1,058) $ 975
======= ======= ======= ======== ======= =======
</TABLE>

(Continued)

F-4
<PAGE> 78

AMERICAN RETIREMENT COMMUNITIES, L.P.

COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Pro forma earnings data (unaudited) (note 16):
Income before income taxes and extraordinary items, as
reported.................................................. $4,613 $ 975
Pro forma income taxes...................................... 820 370
------ ------
Pro forma income before extraordinary item................ 3,793 605
Preferred return on special redeemable preferred limited
partnership interests..................................... 1,104 --
------ ------
Pro forma income before extraordinary item available
for distribution to partners and shareholders......... $2,689 $ 605
====== ======
Pro forma earnings per common share (note 16):
Pro forma income before extraordinary item................ $ 0.40 $ 0.06
Preferred return on special redeemable preferred limited
partnership interests.................................. 0.12 --
------ ------
Pro forma income before extraordinary item available for
distribution to partners and shareholders.............. $ 0.29 $ 0.06
====== ======
Shares used in computing pro forma income per common
share.................................................. 9,375 9,375
====== ======
</TABLE>

See accompanying notes to combined and consolidated financial statements.

F-5
<PAGE> 79

AMERICAN RETIREMENT COMMUNITIES, L.P.

COMBINED AND CONSOLIDATED STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY

YEAR ENDED DECEMBER 31, 1994; THREE MONTHS ENDED MARCH 31, 1995;
NINE MONTHS ENDED DECEMBER 31, 1995; YEAR ENDED DECEMBER 31, 1996;
AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
PARTNERS'/
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Combined balance, January 1, 1994........................... $15,042
Combined income for 1994.................................. 162
Exercise of stock options (ARC)........................... 199
Distributions to partners during 1994..................... (2,580)
-------
Combined balance, December 31, 1994......................... 12,823
Combined loss for the period January 1, 1995 through March
31, 1995............................................... (1,268)
Exercise of stock options (ARC)........................... 257
Acquisition of treasury stock by ARC...................... (1,619)
Contribution by ARC-LP partners........................... 11,000
Distributions to partners................................. (1,400)
-------
Combined balance, March 31, 1995............................ $19,793
=======
</TABLE>

<TABLE>
<CAPTION>
SPECIAL REDEEMABLE OTHER GENERAL
PREFERRED LIMITED AND LIMITED
PARTNERSHIP INTERESTS PARTNERSHIP INTERESTS TOTAL
--------------------- --------------------- --------
<S> <C> <C> <C>
Combined balance, March 31, 1995................. $ -- $19,793 $ 19,793
Adjustment to equity as a result of business
combination (note 1)........................ -- 23,923 23,923
Conversion of debt to special redeemable
preferred limited partnership interests..... 10,000 -- 10,000
Earnings for the period April 1, 1995 through
December 31, 1995........................... 1,125 2,171 3,296
Distribution to partners for the period April
1, 1995 through December 31, 1995........... (1,125) (4,064) (5,189)
-------- ------- --------
Consolidated balance, December 31, 1995.......... 10,000 41,823 51,823
Earnings for 1996.............................. 1,104 2,094 3,198
Redemption of preferred limited partnership
interests................................... (10,000) -- (10,000)
Distribution to partners....................... (1,104) (6,035) (7,139)
-------- ------- --------
Consolidated balance, December 31, 1996.......... -- 37,882 37,882
Earnings for the period January 1, 1997 through
March 31, 1997 (unaudited)..................... -- 975 975
Distribution to partners (unaudited)............. -- (2,500) (2,500)
-------- ------- --------
Consolidated balance, March 31, 1997
(unaudited).................................... $ -- $36,357 $ 36,357
======== ======= ========
</TABLE>

See accompanying notes to combined and consolidated financial statements.

F-6
<PAGE> 80

AMERICAN RETIREMENT COMMUNITIES, L.P.

COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
--------------------------- ---------------------------------------------------------
YEAR THREE MONTHS NINE MONTHS YEAR THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1994 1995 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................ $ 162 $(1,268) $ 3,296 $ 3,198 (683) 975
Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating
activities:
Depreciation and
amortization................. 2,891 1,127 4,534 6,906 1,390 1,585
Amortization of deferred
gain......................... -- -- -- -- -- (111)
Deferred taxes................. -- -- -- (920) -- --
Extraordinary loss on
extinguishment of debt....... -- -- -- 2,335 2,335 --
Write-down of value of
insurance policies........... -- -- -- 66 -- --
Gain on sale of assets......... (155) -- (1,143) (874) -- --
Increase (decrease), net of
retirement communities
acquired, in cash, due to
changes in:
Receivables.................. (653) (903) 701 (431) 523 (757)
Inventory.................... (67) (6) (21) (56) 11 15
Prepaid expenses............. 27 (1,496) 1,894 (105) (256) (661)
Other assets................. (97) 382 -- 521 -- (115)
Accounts payable............. 586 381 948 (249) (649) 1,111
Accrued expenses............. 1,004 (157) 487 1,130 697 (819)
Tenant deposits.............. 344 60 279 202 40 426
Other long-term
liabilities................ (588) -- (87) (27) (63) (3)
-------- ------- ------- -------- ------- -------
Net cash provided (used) by
operating activities..... 3,454 (1,880) 10,888 11,696 3,345 1,646
-------- ------- ------- -------- ------- -------
Cash flows from (used by) investing
activities:
Additions to land, building and
equipment...................... (45,606) (3,237) (6,032) (71,545) (1,667) (3,317)
Proceeds from (purchases of)
assets limited as to use....... (904) 17 (2,915) 2,578 819 139
Proceeds from the sale of
assets......................... 205 6 1,214 1,346 -- 27,144
Proceeds from (purchases of)
marketable securities.......... (52) -- (50) -- 102 --
-------- ------- ------- -------- ------- -------
Net cash provided (used) by
investing activities..... (46,357) (3,214) (7,783) (67,621) (746) 23,966
-------- ------- ------- -------- ------- -------
</TABLE>

(Continued)

F-7
<PAGE> 81

AMERICAN RETIREMENT COMMUNITIES, L.P.

COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)

<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
--------------------------- ---------------------------------------------------------
YEAR THREE MONTHS NINE MONTHS YEAR THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1994 1995 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Contributions from partners...... -- 11,000 -- -- -- --
Distributions to partners........ (2,580) (485) (4,659) (6,952) (1,820) (1,632)
Payment of redeemable preferred
interests...................... -- -- -- (4,805) -- (5,195)
Proceeds from issuance of
long-term debt................. 48,979 1,636 1,614 73,922 1,610 2,423
Principal payments on long-term
debt........................... (2,471) (628) (3,720) (5,479) (422) (15,544)
Expenditures for financing
costs.......................... (1,535) (130) (346) (1,364) (341) (32)
Proceeds from the issuance of
common stock................... 199 257 -- -- -- --
Acquisition of treasury stock.... -- (1,619) -- -- -- --
-------- ------- ------- -------- ------- -------
Net cash provided (used) by
financing activities..... 42,592 10,031 (7,111) 55,322 (973) (19,980)
-------- ------- ------- -------- ------- -------
Net increase (decrease) in
cash and cash
equivalents.............. (311) 4,937 (4,006) (603) 1,626 5,632
Cash and cash equivalents at
beginning of period.............. 3,205 2,894 7,831 3,825 3,825 3,222
-------- ------- ------- -------- ------- -------
Cash and cash equivalents at end of
period........................... $ 2,894 $ 7,831 $ 3,825 $ 3,222 5,451 8,854
======== ======= ======= ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest....................... $ 4,946 $ 2,381 $ 7,772 $ 11,907 $ 1,277 $ 2,037
======== ======= ======= ======== ======= =======
Income taxes paid................ $ -- $ -- $ 20 $ 55 $ -- $ --
======== ======= ======= ======== ======= =======
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION

During 1994, 1995, and 1996, as discussed in note 3, the Partnership acquired
certain communities. In conjunction with the acquisitions, net assets and
liabilities were assumed as follows:

<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
---------------------------- ----------------------------
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current assets........................ $ -- $ 486 $ 892 $ 497
Other assets.......................... 481 -- -- 674
Debt.................................. -- (15,480) (8,010) --
Current liabilities................... (597) -- (384) (502)
Other liabilities..................... (580) (77) -- --
</TABLE>

As discussed in note 1, the Partnership engaged in a roll-up transaction in
1995.

See accompanying notes to combined and consolidated financial statements.

F-8
<PAGE> 82

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997

UNAUDITED INTERIM FINANCIAL INFORMATION

The consolidated balance sheet as of March 31, 1997, the consolidated
statements of operations and cash flows for the three months ended March 31,
1996 and 1997, and the consolidated statement of partners' equity for the three
months ended March 31, 1997 (1996 and 1997 interim financial information) have
been prepared by American Retirement Communities, L.P. (ARC-LP) and are
unaudited. In the opinion of the management of ARC-LP, the 1996 and 1997 interim
financial information includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair statement of the results of the 1996
and 1997 interim periods.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the 1996 and 1997 interim financial
information. The 1996 and 1997 interim financial information should be read in
conjunction with ARC-LP's audited financial statements appearing herein. The
results for the three months ended March 31, 1996 and March 31, 1997 may not be
indicative of operating results for the full year.

(1) BASIS OF PRESENTATION

The accompanying financial statements include the combined financial
statements of (1) American Retirement Corporation II, formerly known as American
Retirement Corporation (ARC) and its wholly owned subsidiaries; (2) Trinity
Towers Limited Partnership; (3) Fort Austin Limited Partnership; (4) Holley
Court Terrace L.P.; and (5) ARC-LP for the period January 1, 1994 through March
31, 1995 and, as a result of a purchase business combination, the consolidated
financial statements of these entities for the periods since April 1, 1995. In
these financial statements, activities or transactions occurring on or after
April 1, 1995 relate to those of the consolidated entity and are referred to as
those of the Partnership.

Prior to March 31, 1995, ARC-LP, and three limited partnerships (Trinity
Towers Limited Partnership, Fort Austin Limited Partnership and Holley Court
Terrace L.P.) were entities that were each managed and/or partially owned by
ARC. ARC provided management services to ARC-LP and was the managing general
partner of and had contracts to provide management services to each of the other
three limited partnerships. The accompanying financial statements for the
periods prior to March 31, 1995 are presented on a combined basis. All material
intercompany transactions and balances have been eliminated.

Effective March 31, 1995, substantially all of the shareholders of ARC and
the non-ARC partners of the three limited partnerships exchanged their common
stock or partnership interests for limited partnership interests in ARC-LP (the
Roll-up). Certain minority shareholders of ARC tendered their common stock for
approximately $1.6 million of cash. The Roll-up was accounted for as a purchase
business combination in which ARC was determined to be the accounting acquirer.
Accordingly, the ownership interests in ARC-LP and the three operating
partnerships not previously owned by ARC were recorded at fair value as of the
date of the Roll-up. The net assets acquired were allocated as follows:
land -- $2.6 million; buildings and improvements -- $20.4 million; and furniture
and fixtures -- $1.0 million. The general partner of ARC-LP is American
Retirement Communities, LLC, whose members are the senior management of ARC.

The accompanying financial statements for the periods beginning after March
31, 1995 are presented on a consolidated basis. All material intercompany
transactions and balances have been eliminated.

Concurrent with the Roll-up, holders of $10.0 million of notes receivable
from Fort Austin Limited Partnership exchanged their notes for an equivalent
amount of preferred limited partnership interests in the Partnership (see note
10).

As further discussed in note 16, a reorganization of the Partnership is
planned for 1997.

F-9
<PAGE> 83

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Use of Estimates and Assumptions

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

(b) Recognition of Revenue

Resident and health care revenues are reported at the estimated net
realizable amounts from residents, third-party payors, and others for services
rendered, including estimated retroactive adjustments under reimbursement
agreements with third-party payors. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered and adjusted in
future periods as final settlements are determined. Resident and health care
revenues, primarily Medicare, subject to retroactive adjustments, were 7.5%,
9.0%, and 7.8% of resident and health care revenues in 1994, 1995 and 1996,
respectively.

Management services revenue is recorded as earned and relates to providing
certain management and administrative support services under management
agreements. Such management agreements generally are for terms of three to five
years, but may be canceled by the owner, without cause, on three to six months
notice. The management services revenues are based either on a contractually
fixed fee or a percentage of revenues. Certain management agreements also
provide the Partnership with an incentive fee based on various performance
goals. Revenues are shown, in these financial statements, net of reimbursed
expenses. The reimbursed expenses were $2.5 million, $0.6 million, $1.7 million,
and $2.3 million for the year ended December 31, 1994, the three months ended
March 31, 1995, the nine months ended December 31, 1995, and the year ended
December 31, 1996, respectively.

All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.

(d) Marketable Securities

Marketable securities consist of U.S. Treasury securities and marketable
corporate debt securities. All of the Partnership's marketable securities are
classified as held-to-maturity securities which are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts. A decline
in the market value of any held-to-maturity security below cost that is deemed
other than temporary is charged to earnings resulting in the establishment of a
new cost basis for the security. Discounts are accreted over the life of the
related held-to-maturity security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.
Realized gains and losses are included in earnings and are derived using the
specific identification method for determining the cost of securities sold.

(e) Assets Limited as to Use

Assets limited as to use include assets held by lenders under loan
agreements in escrow for property taxes and property improvements, certificates
of deposit held as collateral for letters of credit, and resident deposits.

(f) Inventory

Inventory consists of supplies and is stated at the lower of cost
(first-in, first-out) or market.

F-10
<PAGE> 84

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(g) Land, Buildings and Equipment

Land, buildings, and equipment are stated at cost. Depreciation is provided
over the estimated useful life of each class of depreciable asset and is
computed on the straight-line basis. Buildings and improvements are depreciated
over 15 to 40 years, and furniture, fixtures and equipment are depreciated over
5 to 7 years.

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

(h) Other Assets

Other assets consist primarily of deferred financing charges being
amortized on the straight-line basis over the terms of the debt agreement and
management contract rights being amortized over the initial terms of the
management contracts.

(i) Income Taxes

Except for ARC, the entities included in these financial statements are
partnerships, and the income and losses of the partnerships and distributions
are allocated to the partners in accordance with the various partnership
agreements. Accordingly, no provision has been made in the accompanying
financial statements for federal and state income taxes related to the
partnerships since such taxes are the liabilities of the partners.

ARC follows the asset and liability method of accounting for income taxes,
under which deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

See note 16 for a discussion of pro forma taxes.

(j) Disclosure of Fair Value of Financial Instruments

The fair values of the financial instruments are estimates based upon
current market conditions and quoted market prices for the same or similar
instruments as of December 31, 1996. Book value approximates fair value for
substantially all of the Partnership's assets and liabilities meeting the
definition of a financial instrument.

(3) ACQUISITIONS

During 1994, Fort Austin Limited Partnership acquired the assets of four
retirement communities. Santa Catalina Villas was acquired on June 15, 1994 for
a purchase price of $10.9 million. Hampton at Post Oak, Park Place Retirement
Community, and Westlake Village were acquired on October 31, 1994 for a purchase
price of $34.7 million. The purchases were financed primarily through various
borrowings.

On February 1, 1995, ARC-LP acquired certain assets and assumed certain
liabilities of a retirement community in Denver, Colorado known as Heritage
Club. The purchase price was $22.0 million and was a combination of cash of
approximately $6.5 million and assumption of debt of $15.5 million.

F-11
<PAGE> 85

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Effective April 1, 1995, ARC-LP acquired all of the assets and all
contractual liabilities of a retirement community and related home health agency
in Lexington, Kentucky known as Richmond Place. The purchase price approximated
$10.3 million and included the payment of cash of $2.3 million and the
assumption of debt of $8.0 million.

Effective May 1, 1996, ARC-LP acquired all assets and all contractual
liabilities of a retirement community in Charlotte, North Carolina known as
Carriage Club of Charlotte and a retirement community in Jacksonville, Florida
known as Carriage Club of Jacksonville. The purchase price totaled $61.1 million
and was financed primarily through various borrowings. The lender has certain
rights, including the right to receive 30% of the net cash flows generated by
the two communities, 30% of any proceeds from the sale or refinancing of the two
communities in excess of certain defined amounts and the right of first offer
with respect to any proposed sale of the two communities. The purchase prices
have been allocated to the assets acquired and liabilities assumed based on fair
market value at the date of acquisition.

The above acquisitions were accounted for as purchases, and the
accompanying financial statements include the results of operations from the
date of the acquisitions. The following unaudited pro forma financial
information presents the results of operations as if the acquisitions noted
above occurring subsequent to January 1, 1995 had occurred on January 1, 1995,
after giving effect to certain adjustments primarily additional depreciation
expense and increased interest expense on debt related to the acquisitions. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the acquisitions occurred at the
beginning of the year:

<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Total revenues................................... $74,308 $79,543
======= =======
Income (loss) before extraordinary item.......... $ (93) $ 4,750
======= =======
Net income (loss)................................ $ (93) $ 2,415
======= =======
</TABLE>

(4) MARKETABLE SECURITIES

Marketable securities consist of securities which are classified as
held-to-maturity and are reported at amortized cost of $102,000 and $52,000 at
December 31, 1995 and 1996, respectively.

The amortized cost, which approximates market, for marketable securities
was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)

(IN THOUSANDS)
<S> <C> <C> <C>
Held-to-maturity:
U.S. Treasury securities............. $ 52 $52 $52
Exxon Capital Corporation marketable
corporate debt securities......... 50 -- --
---- --- ---
$102 $52 $52
==== === ===
</TABLE>

Maturities of marketable securities classified as held-to-maturity was due
between one and five years.

(5) ASSETS LIMITED AS TO USE

Assets limited as to use that are required for obligations classified as
current liabilities are reported as current assets. Assets limited as to use,
other than tenant deposits, are on deposit with the lender of the mortgage note
payable. The residency agreements which govern the terms under which some of the
communities lease apartments to residents require each resident to place a
tenant deposit with the Partnership in an amount equal to one month's rent. The
deposit functions as a security deposit. These deposits are carried

F-12
<PAGE> 86

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

as a liability on the balance sheet. In compliance with state laws when
applicable, cash reserve accounts are maintained for the tenant deposits. Assets
limited as to use consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)

(IN THOUSANDS)
<S> <C> <C> <C>
Operating expense reserve................. $ 349 $ 349 $ 180
Tax escrow account........................ 1,904 285 206
Capital improvement escrow................ 890 218 88
Bond principal and interest escrow........ 617 862 589
Tenant deposits........................... 1,292 2,114 2,110
Collateral for letter of credit with
bank.................................... 891 801 1,316
------ ------ ------
5,943 4,629 4,489
Less amounts classified as current
assets.................................. 2,411 1,022 975
------ ------ ------
Assets limited as to use, excluding
amounts classified as current assets.... $3,532 $3,607 $3,514
====== ====== ======
</TABLE>

(6) LAND, BUILDINGS, AND EQUIPMENT

A summary of land, buildings and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ ---------
(UNAUDITED)

(IN THOUSANDS)
<S> <C> <C> <C>
Land...................................... $ 18,326 $ 26,519 $ 25,282
Buildings and improvements................ 132,775 187,239 167,428
Furniture, fixtures and equipment......... 8,960 11,512 10,054
-------- -------- --------
160,061 225,270 202,764
Less accumulated depreciation............. 11,141 17,423 14,050
-------- -------- --------
148,920 207,847 188,714
Construction in progress.................. 162 5,277 3,588
-------- -------- --------
Land, buildings and equipment, net........ $149,082 $213,124 $192,302
======== ======== ========
</TABLE>

(7) OTHER ASSETS

Other assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)

(IN THOUSANDS)
<S> <C> <C> <C>
Deferred financing costs, net of
accumulated amortization............... $2,649 $1,129 $1,053
Long term investments.................... 435 -- --
Other.................................... 525 979 974
------ ------ ------
$3,609 $2,108 $2,027
====== ====== ======
</TABLE>

Long-term investments at December 31, 1995 consisted of an investment in
property held by ARC for resale or development. During September 1996,
Williamsburg Landing, Inc. (WLI), a third party, exercised its $1.3 million
option to purchase an unimproved parcel of land adjacent to Williamsburg
Landing, a facility managed by the Partnership. The basis of the land to ARC was
approximately $435,000 resulting in a net gain of approximately $865,000.

F-13
<PAGE> 87

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1996, the Partnership entered into a development management agreement
with WLI whereby the Partnership oversees the land development and administers
any relevant payments; however, WLI provides full funding of the development and
the Partnership has no financial obligation with respect to the project. The
development management agreement provides for a fixed fee to be paid by WLI to
the Partnership on a predetermined schedule throughout the term of the planned
development. The Partnership has a contractual right to participate in the
appreciation value upon any subsequent sale of the real property to the extent
of 20% of the net realized profit.

(8) ACCRUED EXPENSES

Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)

(IN THOUSANDS)
<S> <C> <C> <C>
Property taxes payable................... $2,454 $2,550 $1,630
Accrued payroll.......................... 628 1,439 1,761
Other.................................... 1,360 2,250 1,977
------ ------ ------
$4,442 $6,239 $5,368
====== ====== ======
</TABLE>

(9) LONG-TERM DEBT

A summary of long-term debt is as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Lexington-Fayette Urban County Government Residential
Facilities Revenue Bonds refinanced May 1, 1987,
collateralized by mortgage liens on property and
equipment. The refinancing bond issue is remarketed to
set the coupon rate on April 1 of each year (3.65% for
the year ended March 31, 1997) until the bonds mature on
April 1, 2015. Interest is due semi- annually on April 1
and October 1. .......................................... $ 8,010 $ 8,010 $ 8,010
Mortgage note payable bearing interest at a fixed rate of
8.2%. Interest is due monthly with principal payments due
monthly in varying amounts with remaining principal and
unpaid interest due at maturity on December 31, 2002. The
loan is secured by land, buildings, equipment and
assignment of rents and leases. See note (a) below. ..... 62,109 62,332 62,332
Mortgage note payable bearing interest at 2.65% above the
lender's composite commercial paper rate, as defined in
the promissory note (8.16% at December 31, 1996).
Interest is due monthly with principal payments due
monthly in varying amounts. The remaining principal and
unpaid interest is due at maturity on December 31, 2002.
The loan is secured by land, buildings, equipment and
assignment of rents and leases. See note (a) below. ..... -- 16,767 17,474
</TABLE>

F-14
<PAGE> 88

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Mortgage note payable bearing interest at a fixed rate of
9.28%. Interest is due monthly with principal payments of
$61,000 per month beginning May 1, 1997 and continuing
until and including April 30, 2003, the maturity date of
the note. The loan is secured by land, buildings,
equipment, assignment of leases and rents, and escrow
accounts. ............................................... -- 37,000 37,000
Mortgage note payable bearing interest at 3.25% above the
lender's composite commercial paper rate, as defined in
the promissory note (8.76% at December 31, 1996).
Interest is due monthly with principal payments of
$19,000 due monthly continuing until and including April
30, 2003, the maturity date of the note. The loan is
secured by land, buildings, equipment, assignment of
rents and leases, and escrow accounts. .................. -- 13,110 14,036
Note payable to a bank bearing interest at a floating rate
equal to the bank's index rate (8.25% at December 31,
1996). Interest is due monthly with quarterly principal
payments of an amount equal to 20% of the excess of total
project value over the amount of the note beginning
September 30, 1997, and continuing until December 31,
1998, the maturity date of the note. The note is secured
by a land deed. ......................................... -- 825 825
Mortgage note payable bearing interest at a fixed rate of
8.2%. Interest is due monthly with principal payments of
$20,000 per month with remaining principal and unpaid
interest due at maturity on December 31, 2001. The loan
is secured by land, buildings, equipment and assignment
of rents and leases. .................................... 15,260 15,020 14,960
Note payable to a bank bearing interest at 7.6%. Interest
due quarterly with principal due at maturity on June 30,
1997. The loan is secured by land, buildings and
equipment and assignment of rents and leases, and is
guaranteed by certain limited partners. This debt
instrument was repaid during January 1997 (note 15). See
note (b) below. ......................................... 5,000 5,000 --
Term loan note to a bank with a fixed interest rate of
10.07%. Principal and interest of $288,822 due quarterly
through March 31, 1998. This debt instrument was repaid
during January 1997 (note 15). See note (b) below. ...... 9,768 9,585 --
</TABLE>

F-15
<PAGE> 89

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Term loan note payable to a bank. Principal of $160,000 and
interest at a variable rate (8.04% at December 31, 1996)
tied to the LIBOR rate are due quarterly on the 10th day
of each January, April, July, and October until October
31, 1998, when all remaining principal and interest
become due. The note was amended during 1996 increasing
the face amount by $1,150,000. .......................... 2,000 2,630 2,470
Other long-term debt, generally payable monthly............ 98 410 461
-------- -------- --------
Total long-term debt..................................... 102,245 170,689 157,568
Less current portion..................................... 1,800 8,053 3,189
-------- -------- --------
Long-term debt, excluding current portion........ $100,445 $162,636 $154,379
======== ======== ========
</TABLE>

The aggregate scheduled maturities of long-term debt at December 31, 1996
are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997................................... $ 8,053(b)
1998................................... 14,402(b)
1999................................... 2,303
2000................................... 2,287
2001................................... 2,272
Thereafter............................. 141,372
--------
$170,689
========
</TABLE>

- ---------------
(a) In 1996, the Partnership refinanced two of its notes held with a capital
corporation. In 1995, the debt was in the form of two notes, one for $38.5
million and one for $23.5 million, both of which had a variable interest
rate of 4.5% above the lender's composite commercial paper rate. The
maturity date of both notes was October 31, 2001. The refinancing combined
the two notes into a single loan with a $62.0 million initial advance and a
$35.0 million commitment for additional borrowing. In 1996, the Partnership
borrowed $17.7 million against the remaining commitment. The initial $62.0
million advance bears interest at a fixed rate of 8.2%. Borrowings against
the remaining commitment bear interest at a variable rate of 2.65% over the
lenders' composite commercial paper rate. All principal reductions under the
advances are first applied to any balance outstanding under the variable
rate portion of the advances. The maturity of the loan is December 31, 2002.
In conjunction with the refinancing, the Partnership wrote off net financing
costs related to the previous notes of $2,335,000. This loss was recorded as
an extraordinary loss in 1996.
(b) Of the $14,585,000 of debt repaid in January 1997, $5,207,000 and $9,378,000
matured in 1997 and 1998, respectively (see note 15).

The Partnership is also required to comply with certain restrictive
financial and other covenants. At December 31, 1996, the Partnership was in
compliance with its debt covenants.

Under the terms of various long-term debt accounts, the Partnership is
required to maintain certain deposits with trustees. Such deposits are included
with assets limited as to use in these financial statements.

F-16
<PAGE> 90

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) EQUITY

As discussed in note 1, in connection with the Roll-up, the shareholders of
ARC and the partners in various partnerships exchanged their common stock or
partnership interests for limited partnership interests in the Partnership.
Additionally, holders of $10.0 million of notes payable by the Fort Austin
Limited Partnership exchanged these notes for special redeemable preferred
limited partnership interests. Such preferred interests were entitled to a
cumulative 15% preferred distribution. Such preferred interests were redeemable,
in whole or in part, at the option of the Partnership. During 1996, the
Partnership redeemed $4.8 million of the preferred interests and on December 4,
1996, the Partnership approved the redemption of the remaining $5.2 million.
Accordingly, the $5.2 million was removed from equity and shown as redemption
payable at December 31, 1996 (see note 15). During both 1995 and 1996, the
Partnership distributed $1.1 million of preferred distributions. There were no
cumulative unpaid preferred distributions at December 31, 1995 or 1996.

Distributions of all or any portion of the net cash flow from operations or
from the proceeds of capital transactions are at the discretion of the general
partner. Such distributions are made pursuant to formulas set forth in the
limited partnership agreement.

(11) OTHER INCOME (EXPENSE)

Other income (expense) consists of the following:

<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
--------------------------- ---------------------------
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gain on sale of assets........................ $155 $ -- $1,143 $874
Costs incurred for the roll-up (see note 1)... -- (964) (17) --
Other, net.................................... (57) (49) (207) (86)
---- ------- ------ ----
$ 98 $(1,013) $ 919 $788
==== ======= ====== ====
</TABLE>

The 1995 gain resulted primarily from the sale of certain assets and
liabilities of a retirement center by a general partnership in which ARC had an
investment, and the 1996 gain included a gain of approximately $865,000 from the
sale of land owned by ARC (see note 7).

F-17
<PAGE> 91

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) INCOME TAXES

As discussed in note 2, income taxes, other than those for ARC, are the
responsibility of the individual partners. Accordingly, the information shown
below relates solely to ARC.

The income tax expense (benefit), all of which was allocated to income,
consists of the following:

<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
--------------------------- ---------------------------
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. federal:
Current..................................... $ -- $ 20 $ 55 $ --
Deferred.................................... -- -- -- (823)
------ ------ ------ ------
-- 20 55 (823)
------ ------ ------ ------
State:
Current..................................... -- -- -- --
Deferred.................................... -- -- -- (97)
------ ------ ------ ------
Total......................................... $ -- $ 20 $ 55 $ (920)
====== ====== ====== ======
</TABLE>

For 1994 and 1995, ARC had no income tax expense other than an alternative
minimum tax expense of $75,000 in 1995. ARC has net operating loss carryforwards
available to offset further taxable income. Such carryforwards represent a
deferred tax asset. However, a valuation allowance was applied to produce a net
tax asset of zero for 1994 and 1995, since it was not likely the net operating
loss carryforwards could be realized. In 1996, ARC has recorded an income tax
benefit and a deferred tax asset of $920,000 because of the anticipated
utilization of net operating loss carryforwards that will offset taxable gains
recognized from a January 1997 sale/leaseback transaction (see note 15).

The components of deferred tax assets and liabilities at December 31, 1995
and 1996 are presented below:

<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Federal and state operating loss carryforward............. $1,900 $2,052
Deferred compensation..................................... 28 46
Other..................................................... -- 32
------ ------
Total gross deferred tax assets........................ 1,928 2,130
Less valuation allowance............................... 1,164 339
------ ------
764 1,791
------ ------
Deferred tax liabilities:
Partnership income or loss................................ 740 847
Accumulated depreciation.................................. 24 24
------ ------
Total gross deferred tax liabilities................... 764 871
------ ------
Net deferred tax asset................................. $ -- $ 920
====== ======
</TABLE>

F-18
<PAGE> 92

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1996, ARC had unused net operating loss carryforwards of
approximately $5.4 million for regular tax purposes, and $5.0 million for
alternative minimum tax purposes, which expire in varying amounts from 2004 to
2009. Additionally, the Corporation had alternative minimum tax credit
carryovers in the amount of approximately $143,000 at December 31, 1996, to be
used to offset regular tax in the future in the event the regular tax expense
exceeds the alternative minimum tax expense.

See note 16 for a discussion of pro forma income taxes.

(13) RETIREMENT PLAN

The Partnership has established the American Retirement Communities, L.P.
401(k) Plan (the "Plan") for eligible employees who have completed ninety days
of service and are at least 21 years old. This Plan is administered by the
Partnership with a bank serving as trustee. A Plan participant may elect to
contribute up to 20% of his or her annual compensation, subject to certain
Internal Revenue Service limitations. The Partnership can elect to make
voluntary contributions to the Plan. Such contributions will be allocated to
each participant's account. Participants vest in Partnership contributions at
20% per year beginning the first year of employment becoming fully vested after
five years of service. The Partnership contributed $54,000 and $277,000 to the
Plan during the periods ended December 31, 1995 and 1996, respectively.

At retirement, the participant receives the balance in his or her
individual account. Upon termination of employment prior to retirement, the
participant receives 100% of his or her individual contributions plus related
earnings and the vested portion of the Partnership's contributions and related
earnings. The nonvested portion of a terminated employee's account is
reallocated among the remaining Plan participants.

The Partnership has also established a post tax deferral plan (the 162
plan) for highly compensated employees. The Partnership and the individual
participant can both make contributions to the 162 plan and the individual has
freedom of investment elections. The Partnership contributed $99,000 and
$274,000 to the 162 plan during 1995 and 1996, respectively.

(14) COMMITMENTS AND CONTINGENCIES

The Partnership is subject to claims for medical malpractice liabilities;
however, management is unaware of any incidents which would have a material
impact on the Partnership's financial position or results of operations.

In the normal course of business, the Partnership is a defendant in certain
litigation. However, management is unaware of any action which would have a
material adverse impact on the financial position or results of operation of the
Partnership.

The Partnership is self-insured for workers' compensation claims with
excess loss coverage of $250,000 per individual claim and $1.3 million for
aggregate claims. The Partnership utilizes a third party administrator to
process and pay filed claims. The Partnership has accrued $300,000 to cover open
claims not yet settled and incurred but not reported claims as of December 31,
1996. Management is of the opinion that such amounts are adequate to cover any
such claims.

The Partnership leases its corporate facilities. The current lease expires
December 31, 2001 and requires annual rentals of $252,000.

The Partnership maintains a $2.5 million line of credit with a bank which
is available to provide working capital and to secure various debt instruments.
At December 31, 1996, $925,000 of this line of credit had been used to obtain
letters of credit.

At December 31, 1996, the Partnership has construction in process at the
two retirement communities acquired during the year. The costs to complete the
construction approximates $600,000. The Partnership has

F-19
<PAGE> 93

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

an outstanding commitment from a mortgage lender of $1.1 million to complete the
construction. In December 1996, The Partnership began an expansion of another
retirement community. The total cost of construction is expected to be
approximately $11.6 million. The partnership has a construction loan commitment
from a bank, as well as a permanent loan commitment from a mortgage lender to
cover the construction.

(15) SUBSEQUENT EVENTS

In January 1997, the Partnership entered into a sale-leaseback transaction
with a third party for the property, plant, and equipment of Holley Court
Terrace and Trinity Towers retirement communities owned by the Partnership. The
net cash proceeds to the Partnership were approximately $27.6 million. The lease
is an operating lease with the gain from the transaction of approximately $4.4
million to be recognized over the life of the lease, which is ten years. Lease
payments will consist of a base rent which totals approximately $2.5 million per
year and additional rent, not to exceed 2.5% over the prior year's rent, based
on an increase in revenues at the leased facilities. The agreement contains
three separate ten-year renewal options. The proceeds from the sale were used to
retire debt of approximately $14.6 million and to fund the redemption of the
special redeemable preferred limited partnership interests of $5.2 million.

(16) FORMATION OF NEW AMERICAN RETIREMENT CORPORATION AND PRO FORMA ADJUSTMENTS
(UNAUDITED)

The Partnership intends to proceed with a reorganization and a concurrent
initial public offering of the common stock of the reorganized entity.
Immediately following the effective date of the registration statement covering
the planned public offering of newly issued shares of common stock, the
Partnership will be reorganized such that all of its assets and liabilities will
be contributed to a newly formed corporation known as American Retirement
Corporation (New ARC) in exchange for common stock totaling 7,812,500 shares and
a promissory note to the Partnership in the original principal amount
approximating $25.0 million. The Partnership will distribute its common stock of
New ARC to its partners. New ARC plans to sell up to an additional 3,593,750
shares of its common stock in the initial public offering, including the
overallotment option; the proceeds of which will be utilized to, among other
things, repay the approximately $25.0 million promissory note to the
Partnership. The Partnership will distribute to its limited partners all amounts
received upon repayment of the Reorganization Note. New ARC will only commence
operations and issue shares of common stock upon completion of the
reorganization and initial public offering. New ARC currently has no assets or
liabilities. The Partnership's historical carrying value for assets and
liabilities will carry over to New ARC upon consummation of the reorganization.

(a) Pro Forma Statement of Earnings Information (Unaudited)

The income taxes on earnings of the Partnership, other than for ARC, are
the responsibility of the partners. The pro forma adjustments reflected on the
statement of earnings provide for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, assuming
the Partnership was subject to income taxes. Pro forma income tax expense has
been calculated using statutory U.S. federal and state tax rates and gives
effect to the recognition in 1996 of the $920,000 deferred tax asset as
described in Note 12.

(b) Pro Forma Net Earnings Per Share (unaudited)

Pro forma net earnings per share are based on the number of shares which
would have been outstanding assuming the partners had been shareholders and is
based on the 7,812,500 the partners will receive when the reorganization is
effective plus 1,562,500 shares for the approximately $25.0 million promissory
note assuming an offering price of $16.00 per share.

F-20
<PAGE> 94

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At the time of the reorganization and as a result of the conversion from a
limited partnership to a corporation, New ARC will record, as a one-time charge
to income, a deferred income tax liability of approximately $13.5 million
resulting from the difference between the accounting and tax bases of New ARC's
assets and liabilities.

F-21
<PAGE> 95

INDEPENDENT AUDITORS' REPORT

The Partners
American Retirement Communities, L.P.:

We have audited the accompanying combined statements of operations,
partners' equity and cash flows of the Carriage Club of Charlotte Limited
Partnership and Carriage Club of Jacksonville Limited Partnership for the four
months ended April 30, 1996. These combined financial statements are the
responsibility of the Partnerships' management. Our responsibility is to express
an opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the operations and cash flows of Carriage Club
of Charlotte Limited Partnership and Carriage Club of Jacksonville Limited
Partnership for the four month period ending April 30, 1996, in conformity with
generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Nashville, Tennessee
January 22, 1997

F-22
<PAGE> 96

CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP
AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP

COMBINED STATEMENT OF OPERATIONS

FOUR MONTHS ENDED APRIL 30, 1996
(IN THOUSANDS)

<TABLE>
<S> <C>
Resident and health care revenue............................ $4,086
Expenses:
Community operating expenses.............................. 2,498
Depreciation and amortization............................. 464
------
Total operating expenses............................... 2,962
------
Income from operations................................. 1,124
------
Other income (expense):
Interest expense.......................................... (833)
Interest income........................................... 21
------
Other income (expense), net............................ (812)
------
Net income........................................ $ 312
======
Pro forma earnings data (unaudited) (note 6):
Income as reported........................................ $ 312
Pro forma income taxes.................................... 119
------
Pro forma net income...................................... $ 193
======
</TABLE>

COMBINED STATEMENT OF PARTNERS' EQUITY

FOUR MONTHS ENDED APRIL 30, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
PARTNERS'
EQUITY
---------
<S> <C>
Combined balance, December 31, 1995......................... $1,090
Combined net income for the four months ended April 30,
1996................................................... 312
Contributions from partners............................... 646
------
Combined balance, April 30, 1996............................ $2,048
======
</TABLE>

See accompanying notes to combined financial statements.

F-23
<PAGE> 97

CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP
AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP

COMBINED STATEMENT OF CASH FLOWS

FOUR MONTHS ENDED APRIL 30, 1996
(IN THOUSANDS)

<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 312
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 464
Increase (decrease) in cash, due to changes in:
Resident, patient, and personal care receivables..... 4
Inventory............................................ 2
Prepaid expenses..................................... 8
Other assets......................................... (4)
Accounts payable..................................... (65)
Property taxes payable............................... (42)
Accrued expenses and other current liabilities....... 24
Tenant deposits...................................... (34)
-------
Net cash provided by operating activities......... 669
-------
Cash flows used by investing activities:
Expenditures for purchases of furniture, fixtures and
equipment............................................. (2,664)
Purchases of assets limited as to use.................. (81)
-------
Net cash used by investing activities............. (2,745)
-------
Cash flows from financing activities:
Contributions from partners............................ 646
Proceeds from the issuance of long-term debt........... 727
Expenditures for financing costs....................... (27)
-------
Net cash provided by financing activities................... 1,346
-------
Net decrease in cash and cash equivalents................... (730)
Cash and cash equivalents at beginning of period............ 1,963
-------
Cash and cash equivalents at end of period.................. $ 1,233
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................... $ 833
=======
</TABLE>

See accompanying notes to combined financial statements

F-24
<PAGE> 98

CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP
AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP

NOTES TO COMBINED FINANCIAL STATEMENTS
APRIL 30, 1996

(1) BASIS OF PRESENTATION

The accompanying financial statements include the combined financial
statements of Carriage Club of Charlotte Limited Partnership and Carriage Club
of Jacksonville Limited Partnership (the Partnerships) for the four months ended
April 30, 1996. Carriage Club of Charlotte is a retirement living community
located in Charlotte, North Carolina with 306 units. Carriage Club of
Jacksonville is a retirement community located in Jacksonville, Florida with 260
units. The limited partners in the Partnerships are shareholders of the
corporate general partners. Allocations of profits, losses and cash
distributions of the Partnership are made pursuant to the terms of the
partnership agreement. Generally, such allocations and cash distributions are
made to the partners in proportion to their respective ownership interests.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Use of Estimates and Assumptions

(b) Cash Equivalents

For the purposes of the statement of cash flows, the Partnerships consider
highly liquid debt investments with a maturity of three months or less when
purchased to be cash equivalents.

The entities included in these financial statements are partnerships, and
the income and losses of the partnerships and distributions are allocated to the
partners in accordance with the various partnership agreements. Accordingly, no
provision has been made in the accompanying financial statements for federal and
state income taxes related to the partnerships since such taxes are the
liabilities of the partners.

(d) Recognition of Revenue

(e) Depreciation

Depreciation is provided over the estimated useful life of each class of
depreciable asset and is computed on the straight-line basis.

F-25
<PAGE> 99

CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP
AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(3) RENTS

The partnerships lease the majority of their units to their tenants under
leases that have lease terms of one year with rents due monthly. The leases are
noncancelable except for instances of tenant death or tenant health reasons.

(4) MANAGEMENT AGREEMENT

Carriage Club of Charlotte and Carriage Club of Jacksonville each have a
management agreement with a wholly-owned subsidiary of American Retirement
Corporation II (ARC) which provides for management of daily operations of the
retirement communities. Each entity pays ARC $20,000 per month for these
services.

(5) SUBSEQUENT EVENTS

Effective May 1, 1996, American Retirement Communities, L.P. acquired all
assets and all contractual liabilities of Carriage Club of Charlotte Limited
Partnership and Carriage Club of Jacksonville Limited Partnership.

(6) PRO FORMA INCOME TAXES

The income taxes of the Partnerships are the responsibility of the
partners. The pro forma adjustment reflected in the statement of operations
provides for income taxes as if the Partnership were subject to the taxes.

F-26
<PAGE> 100

Back Inside Cover Page:

Omitted Graphic and Image Material

The Company's logo, accompanied by photographs of (i) residents conversing
in resident common area; (ii) an external view of one of the Company's
communities; (iii) an external view of one of the Company's communities; (iv)
residents gather around a piano; (v) a resident and a child paying the piano;
and (vi) a resident.
<PAGE> 101

======================================================

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 14
Use of Proceeds....................... 15
Dividend Policy and Prior
Distributions....................... 16
Capitalization........................ 17
Dilution.............................. 18
Unaudited Pro Forma Condensed Combined
Financial Information............... 19
Selected Combined and Consolidated
Financial Data...................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 37
Management............................ 53
Principal Shareholders................ 61
Certain Transactions.................. 62
Description of Capital Stock.......... 66
Shares Eligible for Future Sale....... 70
Underwriting.......................... 71
Legal Matters......................... 73
Experts............................... 73
Additional Information................ 73
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

------------------
UNTIL JUNE 24, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
3,125,000 SHARES

AMERICAN RETIREMENT CORPORATION (LOGO)

COMMON STOCK
--------------------------------
PROSPECTUS
--------------------------------
NATWEST SECURITIES LIMITED

EQUITABLE SECURITIES CORPORATION

MCDONALD & COMPANY
SECURITIES, INC.
May 30, 1997
======================================================