AMERICAN RETIREMENT CORP, 424A, 1997-09-08

AMERICAN RETIREMENT CORP
424A, 1997-09-08
SKILLED NURSING CARE FACILITIES

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<PAGE> 1

Filed Pursuant to Rule 424(a)
Registration No. 333-34339

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED SEPTEMBER 8, 1997

PROSPECTUS
$100,000,000

AMERICAN RETIREMENT CORPORATION (LOGO)

% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2004

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

The Debentures will be convertible into shares of common stock of the
Company, par value $0.01 per share (the "Common Stock"), at any time on or after
December 31, 1997 and prior to maturity, unless previously redeemed, at a
conversion price of $ per share (the "Conversion Price"), subject to
adjustment in certain events. The Common Stock is traded on the New York Stock
Exchange (the "NYSE") under the symbol "ACR." On September 5, 1997, the last
reported sale price of the Common Stock on the NYSE was $18.50 per share. See
"Price Range of Common Stock." The Debentures have been approved for listing on
the NYSE. At the request of the Company, up to $10,000,000 principal amount of
the Debentures 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."

Interest on the Debentures will be payable semi-annually on
and of each year, commencing , 1998. The Debentures
will be redeemable at any time on or after , 2000 at the option of the
Company, from time to time, in whole or in part, at a redemption price equal to
100% of the principal amount thereof, together with accrued interest thereon to
the redemption date. Upon a Change in Control (as defined), each holder of the
Debentures will have the right, subject to certain conditions and restrictions,
to require the Company to repurchase any or all outstanding Debentures owned by
such holder at 101% of the principal amount thereof, plus accrued and unpaid
interest.

The Debentures will be unsecured and subordinated in right of payment to
all present and future Senior Indebtedness (as defined) of the Company. In
addition, the Debentures will be effectively subordinated to liabilities
(including trade payables, but excluding intercompany liabilities) of the
Company's subsidiaries. As of June 30, 1997, Senior Indebtedness of the Company
and other liabilities to which the Debentures are effectively subordinated
totaled $176.8 million. See "Description of Debentures."

SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE DEBENTURES 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(1) COMMISSIONS(2) COMPANY(1)(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Debenture..................... % % %
- -------------------------------------------------------------------------------------------------------------
Total(4).......................... $ $ $
=============================================================================================================
</TABLE>

(1) Plus accrued interest, if any, from , 1997.

(2) See "Underwriting" for indemnification arrangements.

(3) Before deducting expenses payable by the Company estimated to be $400,000.

(4) The Company has granted the Underwriter a 30-day option to purchase up to an
additional $15,000,000 principal amount of Debentures solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, and Proceeds to
Company will be $ , $ , and $ ,
respectively. See "Underwriting."

The Debentures are offered by the Underwriter when, as, and if delivered to
and accepted by the Underwriter, 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 Debentures will be
made in New York, New York on or about , 1997.

SCHRODER & CO. INC.
September , 1997
<PAGE> 2

Omitted Graphic and Image Material

The following graphic and image material is omitted from the form of
the prospectus filed electronically:

A map of the United States depicting the location of the Company's
operating home health care agencies and a home health care agency under
development, and the location and resident capacity of the Company's operating
communities, communities under development, and a community to be acquired by
the Company in the future. The following caption accompanies the map: "The
above map shows the locations of the Company's existing owned, leased, and
managed senior living communities and home health care agencies, including
those under development, and a pending acquisition."

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
DEBENTURES OFFERED HEREBY OR THE COMMON STOCK, INCLUDING OVER-ALLOTMENT,
STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS, AND PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<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." Unless
otherwise indicated, all information in this Prospectus assumes no exercise of
the Underwriter's over-allotment option. Unless the context otherwise requires,
references to the Company include the Company, its subsidiary partnerships and
corporations, and the Company's predecessor, American Retirement Communities,
L.P. ("ARCLP" or the "Predecessor"). Immediately prior to the Company's initial
public offering in May 1997 (the "IPO"), the Predecessor was reorganized (the
"Reorganization") and all of its assets and liabilities were contributed to the
Company. See "The Company -- Reorganization."

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 22 senior living communities in 12 states, consisting of 12
owned communities, three leased communities, and seven managed communities, with
an aggregate capacity for approximately 5,800 residents. In the fourth quarter
of 1997, the Company expects to acquire a long-term leasehold in an additional
community located in Richmond, Virginia with capacity for 917 residents. The
Company operates 15 home health care agencies, ten of which are owned and five
of which are managed. At June 30, 1997, the Company's owned communities had a
stabilized occupancy rate of 95%, its leased communities had a stabilized
occupancy rate of 94%, and its managed communities had a stabilized occupancy
rate of 94% (stabilized communities are generally defined as communities or
expansions thereof that have (i) achieved 95% occupancy; or (ii) been open at
least 12 months). For the year ended December 31, 1996, and the six months ended
June 30, 1997, revenues attributable to the Company's senior living communities
accounted for 91.5% and 89.8%, respectively, of the Company's total revenues,
and revenues attributable to the Company's home health care agencies accounted
for 6.2% and 8.0%, 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 89.2% of the Company's total revenues for the six months ended
June 30, 1997 were derived from private pay sources.

Since 1992, the Company has experienced significant growth, primarily
through the acquisition of 14 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 by developing
senior living networks 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 27 free-standing assisted living residences, with an
estimated aggregate capacity for approximately 2,400 residents, and is expanding
nine of its existing communities to add capacity to accommodate approximately
800 additional residents.

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 ten years and have an average of 14 years of industry experience.
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

Debentures Offered............ $100,000,000 aggregate principal amount of the
Company's % Convertible Subordinated
Debentures Due 2004 ($115,000,000 if the
Underwriter's over-allotment option is
exercised in full).

Interest Payment Dates........ and , commencing
, 1998.

Maturity...................... Due on , 2004.

Conversion of Debentures...... The Debentures will be convertible at any time
on or after December 31, 1997 and prior to
maturity, unless previously redeemed, into
shares of Common Stock at a price of
$ per share, subject to adjustment in
certain events.

Optional Redemption........... The Debentures will be redeemable at any time
and from time to time on or after
, 2000 at the option of the
Company, in whole or in part, at a redemption
price equal to 100% of the principal amount
thereof, together with accrued interest thereon
to the redemption date.

Ranking....................... The Debentures will be subordinated to all
present and future Senior Indebtedness of the
Company. In addition, the Debentures will be
effectively subordinated to all liabilities of
the Company's subsidiaries. The Indenture will
not limit the amount of Senior Indebtedness or
other liabilities the Company or its
subsidiaries may incur from time to time. At
June 30, 1997, the Company's outstanding Senior
Indebtedness totaled approximately $90.9
million and liabilities of the Company's
subsidiaries totaled approximately $85.9
million.

Change in Control............. Upon a Change in Control, each holder of the
Debentures will have the right, subject to
certain conditions and restric-
4
<PAGE> 5

tions, to require the Company to repurchase any
or all outstanding Debentures owned by such
holder at 101% of the principal amount thereof,
plus accrued and unpaid interest.

Use of Proceeds............... For general corporate purposes, including the
development and construction of free-standing
assisted living residences, possible
acquisitions of businesses engaged in
activities similar or complementary to the
Company's business, and the possible prepayment
of indebtedness.

NYSE symbol................... "ACR04"

5
<PAGE> 6

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 six months ended June 30, 1996, and the year ended
December 31, 1996 is derived from the consolidated financial statements of the
Predecessor. The summary financial data for the six months ended June 30, 1997
is derived from the unaudited consolidated financial statements of the Company
and includes the operations of the Predecessor for the period January 1, 1997
through May 28, 1997 and the Company for the period May 29, 1997 through June
30, 1997. See "The Company -- Reorganization" and Note 1 to the Combined and
Consolidated Financial Statements.
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR
--------------------------- ---------------------------------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED SIX MONTHS
YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED JUNE 30, 1996
DECEMBER 31, MARCH 31, DECEMBER 31, ----------------------- ----------------------
1994 1995 1995 ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1)
------------ ------------ ------------ -------- ------------ ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................ $33,341 $12,356 $48,763 $ 75,617 $ 79,543 $34,806 $38,732
Operating expenses............ 28,126 10,270 38,730 60,066 63,861 27,313 30,685
------- ------- ------- -------- -------- ------- -------
Income from operations....... 5,215 2,086 10,033 15,551 15,682 7,493 8,047
Other income (expense), net... (5,053) (3,334) (6,682) (10,938) (11,353) (4,609) (5,718)
------- ------- ------- -------- -------- ------- -------
Income (loss) before income
taxes and extraordinary
item......................... 162 (1,248) 3,351 4,613 4,329 2,884 2,329
Income tax expense
(benefit) -- current(2)...... -- 20 55 (920) (920) -- --
Income tax expense --
deferred(3).................. -- -- -- -- -- -- --
------- ------- ------- -------- -------- ------- -------
Income (loss) before
extraordinary item........... 162 (1,268) 3,296 5,533 5,249 2,884 2,329
Extraordinary item(4)......... -- -- -- (2,335) (2,335) (2,335) (2,335)
------- ------- ------- -------- -------- ------- -------
Net income (loss)............. $ 162 $(1,268) $ 3,296 $ 3,198 $ 2,914 $ 549 $ (6)
======= ======= ======= ======== ======== ======= =======
Net income (loss) available
for distribution to partners
and shareholders............. $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590 $ (165) $ (330)
======= ======= ======= ======== ======== ======= =======

UNAUDITED PRO FORMA TAX
DATA(5):
Income before income taxes and
extraordinary item........... $ 4,613 $ 4,329 $ 2,884 $ 2,329
Pro forma income tax expense.. 820 712 1,096 886
-------- -------- ------- -------
Pro forma income before
extraordinary item........... $ 3,793 $ 3,617 $ 1,788 $ 1,443
======== ======== ======= =======
Pro forma income before
extraordinary item available
for distribution to partners
and shareholders............. $ 2,689 $ 3,293 $ 1,074 $ 1,119
======== ======== ======= =======
Pro forma per share data:
Income before extraordinary
item available for
distribution to partners
and shareholders........... $ 0.29 $ 0.35 $ 0.11 $ 0.12
======== ======== ======= =======
Shares used in computing pro
forma per share data(7).... 9,375 9,375 9,375 9,375
======== ======== ======= =======
Pro forma as adjusted per share
data(8):
Income before extraordinary
item available for
distribution to partners
and shareholders........... $ 0.29 $ 0.10
======== =======
Shares used in computing pro
forma as adjusted per share
data(9).................... 11,406 11,406
======== =======

SIX
MONTHS
ENDED
JUNE 30,
1997
--------

<S> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................ $44,389
Operating expenses............ 35,867
-------
Income from operations....... 8,522
Other income (expense), net... (6,308)
-------
Income (loss) before income
taxes and extraordinary
item......................... 2,214
Income tax expense
(benefit) -- current(2)...... 92
Income tax expense --
deferred(3).................. 10,728
-------
Income (loss) before
extraordinary item........... (8,606)
Extraordinary item(4)......... --
-------
Net income (loss)............. $(8,606)
=======
Net income (loss) available
for distribution to partners
and shareholders............. $(8,606)
=======
UNAUDITED PRO FORMA TAX
DATA(5):
Income before income taxes and
extraordinary item........... $ 2,214
Pro forma income tax expense.. 841(6)
-------
Pro forma income before
extraordinary item........... $ 1,373
=======
Pro forma income before
extraordinary item available
for distribution to partners
and shareholders............. $ 1,373
=======
Pro forma per share data:
Income before extraordinary
item available for
distribution to partners
and shareholders........... $ 0.14
=======
Shares used in computing pro
forma per share data(7).... 9,752
=======
Pro forma as adjusted per share
Income before extraordinary
item available for
distribution to partners
and shareholders........... $ 0.12
=======
Shares used in computing pro
forma as adjusted per share
data(9).................... 11,406
=======
</TABLE>

6
<PAGE> 7

<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------------
AS
ACTUAL ADJUSTED(10)
-------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 21,863 $118,963
Working capital............................................. 15,472 112,572
Total assets................................................ 246,072 346,072
Long-term debt, including current portion................... 167,259 267,259
Shareholders' equity........................................ 50,122 50,122
</TABLE>

<TABLE>
<CAPTION>
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR
--------------------------- ----------------------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, ---------------------- JUNE 30, JUNE 30,
1994 1995 1995 ACTUAL PRO FORMA(1) 1996 1997
------------ ------------ ------------ ------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Adjusted EBITDA(11)............. $8,407 $3,262 $15,815 $23,679 $23,198 $10,782 $12,031
Ratio of Adjusted EBITDA to
interest expense(12)........... 1.6x 1.4x 2.1x 2.0x 1.9x 2.3x 1.9x
Ratio of earnings to fixed
charges(13).................... 1.0x 0.5x 1.4x 1.4x 1.3x 1.6x 1.3x
Distribution to partners,
including preferred
distributions.................. $2,580 $1,400 $ 5,189 $ 7,139 $ 6,359(14) $ 3,546 $ 2,500(15)
OPERATING DATA:
Revenue mix:
Private pay.................... 93.0% 92.2% 91.2% 92.4% 92.5% 91.3% 89.2%
Medicare and other(16)......... 7.0 7.8 8.8 7.6 7.5 8.7 10.8
------ ------ ------- ------- ------- ------- -------
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 3,369 3,002
Leased......................... -- -- -- -- 483 -- 573
Managed........................ 3,315 3,079 3,008 2,159 2,159 2,159 2,159
------ ------ ------- ------- ------- ------- -------
Total.................... 5,456 5,465 5,602 5,528 5,528 5,528 5,734
Average occupancy rate:
Owned.......................... 89% 91% 93% 94% 94% 93% 94%
Leased......................... -- -- -- -- 89 -- 93
Managed........................ 93 95 91 91 90 90 93
------ ------ ------- ------- ------- ------- -------
Total.................... 90% 93% 92% 92% 92% 92% 93%
</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) Periods prior to 1997 reflect 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. Income tax expense for the six months ended
June 30, 1997 reflects income taxes incurred by the Company during the
period May 29, 1997 (the day following the Reorganization) through June 30,
1997. During the period January 1, 1997 through the date of the
Reorganization (May 28, 1997), the Predecessor did not incur income tax
expense because it was a partnership. See Note 12 to the Combined and
Consolidated Financial Statements.

(3) At the time of the Reorganization and as a result of the conversion from a
non-taxable to a taxable entity, the Company recorded as a one-time charge
to income a net deferred income tax expense of approximately $10.7 million
resulting from 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.

(4) Amount represents loss on early extinguishment of debt. See Note 9 to the
Combined and Consolidated Financial Statements.

(5) 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 unaudited pro forma tax 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 (2) above.

(6) The unaudited pro forma tax data for the six months ended June 30, 1997,
does not give effect to a non-recurring $10.7 million ($1.10 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 footnote (3) above and Note 16 to the Combined and
Consolidated Financial Statements.
7
<PAGE> 8

(7) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500
shares, representing the value of the $21.9 million principal amount of a
promissory note issued to the Predecessor in connection with the
Reorganization ("the Reorganization Note") (based upon the IPO price of
$14.00 per share). For the six months ended June 30, 1997, also includes
the weighted average effect of (a) the 3,593,750 shares sold by the Company
in the IPO; and (b) Common Stock equivalents.

(8) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Reorganization; (b) the sale of the 3,593,750
shares sold by the Company in the IPO, and the application of a portion of
the net proceeds to retire the Reorganization Note; and (c) for the year
ended December 31, 1996 data, the transactions described in footnote (1)
above.

(9) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750
shares sold by the Company in the IPO.

(10) Adjusted to reflect the sale of the Debentures offered hereby.

(11) Adjusted EBITDA represents earnings before deductions for interest expense,
income taxes, depreciation and amortization and excludes the non-recurring
charge related to the 1995 Roll-Up and extraordinary loss from early
extinguishment of debt. The Company believes that Adjusted EBITDA provides
additional information for determining its ability to meet its future debt
service, capital expenditure and working capital requirements. Adjusted
EBITDA is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to net
income (loss) or income from operations as an indicator of the Company's
operating performance, or to cash flows as a measure of the Company's
liquidity.

(12) For purposes of this computation, interest expense includes interest
capitalized and net interest expense.

(13) For purposes of this computation, earnings are defined as income (loss)
before income taxes and extraordinary item and fixed charges (excluding
capitalized interest). Fixed charges are defined as interest expensed and
capitalized, amortization of capitalized financing costs, and the portion
of operating lease rental expense that is representative of the interest
factor. Earnings were inadequate to cover fixed charges for the three
months ended March 31, 1995 by $1.2 million.

(14) Reflects the elimination, on a pro forma basis, of the preferred
distributions paid with respect to $5.2 million of the Predecessor'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.

(15) Reflects the payment by ARCLP of an aggregate of $2.5 million to its
partners (the "Tax Distribution"), which amount represented the approximate
amount of income taxes associated with the Predecessor's earnings in 1997
through the date of the Reorganization.

(16) Includes Medicare (including Medicare-related private co-insurance) and
Medicaid.
8
<PAGE> 9

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 June 30, 1997, the Company had long-term debt (including current
portion) of $167.3 million, of which $144.3 million was payable to one lender,
and was obligated to pay annual rental obligations of approximately $3.0 million
under long-term operating leases. In addition, the Company has signed a
definitive agreement to acquire a long-term leasehold interest in a community
located in Richmond, Virginia that will require annual rental payments of
approximately $4.3 million. 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"). Currently, the Company has been allocated
$41.6 million and $4.7 million, respectively, in commitments under 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, the
remaining proceeds from the IPO, the proceeds from the sale of the Debentures
offered hereby, 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 June 30, 1997, the Company's existing debt and lease agreements
required aggregate annual payments for the years ending December 31, 1997, 1998,
1999, 2000, and 2001, assuming no change in the Company's average interest cost
(8.4% at June 30, 1997), ranging from approximately $20.7 million to $22.9
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
maintains a $2.5 million line of credit that 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 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.

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<PAGE> 10

At June 30, 1997, $48.3 million in principal amount, or approximately
28.9%, of the Company's indebtedness, bore interest at floating rates, with a
weighted average annual rate of 7.9%. 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 obligations and could have a material adverse effect on the
Company's business, financial condition, and results of operations.

SUBORDINATION

The Debentures will be expressly subordinated in right of payment to all
existing and future Senior Indebtedness of the Company. At June 30, 1997, the
Company's Senior Indebtedness aggregated approximately $90.9 million. In
addition, the Debentures will be effectively subordinated to the liabilities
(including trade payables but excluding intercompany liabilities) of the
Company's subsidiaries, which were approximately $85.9 million at June 30, 1997.
Neither the Indenture nor the Debentures will limit the ability of the Company
or any of its subsidiaries to incur additional Senior Indebtedness or other
liabilities. The Indenture and the Debentures will not contain any financial
covenants or similar restrictions with respect to the Company and, therefore,
the holders of the Debentures will have no protection (other than rights upon
Events of Default as described under "Description of Debentures") from adverse
changes in the Company's financial condition. By reason of the subordination of
the Debentures, in the event of insolvency, bankruptcy, liquidation,
reorganization, dissolution, or winding up of the business of the Company or
upon a default in payment with respect to any indebtedness of the Company or an
event of default with respect to such indebtedness resulting in the acceleration
thereof, the assets of the Company will be available to pay the amounts due on
the Debentures only after all Senior Indebtedness and all liabilities of the
Company's subsidiaries have been paid in full.

DISCRETIONARY USE OF PROCEEDS

The Company intends to use the net proceeds of the offering for general
corporate purposes, including the development and construction of free-standing
assisted living residences, possible acquisitions of businesses engaged in
activities similar or complementary to the Company's business, and the possible
prepayment of indebtedness. Accordingly, the Company will have broad discretion
as to the application of such proceeds. See "Use of Proceeds."

DEPENDENCE ON PRIVATE PAY RESIDENTS

Approximately 92.4% of the Company's total revenues for the year ended
December 31, 1996 and approximately 89.2% of the Company's total revenues for
the six months ended June 30, 1997 were attributable to private pay sources. For
the same periods, 7.6% and 10.8%, 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.

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
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.

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<PAGE> 11

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."

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 27 free-standing assisted living
residences, with an estimated aggregate capacity for approximately 2,400
residents, and is expanding nine of its existing senior living communities to
add capacity to accommodate approximately 800 additional 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.

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<PAGE> 12

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."

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

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<PAGE> 13

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

The Company's officers and directors and entities controlled by them,
collectively, beneficially own approximately 40.0% of the outstanding shares of
Common Stock. Accordingly, such persons 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 Debentures
and the Common Stock. See "Principal Shareholders."

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,

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<PAGE> 14

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

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

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<PAGE> 15

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. In the event of
any Change in Control of the Company, each holder of the Debentures will have
the right, at such holder's option and subject to certain conditions and
restrictions, to require the Company to repurchase all or any part of such
holder's Debentures. The right to require the Company to repurchase Debentures
may delay, deter, or prevent a change in control of the Company. See
"Description of Debentures" and "Description of Capital Stock -- Certain
Provisions of the Charter, Bylaws, and Tennessee Law."

ABSENCE OF PUBLIC MARKET FOR THE DEBENTURES

The Debentures are a new class of securities for which there is currently
no public market. Although the Debentures have been approved for listing on the
NYSE, there can be no assurance as to the liquidity of the market for the
Debentures that may develop, the ability of the holders to sell their
Debentures, or the prices at which holders of the Debentures would be able to
sell their Debentures. If a market for the Debentures does develop, the
Debentures may trade at a discount from their initial public offering price,
depending on prevailing interest rates, the market for similar securities,
performance of the Company, performance of the senior living industry, and other

factors. See "Underwriting."

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<PAGE> 16

FORWARD-LOOKING STATEMENTS

This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
the discussions of the Company's operating and growth strategy, including its
development plans and possible acquisitions. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, the factors set forth under the caption "Risk Factors" in this
Prospectus. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.

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<PAGE> 17

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 22 senior living communities in 12 states, consisting of 12 owned
communities, three leased communities, and seven managed communities, with an
aggregate capacity for approximately 5,800 residents. In the fourth quarter of
1997, the Company expects to acquire a long-term leasehold in an additional
community located in Richmond, Virginia with capacity for 917 residents. The
Company also operates 15 home health care agencies, ten of which are owned and
five of which are managed. At June 30, 1997, the Company's owned communities had
a stabilized occupancy rate of 95%, its leased communities had a stabilized
occupancy rate of 94%, and its managed communities had a stabilized occupancy
rate of 94%. For the year ended December 31, 1996 and the six months ended June
30, 1997, revenues attributable to the Company's senior living communities
accounted for 91.5% and 89.8%, respectively, of the Company's total revenues,
and revenues attributable to the Company's home health care agencies accounted
for 6.2% and 8.0%, 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 89.2% of the Company's total revenues for the six months ended
June 30, 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 IPO. 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

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 was
American Retirement Communities, LLC, a Tennessee limited liability company (the
"LLC"), whose members included 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> 18

REORGANIZATION

Prior to the IPO, 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 $21.9 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 6,462,500 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 IPO, the Reorganization Note was repaid by
the Company out of the net proceeds from the IPO and such amount was distributed
to the limited partners of ARCLP in liquidation in accordance with the limited
partners' ARCLP contribution accounts. See "Certain Transactions --
Reorganization."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Debentures offered
hereby are estimated to be approximately $97.1 million (approximately $111.7
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 intends to use the net proceeds for
general corporate purposes, including the development and construction of
additional free-standing assisted living residences, possible acquisitions of
businesses engaged in activities similar or complementary to the Company's
business, and the possible prepayment of indebtedness at such time as management
deems to be in the best interest of the Company. Any such debt prepayment may be
subject to substantial prepayment penalties and no assurance can be given that
the Company will prepay any indebtedness.

The Company currently has eight owned communities undergoing expansions and
27 free-standing assisted living residences under development. The estimated
cost to complete and lease-up the Company's existing expansion and development
projects ranges from $250.0 million to $300.0 million. In addition, the Company
has reached an agreement in principle to acquire a long-term leasehold interest
in a community located in Richmond, Virginia. See "Business -- Recent and
Pending Acquisitions." The Company believes the remaining net proceeds from the
IPO, the net proceeds from this 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 and acquisition 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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<PAGE> 19

PRICE RANGE OF COMMON STOCK

The Company sold shares of Common Stock in the IPO at a price per share of
$14.00. Since the date of the IPO (May 30, 1997), the Common Stock has traded on
the NYSE under the symbol "ACR." The following table sets forth the range of
high and low sales prices for the Common Stock for the periods indicated on the
NYSE.

<TABLE>
<CAPTION>
1997 HIGH LOW
- ---- ------ ------
<S> <C> <C>
Second Quarter (beginning May 30, 1997)..................... $17.88 $14.25
Third Quarter (through September 5, 1997)................... 21.88 17.88
</TABLE>

On September 5, 1997, the last reported sale price for the Common Stock on
the NYSE was $18.50 per share. The Company estimates that as of August 22, 1997,
there were approximately 135 holders of record of the Common Stock.

DIVIDEND POLICY AND PRIOR DISTRIBUTIONS

It is the policy of the Company's Board of Directors to retain all future
earnings to finance the operation and expansion of the Company's business.
Accordingly, the Company 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 Reorganization, the Predecessor and the Predecessor Entities
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 the second
quarter of 1997, ARCLP paid the Tax Distribution, which approximated the income
taxes associated with the Predecessor's earnings in 1997 through the date of the
Reorganization. In addition, immediately following the consummation of the IPO,
and in connection with ARCLP's liquidation, the proceeds from the repayment of
the Reorganization Note were distributed by ARCLP to its limited partners,
generally in accordance with their respective contribution accounts. See "The
Company -- Reorganization" and "Certain Transactions -- Reorganization."

19
<PAGE> 20

CAPITALIZATION

The following table sets forth the capitalization of the Company (i) at
June 30, 1997, (ii) as adjusted to reflect the issuance and sale of the
Debentures offered hereby, and (iii) as further adjusted to give effect to the
assumed conversion of all of the Debentures at the initial Conversion Price.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Condensed
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------------------------
ASSUMING
100%
ACTUAL AS ADJUSTED CONVERSION
----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt, including current portion of long-term
debt...................................................... $ 5,935 $ 5,935 $ 5,935
======== ======== ========
Long-term debt:
Long-term unsubordinated debt, less current portion....... $161,324 $161,324 $161,324
% Convertible Subordinated Debentures due 2004........ -- 100,000 --
-------- -------- --------
Total long-term debt, less current portion.......... $161,324 $261,324 $161,324

Shareholders' equity:
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; 11,406,250 shares issued and outstanding,
actual and as adjusted; shares issued and
outstanding assuming 100% conversion of the
Debentures(1)........................................... 114 114
Additional paid-in capital................................ 60,213 60,213
Accumulated deficit....................................... (10,205) (10,205) (10,205)
-------- -------- --------
Total shareholders' equity.............................. 50,122 50,122 147,222
-------- -------- --------
Total capitalization.................................... $211,446 $311,446 $308,546
======== ======== ========
</TABLE>

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

(1) Does not include 627,500 shares of Common Stock reserved for issuance
pursuant to outstanding stock options under the Company's Stock Incentive
Plan. See "Management -- Compensation Pursuant to Plans -- 1997 Stock
Incentive Plan" and "Description of Capital Stock."

20
<PAGE> 21

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The accompanying Unaudited Pro Forma Consolidated Statements of Operations
for the six months ended June 30, 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 six
months ended June 30, 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 June 30, 1997
or for the six months then ended because there were no transactions for which
pro forma financial information is required for that period.

21
<PAGE> 22

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(I):
Income before extraordinary item available for
distribution to partners and
shareholders(J)..............................
Shares used in computing pro forma as adjusted
per share data(K)............................

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(I):
Income before extraordinary item available for
distribution to partners and
shareholders(J).............................. $ 0.29
========
Shares used in computing pro forma as adjusted
per share data(K)............................ 11,406
========
</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

22
<PAGE> 23

(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 $21.9 million principal amount of the
Reorganization Note (based upon the IPO price of $14.00 per share).

(I) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Reorganization; (b) the sale of the 3,593,750
shares sold by the Company in the IPO, and the application of a portion of
the net proceeds to retire the Reorganization Note; (c) the Carriage Club
Acquisitions; and (d) the Sale-Leaseback Transactions and the application
of a portion of the net proceeds therefrom to retire debt.

(J) Does not reflect a $10.7 million ($1.10 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.

(K) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750
shares sold by the Company in the IPO.

23
<PAGE> 24

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 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............ $33,888 $4,086 $ -- $ --
Management services revenue................. 918 -- (160) --
------- ------ -------- -----
Total revenues............................ 34,806 4,086 (160) --
Operating expenses:
Community operating expense................. 21,727 2,498 (160) --
General and administrative.................. 2,421 -- -- --
Lease expense............................... -- -- -- 1,046
Depreciation and amortization............... 3,165 464 104 (580)
------- ------ -------- -----
Total operating expenses.................. 27,313 2,962 (56) 466
------- ------ -------- -----
Income (loss) from operations............. 7,493 1,124 (104) (466)
------- ------ -------- -----
Other income (expense):
Interest expense............................ (4,733) (833) (991) 694
Interest income............................. 132 21 -- --
Other....................................... (8) -- -- --
------- ------ -------- -----
Other income (expense), net............... (4,609) (812) (991) 694
------- ------ -------- -----
Income (loss) before income taxes and
extraordinary item...................... 2,884 312 (1,095) 228
Income tax expense (benefit).............. -- -- -- --
------- ------ -------- -----
Income (loss) before extraordinary item... $ 2,884 $ 312 $ (1,095) $ 228
======= ====== ======== =====
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item.......................... $ 2,884 $ 312 $ (1,095) $ 228
Pro forma income tax expense (benefit)(E)..... 1,096 119 (416) 87
------- ------ -------- -----
Pro forma income (loss) before extraordinary
item........................................ 1,788 193 (679) 141
Preferred return on special redeemable
preferred limited partnership
interests(F)................................ (714) -- -- 390
------- ------ -------- -----
Pro forma income before extraordinary item
available for distribution to partners and
shareholders................................ $ 1,074 $ 193 $ (679) $ 531
======= ====== ======== =====
Pro forma per share data:
Income before extraordinary item available
for distribution to partners and
shareholders(G)........................... $ 0.11
=======
Shares used in computing pro forma per share
data(H)................................... 9,375
=======
Pro forma as adjusted per share data(I):
Income before extraordinary item available
for distribution to partners and
shareholders(J)...........................
Shares used in computing pro forma as
adjusted per share data(K)................

PRO FORMA
---------

<S> <C>
Revenues:
Resident and health care revenue............ $37,974
Management services revenue................. 758
-------
Total revenues............................ 38,732
Operating expenses:
Community operating expense................. 24,065
General and administrative.................. 2,421
Lease expense............................... 1,046
Depreciation and amortization............... 3,153
-------
Total operating expenses.................. 30,685
-------
Income (loss) from operations............. 8,047
-------
Other income (expense):
Interest expense............................ (5,863)
Interest income............................. 153
Other....................................... (8)
-------
Other income (expense), net............... (5,718)
-------
Income (loss) before income taxes and
extraordinary item...................... 2,329
Income tax expense (benefit).............. --
-------
Income (loss) before extraordinary item... $ 2,329
=======
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item.......................... $ 2,329
Pro forma income tax expense (benefit)(E)..... 886
-------
Pro forma income (loss) before extraordinary
item........................................ 1,443
Preferred return on special redeemable
preferred limited partnership
interests(F)................................ (324)
-------
Pro forma income before extraordinary item
available for distribution to partners and
shareholders................................ $ 1,119
=======
Pro forma per share data:
Income before extraordinary item available
for distribution to partners and
shareholders(G)........................... $ 0.12
=======
Shares used in computing pro forma per share
data(H)................................... 9,375
=======
Pro forma as adjusted per share data(I):
Income before extraordinary item available
for distribution to partners and
shareholders(J)........................... $ 0.10
=======
Shares used in computing pro forma as
adjusted per share data(K)................ 11,406
=======
</TABLE>

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

(A) Reflects the historical consolidated statement of operations of the
Predecessor for the six months ended June 30, 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

24
<PAGE> 25

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 $580,000 of depreciation and amortization
expense on assets sold in the Sale-Leaseback Transactions; (ii) lease
expense of approximately $1.3 million, less $228,000 representing
amortization of the deferred gain on the Sale-Leaseback Transactions ($4.4
million over ten years); and (iii) elimination of $694,000 of interest
expense on debt retired with a portion of the net proceeds from the
Sale-Leaseback Transactions.

(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.

(K) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750
shares sold by the Company in the IPO.

25
<PAGE> 26

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 six months ended June 30, 1996 are
derived from the unaudited consolidated financial statements of the Predecessor.
The selected statements of operations and balance sheet data as of and for the
six months ended June 30, 1997 are derived from the unaudited consolidated
financial statements of the Company and includes the operations of the
Predecessor for the period January 1, 1997 through May 28, 1997 and the Company
for the period May 29, 1997 through June 30, 1997. In the opinion of the
Company's management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1997 are not necessarily indicative of
the results that may be expected for 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
------------------------------------------- -------------------------------------
NINE MONTHS
YEARS ENDED THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, ENDED DECEMBER DECEMBER 31, 1996
--------------------------- MARCH 31, 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) --
current(3)............................ -- -- -- 20 55 (920) (920)
Income tax expense -- deferred(4)...... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
item.................................. (453) 714 162 (1,268) 3,296 5,533 5,249
Extraordinary item(5).................. -- -- -- -- -- (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(6).......................... -- -- -- -- (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
----------------------
SIX
SIX MONTHS MONTHS
ENDED JUNE 30, 1996 ENDED
---------------------- JUNE 30,
ACTUAL PRO FORMA(1) 1997
------- ------------ --------

<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and health care revenue...... $33,888 $37,974 $43,424
Management services revenue........... 918 758 965
------- ------- -------
Total revenues.................. 34,806 38,732 44,389
Operating expenses:
Community operating expense........... 21,727 24,065 27,519
Lease expense......................... -- 1,046 1,072
General and administrative............ 2,421 2,421 4,070
Depreciation and amortization......... 3,165 3,153 3,206
------- ------- -------
Total operating expenses............ 27,313 30,685 35,867
------- ------- -------
Income from operations.............. 7,493 8,047 8,522
------- ------- -------
Other income (expense):
Interest expense...................... (4,733) (5,863) (6,611)
Interest income....................... 132 153 364
Other................................. (8) (8) (61)
------- ------- -------
Other income (expense), net......... (4,609) (5,718) (6,308)
------- ------- -------
Income (loss) before income taxes
and extraordinary item............ 2,884 2,329 2,214
Income tax expense (benefit) --
current(3)............................ -- -- 92
Income tax expense -- deferred(4)...... -- -- 10,728
------- ------- -------
Income (loss) before extraordinary
item.................................. 2,884 2,329 (8,606)
Extraordinary item(5).................. (2,335) (2,335) --
------- ------- -------
Net income (loss)...................... 549 (6) (8,606)
Preferred return on special redeemable
preferred limited partnership
interests(6).......................... (714) (324) --
------- ------- -------
Net income (loss) available for
distribution to partners and
shareholders.......................... $ (165) $ (330) $(8,606)
======= ======= =======
Distribution to partners, excluding
preferred distributions............... $ 2,832 $ 2,832 $ 2,500(7)
======= ======= =======
</TABLE>

26
<PAGE> 27

<TABLE>
<CAPTION>
PREDECESSOR
---------------------------------------------
YEAR ENDED SIX MONTHS SIX MONTHS
DECEMBER 31, 1996 ENDED JUNE 30, 1996 ENDED
--------------------- --------------------- JUNE 30,
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(8):
Income before income taxes and extraordinary item........... $4,613 $4,329 $2,884 $2,329 $2,214
Pro forma income tax expense................................ 820 712 1,096 886 841(9)
------ ------ ------ ------ ------
Pro forma income before extraordinary item.................. 3,793 3,617 1,788 1,443 1,373
Preferred return on special redeemable preferred limited
partnership interests(6)................................... (1,104) (324) (714) (324) --
------ ------ ------ ------ ------
Pro forma income before extraordinary item available for
distribution to partners and shareholders.................. $2,689 $3,293 $1,074 $1,119 $1,373
====== ====== ====== ====== ======
Pro forma per share data:
Income before extraordinary item........................... $ 0.40 $ 0.39 $ 0.19 $ 0.15 $ 0.14
Preferred return on special redeemable preferred limited
partnership interests.................................... (0.12) (0.03) (0.08) (0.03) --
------ ------ ------ ------ ------
Income before extraordinary item available for distribution
to partners and shareholders............................. $ 0.29 $ 0.35 $ 0.11 $ 0.12 $ 0.14
====== ====== ====== ====== ======
Shares used in computing pro forma per share data(10)...... 9,375 9,375 9,375 9,375 9,752
====== ====== ====== ====== ======
Pro forma as adjusted per share data(11):
Income before extraordinary item........................... $ 0.32 $ 0.13 $ 0.12
Preferred return on special redeemable preferred limited
partnership interests.................................... (0.03) (0.03) --
------ ------ ------
Income before extraordinary item available for distribution
to partners and shareholders............................. $ 0.29 $ 0.10 $ 0.12
====== ====== ======
Shares used in computing pro forma as adjusted per share
data(12)................................................. 11,406 11,406 11,406
====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
At December 31, At June 30, 1997
-------------------------------------------------- -------------------------
Predecessor Entities
(Combined) Predecessor
---------------------------- ------------------- As
1992 1993 1994 1995 1996 Actual Adjusted(13)
------- ------- -------- -------- -------- ---------- ------------
(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 $ 21,863 $118,963
Working capital (deficit)........................ 1,545 2,529 3,168 (1,048) (14,289) 15,472 112,572
Total assets..................................... 54,419 63,393 111,425 165,579 228,162 246,072 346,072
Long-term debt, including current portion........ 38,469 43,335 89,414 102,245 170,689 167,259 267,259
Partners' and shareholders' equity............... 11,937 15,042 12,823 51,823 37,882 50,122 50,122
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR
---------------------------------------- -------------------------------------
NINE MONTHS
YEARS ENDED THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, ENDED DECEMBER DECEMBER 31, 1996
------------------------ MARCH 31, 31, ----------------------
1992 1993 1994 1995 1995 ACTUAL PRO FORMA(1)
------ ------ ------ ------------- ------------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Adjusted EBITDA(14).......... $4,018 $6,534 $8,407 $3,262 $15,815 $23,679 $23,198
Ratio of adjusted EBITDA to
interest expense(15)........ 1.5x 1.9x 1.6x 1.4x 2.1x 2.0x 1.9x
Ratio of earnings to fixed
charges(16)................. 0.9x 1.2x 1.0x 0.5x 1.4x 1.4x 1.3x

<CAPTION>
PREDECESSOR
----------------------
SIX
SIX MONTHS MONTHS
ENDED JUNE 30, 1996 ENDED
---------------------- JUNE 30,
ACTUAL PRO FORMA(1) 1997
------- ------------ --------

<S> <C> <C> <C>
OTHER FINANCIAL DATA:
Adjusted EBITDA(14).......... $10,782 $11,345 $12,031
Ratio of adjusted EBITDA to
interest expense(15)........ 2.3x 2.0x 1.9x
Ratio of earnings to fixed
charges(16)................. 1.6x 1.3x 1.3x
</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) Periods prior to 1997 reflect 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. Income tax expense
for the six months ended June 30,1997 reflects income taxes incurred by the
Company during the period May 29, 1997 (the day following the
Reorganization) through June 30, 1997. During the period January 1, 1997
through the date of the Reorganization (May 28, 1997), the Predecessor did
not incur income tax expense because it was a partnership. See Note 12 to
the Combined and Consolidated Financial Statements.

(4) At the time of the Reorganization and as a result of the conversion from a
non-taxable to a taxable entity, the Company recorded as a one-time charge
to income a net deferred income tax expense of approximately $10.7 million
resulting from 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.

27
<PAGE> 28

(5) Amount represents loss on early extinguishment of debt. See Note 9 to the
Combined and Consolidated Financial Statements.

(6) 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 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.

(7) Reflects the Tax Distribution.

(8) 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 unaudited pro forma tax 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 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.

(9) The unaudited pro forma tax data for the six months ended June 30, 1997
does not give effect to a non-recurring $10.7 million ($1.10 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 footnote (4) above and Note 16 to the Combined and
Consolidated Financial Statements.

(10) Reflects 7,812,500 shares issued in the Reorganization, plus 1,562,500
shares, representing the value of the $21.9 million principal amount of the
Reorganization Note (based upon the IPO price of $14.00 per share). For the
six months ended June 30, 1997, also includes the weighted average effect
of (a) the 3,593,750 shares sold by the Company in the IPO; and (b) Common
Stock equivalents.

(11) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Reorganization; (b) the sale of the 3,593,750
shares sold by the Company in the IPO; and (c) for the year ended December
31, 1996 data, the transactions described in footnote (1) above. See Note
16 to the Combined and Consolidated Financial Statements.

(12) Reflects 7,812,500 shares issued in the Reorganization, plus the 3,593,750
shares sold by the Company in the IPO.

(13) Adjusted to reflect the sale of the Debentures offered hereby.

(14) Adjusted EBITDA represents earnings before deductions for interest expense,
income taxes, depreciation and amortization and excludes the non-recurring
charge related to the 1995 Roll-Up and extraordinary loss from early
extinguishment of debt. The Company believes that adjusted EBITDA provides
additional information for determining its ability to meet its future debt
service, capital expenditure and working capital requirements. Adjusted
EBITDA is not a measure of financial performance under generally accepted
accounting principals and should not be considered as an alternative to net
income (loss) or income from operations as an indicator of the Company's
operating performance, or to cash flows as a measure of the Company's
liquidity.

(15) For purposes of this computation, interest expense includes capitalized and
net interest expense.

(16) For purposes of this computation, earnings are defined as income (loss)
before income taxes and extraordinary item and fixed charges (excluding
capitalized interest). Fixed charges are defined as interest expensed and
capitalized, amortization of capitalized financing costs, and the portion
of operating lease rental expense that is representative of the interest
factor. Earnings were inadequate to cover fixed charges for the year ended
December 31, 1992 and the three months ended March 31, 1995 by $453,000 and
$1.2 million, respectively.

28
<PAGE> 29

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 22 senior living communities in 12
states with an aggregate capacity for approximately 5,800 residents. The Company
currently owns 12 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 completed the IPO and the Reorganization in the second quarter
of 1997. 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 IPO. 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 and amounts for the six months ended June 30, 1997 represent
the sum of the results of operations of the Predecessor for the period January
1, 1997 through May 28, 1997 and the results of operations of the Company for
the period May 29, 1997 through June 30, 1997. 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 six of its owned communities, which are
expected to cost approximately $60.0 million to $70.0 million to complete and
lease-up. These eight expansion projects will add capacity to accommodate
approximately 700 additional 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.

29
<PAGE> 30

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
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 73.5% and 73.7% of total revenues for the six months
ended June 30, 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 14.0% and 15.1% of
total revenues for the six months ended June 30, 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 10.3% and 8.6%
of total revenues for the six months ended June 30, 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
2.2% and 2.6% of total revenues for the six months ended June 30, 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 89.2% and 91.3%
of the Company's total revenues for the six months ended June 30, 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
(10.7% for the six months ended June 30, 1997 and 7.5% for the year ended
December 31, 1996), including Medicare-related private co-insurance, and
Medicaid (0.1% for the six months ended June 30, 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) lease expense; (iii) general and administrative expense,
which includes all corporate office overhead; and (iv) depreciation and
amortization expense.

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 12 senior living communities
and ten home health care agencies; leases three communities; and operates seven
communities and five home health care agencies 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.

30
<PAGE> 31

The Company's community 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
services, risk management, 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 April 1998 and July 2000.

The Company's home health care agency management agreements are generally
for terms of three years; however, certain of the agreements may be canceled by
the owner of the agency on short notice. Pursuant to the management agreements,
the Company is generally responsible for providing operational oversight,
utilization review, billing, accounting, data processing services, and other
services. The Company receives a monthly fee for its services based on a
contractual fee per visit. The Company's current home health care agency
management agreements expire between February 2000 and July 2000.

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 income (expense)...................................... 98 0.3 (94) (0.1) 788 1.0
------- ----- ------- ----- ------- -----
Other 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>

31
<PAGE> 32

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
1996 1997
---------------- ---------------
$ % $ %
-------- ----- ------- -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Resident and health care revenue............................ $ 33,888 97.4% $43,424 97.8%
Management services revenue................................. 918 2.6 965 2.2
-------- ----- ------- -----
Total revenues............................................ 34,806 100.0 44,389 100.0
Community operating expense................................. 21,727 62.4 27,519 62.0
Lease expense............................................... -- -- 1,072 2.4
General and administrative.................................. 2,421 7.0 4,070 9.2
Depreciation and amortization............................... 3,165 9.1 3,206 7.2
-------- ----- ------- -----
Total operating expenses.................................. 27,313 78.5 35,867 80.8
-------- ----- ------- -----
Income from operations.................................... 7,493 21.5 8,522 19.2
Interest expense............................................ (4,733) (13.6) (6,611) (14.9)
Interest income............................................. 132 0.4 364 0.8
Other income (expense)...................................... (8) -- (61) (0.1)
-------- ----- ------- -----
Other expense, net........................................ (4,609) (13.2) (6,308) (14.2)
-------- ----- ------- -----
Income before income taxes and extraordinary item......... 2,884 8.3 2,214 5.0
Income tax expense -- current............................... -- -- 92 (0.2)
Income tax expense -- deferred.............................. -- -- 10,728 (24.2)
-------- ----- ------- -----
Income before extraordinary item............................ 2,884 8.3 (8,606) (19.4)
Extraordinary item.......................................... (2,335) (6.7) -- --
-------- ----- ------- -----
Net income (loss)........................................... $ 549 1.6% $(8,606) (19.4)%
======== ===== ======= =====
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
----------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
End of period capacity:
Owned..................................................... 2,141 2,594 3,369 3,369 3,002
Leased.................................................... -- -- -- -- 573
Managed................................................... 3,315 3,008 2,159 2,159 2,159
----- ----- ----- ----- -----
Total............................................... 5,456 5,602 5,528 5,528 5,734
===== ===== ===== ===== =====
Average occupancy rate:
Owned..................................................... 89% 93% 94% 93% 94%
Leased.................................................... -- -- -- -- 93
Managed................................................... 93 91 91 90 93
----- ----- ----- ----- -----
Total............................................... 90% 92% 92% 92% 93%
===== ===== ===== ===== =====
End of period occupancy rate:
Owned..................................................... 91% 94% 96% 93% 93%
Leased.................................................... -- -- -- -- 84
Managed................................................... 96 91 92 88 93
----- ----- ----- ----- -----
Total............................................... 94% 92% 94% 91% 92%
===== ===== ===== ===== =====
Stabilized average occupancy rate(1):
Owned..................................................... 89% 93% 94% 94% 95%
Leased.................................................... -- -- -- -- 94
Managed................................................... 93 95 95 95 94
----- ----- ----- ----- -----
Total............................................... 91% 94% 95% 94% 95%
===== ===== ===== ===== =====
</TABLE>

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

(1) Includes communities or expansions thereof that have (i) achieved 95%
occupancy or (ii) been open at least 12 months. The 12-month stabilization
period may be extended for certain large retirement communities. In the
table above, the stabilized results for the year ended December 31, 1996 do
not include a large managed community with a capacity for over 240 residents
which opened in August 1995.

32
<PAGE> 33

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>
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
----------------- ----------------- -----------------
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% $28,803 $30,962 7.5%
Home health and
companion services
revenue............... 627 2,699 330.5% 2,699 3,789 40.4% 3,010 4,424 47.0%
------- ------- ------- ------- ------- -------
Resident and health
care revenue........ 27,011 31,739 17.5% 49,097 52,677 7.3% 31,813 35,386 11.2%
Community operating
expense............... 19,212 21,795 13.4% 32,854 34,314 4.4% 20,570 22,866 11.2%
------- ------- ------- ------- ------- -------
Resident income from
operations(1)....... $ 7,799 $ 9,944 27.5% $16,243 $18,363 13.1% $11,243 $12,520 11.4%
======= ======= ======= ======= ======= =======
Resident income from
operations
margin(1)(2)........ 28.9% 31.3% 33.1% 34.9% 35.3% 35.4%
OTHER DATA:
Average occupancy
rate(3)............... 88% 91% 92% 94% 94% 96%
Average monthly revenue
per occupied
unit(4)............... $ 2,322 $ 2,467 6.2% $ 2,217 $ 2,295 3.5% $ 2,200 $ 2,337 5.3%
Average monthly expense
per occupied
unit(5)............... $ 1,639 $ 1,665 1.6% $ 1,465 $ 1,475 0.7% $ 1,398 $ 1,471 5.2%
</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>
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
---------------- ------------------ ------------------
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 $11,243 $12,520
Lease expense........................ -- -- -- -- -- 1,027
Depreciation and amortization........ 2,533 3,090 4,648 4,332 2,642 2,260
------ ------ ------- ------- ------- -------
Income from operations................. $5,266 $6,854 $11,595 $14,031 $ 8,601 $ 9,233
====== ====== ======= ======= ======= =======
Income from operations margin.......... 19.5% 21.6% 23.6% 26.6% 27.0% 26.1%
</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.

33
<PAGE> 34

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

Revenues. Total revenues were $44.4 million for the six months ended June
30, 1997 compared to $34.8 million for the comparable period in 1996,
representing an increase of $9.6 million, or 27.5%. Resident and health care
revenues increased by $9.5 million, and management services revenues increased
by $47,000. Of the increase in resident and health care revenues, $6.0 million,
or 62.7%, was attributable to revenues derived from two senior living
communities acquired in May 1996, one assisted living residence acquired in May
1997, and one assisted living residence leasehold acquired in May 1997. The
remaining $3.6 million, or 37.3%, of such increase was attributable to Same
Facility growth.

Revenues attributable to Same Facilities were $35.4 million for the six
months ended June 30, 1997, representing an increase of $3.6 million, or 11.2%,
over 1996. Home health care agency and companion services fees on a Same
Facility basis increased by $1.4 million, or 47%, over the comparable 1996
period. Monthly/per diem service fee revenue on a Same Facility basis increased
$2.2 million, or 7.5%, over the comparable 1996 period. Of this increase, 5.5%
was due primarily to increases in average rates (including Medicare rate
adjustments) and 2.0% was due to higher occupancy. Same Facility average
occupancy rates increased to 95.6% for the six months ended June 30, 1997 from
93.6% for the comparable period in 1996.

Community Operating Expense. Community operating expense increased to
$27.5 million for the six months ended June 30, 1997, as compared to $21.7
million for the comparable period in 1996, representing an increase of $5.8
million, or 26.7%. Of the increase in community operating expenses, $3.5
million, or 60.3%, was attributable to expenses from acquired living communities
and acquired and newly leased assisted living residences, and 39.6% of the
increase was attributable to Same Facility operating expenses, which increased
by $2.3 million, or 11.2%, over the comparable 1996 period. Of such increase,
$948,000 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 7.4% for the six months
ended June 30, 1997 as compared to the comparable period in 1996. Community
operating expense as a percentage of resident and health care revenues declined
to 63.4% for the six months ended June 30, 1997 from 64.1% for the comparable
period in 1996. Same Facility community operating expense as a percentage of
Same Facility resident and health care revenues declined to 64.6% for the six
months ended June 30, 1997 from 64.7% for the comparable period in 1996. Same
Facility operating expenses exclusive of home health agency and companion
services expenses as a percentage of Same Facility revenues, exclusively of home
health and companion services revenue decreased to 62.9% for the six months
ended June 30, 1997 from 63.0% for the comparable period in 1996.

General and Administrative. General and administrative expense increased
to $4.1 million for the six months ended June 30, 1997, as compared to $2.4
million for the comparable period in 1996, representing an increase of $1.6
million, or 68.1%. Of this increase, $580,000 was directly related to the growth
of the Company's home health care agencies and $427,000 of the increase related
to salary and wage expenses of new employees. The remaining increase of
approximately $642,000 resulted from continued investments in infrastructure
necessary to support the Company's growth. General and administrative costs as a
percentage of total revenues increased to 9.2% for the six months ended June 30,
1997 from 7.0% for the comparable period in 1996.

Lease Expense. The Company incurred lease expense of $1.1 million for the
six months ended June 30, 1997, primarily as a result of the Sale-Leaseback
Transaction, as well as the acquisition of a leasehold interest in an assisted
living residence in May 1997. The Company did not incur lease expense prior to
the Sale-Leaseback Transaction.

Depreciation and Amortization. Depreciation and amortization expense
increased to $3.2 million for the six months ended June 30, 1997, representing
an increase of $41,000, or 1.3% over the comparable period of the previous year.
This outcome was primarily the result of decreases related to the Sale-Leaseback
Transaction partially offset by increases related to the acquisitions of two
retirement communities in May 1996 and one assisted living residence in May
1997. Same

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Facility depreciation and amortization expense decreased to $2.3 million for the
six months ended June 30, 1997 from $2.6 million for the six months ended June
30, 1996, as result of the Sale-Leaseback Transaction.

Other Income (Expense). Interest expense increased to $6.6 million for the
six months ended June 30, 1997 from $4.7 million for the comparable period in
1996, representing an increase of $1.9 million, or 39.7%. The increase in
interest expense was related to indebtedness incurred in connection with the
acquisition of two senior living communities in May 1996. Interest expense, as a
percentage of total revenues, increased to 14.9% for the six months ended June
30, 1997 from 13.6% in 1996. Interest income increased to $364,000 for the six
months ended June 30, 1997 from $132,000 for the comparable period in 1996,
primarily as a result of interest income earned from the investment of the
remaining net proceeds from the IPO.

Income Tax Expense. The conversion from a non-taxable limited partnership
to a taxable corporation in May 1997 resulted in a one-time $10.7 million charge
of income related to the recognition of a net deferred income tax liability for
the amount of the difference between the accounting and tax bases of the
Company's assets and liabilities.

Extraordinary Loss. In the six months ended June 30, 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 (Loss). As a result of the foregoing factors, the Company
reported a net loss of $8.6 million for the six months ended June 30, 1997.
Adjusting for the effect of the income tax charge referenced above, the Company
reported pro forma net income of $1.4 million for the six months ended June 30,
1997. For the six months ended June 30, 1996, the Company reported pro forma net
income before extraordinary item of $1.8 million, pro forma net income before
extraordinary item available for distribution to partners and shareholders of
$1.1 million, and net income of $549,000.

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

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<PAGE> 36

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.

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

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<PAGE> 37

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 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 RESOURCES

The Company sold 3,593,750 shares of Common Stock in the IPO in the second
quarter of 1997 and received net proceeds (after deducting the underwriting
discount and expenses) of approximately $45.2 million. The Company used
approximately $21.9 million of the net proceeds from the IPO to repay the
Reorganization Note to the limited partners of the Predecessor. The Company has
been using and will continue to use the remaining $23.3 million of the net
proceeds from the IPO to fund the Company's growth strategy. See
"Business -- Growth Strategy."

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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 June 30, 1997, the Company had $167.3 million of
indebtedness outstanding, including $144.3 million payable to GECC, with fixed
maturities ranging from December 31, 2001 to April 30, 2003. The Company has the
capacity to borrow up to an additional $17.0 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 June 30, 1997, approximately $2.3 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 June 30, 1997, $2.9 million 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 $2.3 million was
outstanding as of June 30, 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.

All of the Company's owned communities are subject to mortgages. Except for
the Company's Homewood Residence at Corpus Christi, Richmond Place, and Homewood
Residence at Tarpon Springs communities, each of the Company's owned communities
serves as blanket collateral for the indebtedness payable to GECC described
above. The Homewood Residence 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. The
Homewood Residence at Tarpon Springs community is subject to a $3.5 million
mortgage in favor of a bank.

As of June 30, 1997, approximately 71.1% of the Company's indebtedness bore
interest at fixed rates, with a weighted average interest rate of 8.6%. The
Company's variable rate indebtedness carried an average rate of 7.9% as of June
30, 1997. Less than 15% of the Company's currently outstanding indebtedness
matures before December 31, 2002. Currently, the Company's minimum annual lease
obligations are approximately $3.0 million. The Company expects to service
current outstanding indebtedness and lease obligations with internally generated
funds.

At June 30, 1997, the Company was obligated to pay annual rental
obligations under long-term leases of approximately $3.0 million. As of June 30,
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 (8.4% at June 30,
1997), ranging from $20.7 million to $22.9 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.

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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 $4.7 million and $8.2 million for the six months ended June
30, 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 June 30, 1997, unrestricted cash balances were $21.8
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 $3.4 million for the six months ended June 30, 1997, as compared to net cash
used of $64.5 million for the six months ended June 30, 1996. During the six
months ended June 30, 1997, the Company acquired an aggregate of $11.5 million
of assisted living residence assets, sold $28.8 million of assets, and made
$10.9 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 $4.8 million of the $10.0
million of Preferred Partnership Interests in 1996. Net cash provided by
financing activities was $10.6 million and $59.4 million for the six months
ended June 30, 1997 and 1996, respectively. During the six months ended June 30,
1997, the Company repaid $14.6 million of indebtedness with a portion of the
proceeds from the Sale-Leaseback Transactions, repaid a $2.3 million term loan,
made $3.6 million of principal payments on its long-term debt, and redeemed the
remaining $5.2 million of the Preferred Partnership Interests, which was accrued
as of December 31, 1996. The Company paid the $2.5 million Tax Distribution to
its partners in the second quarter of 1997. 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 $4.6 million and was
financed primarily through a $3.5 million mortgage loan provided by a bank. The
residence was licensed and opened in August 1997.

In May 1997, the Company acquired the Homewood Residence at Corpus Christi
community and acquired a long-term leasehold in the Homewood Residence 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

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<PAGE> 40

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 has also entered into five joint venture arrangements with
third parties pursuant to which it will develop six assisted living residences
with an aggregate capacity for approximately 500 residents.

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.

The Company has reached an agreement in principle to lease and operate
Imperial Plaza, a senior living community located in Richmond, Virginia with
capacity for 917 residents, and to acquire title to certain related assets. The
Company will have the option to acquire the community at its fair market value
at the expiration of the lease. Expenditures by the Company for the acquisition
of the leasehold, the related property, and the purchase option will aggregate
approximately $13.1 million, which will be payable in varying amounts over the
next three years. The Company will be obligated to make annual rental payments
of approximately $4.3 million under the lease. In addition, the Company will be
required to maintain a capital reserve account with payments of approximately
$300,000 annually, and to make a refundable deposit of $5.4 million to secure
the performance of its obligations under the lease.

Capital expenditures planned for 1997 total approximately $60.0 million. Of
this amount, the Company anticipates that approximately $30.0 million will be
used toward the development of approximately 27 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 this
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 $10.7 million ($1.10 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.

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 22 senior living communities in 12 states, consisting of 12
owned communities, three leased communities, and seven managed communities, with
an aggregate capacity for approximately 5,800 residents. In the fourth quarter
of 1997, the Company expects to acquire a long-term leasehold in an additional
community located in Richmond, Virginia with capacity for 917 residents. The
Company also operates 15 home health care agencies, ten of which are owned and
five of which are managed. At June 30, 1997, the Company's owned communities had
a stabilized occupancy rate of 95%, its leased communities had a stabilized
occupancy rate of 94%, and its managed communities had a stabilized occupancy
rate of 94%. For the year ended December 31, 1996 and the six months ended June
30, 1997, revenues attributable to the Company's senior living communities
accounted for 91.5% and 89.8%, respectively, of the Company's total revenues,
and revenues attributable to the Company's home health care agencies accounted
for 6.2% and 8.0%, 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 89.2% of the Company's total revenues for the six months ended
June 30, 1997 were derived from private pay sources.

The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the
principal founders of Hospital Corporation of America. 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 ten years and have an average of 14 years of
industry experience. 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.

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

41
<PAGE> 42

living networks in targeted geographic markets. The development of a senior
living network involves the clustering of assisted living residences and other
senior living communities within a particular geographic service area,
complemented by one or more of the Company's home health care agencies, thereby
providing residents with a broad range of high quality care in a cost-efficient
manner. The following are the principal elements of the Company's growth
strategy:

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 27
free-standing assisted living residences, with an estimated aggregate capacity
for approximately 2,400 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

42
<PAGE> 43

other forms of dementia), and skilled nursing beds. The Company currently has
three expansion projects under construction (including one managed community)
and six expansion projects under development, representing an aggregate increase
in capacity to accommodate approximately 800 additional 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 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 or near 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 15 home health care agencies, 12
of which are in their initial year of operation. The Company owns ten home
health care agencies and manages five agencies for third parties.

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.

43
<PAGE> 44

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.

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.

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<PAGE> 45

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 eleven
communities, leases three communities, and manages an additional five
communities which provide independent living services, with an aggregate
capacity for 2,358 residents, 434 residents, and 1,491 residents, respectively.

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.

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<PAGE> 46

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.

- 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

46
<PAGE> 47

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 or near certain of its existing senior living communities and
manages home health care agencies owned by third parties. 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 15 home health
care agencies, 12 of which are in their initial year of operation. The Company
owns ten home health care agencies and manages five agencies for third parties.

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<PAGE> 48

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 or to be acquired by the Company.

<TABLE>
<CAPTION>
AVERAGE OCCUPANCY
RESIDENT CAPACITY(1) COMMENCEMENT 1996 RATE AT
------------------------- OF OCCUPANCY JUNE 30,
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% 91%(4)
Carriage Club of Charlotte(5)....... Charlotte, NC 363 54 42 459 May-96 91(6) 92(6)
Carriage Club of Jacksonville(5).... Jacksonville, FL 292 60 -- 352 May-96 89(6) 89(6)
The Hampton at Post Oak............. Houston, TX 162 21 -- 183 Oct-94 94 94
Heritage Club....................... Denver, CO 220 35 -- 255 Feb-95 100 99
Parkplace........................... Denver, CO 195 48 -- 243 Oct-94 99 98
Homewood Residence at Corpus
Christi(7)........................ Corpus Christi, TX 60 30 -- 90 May-97 N/A 29
Richmond Place...................... Lexington, KY 204 4 -- 208 Apr-95 98 98
Santa Catalina Villas............... Tucson, AZ 197 15 -- 212 Jun-94 90 98
The Summit at Westlake Hills........ Austin, TX 167 30 89 286 Apr-92 98 100
Homewood Residence at Tarpon
Springs(8)........................ Tarpon Springs, FL -- 64 -- 64 Aug-97 N/A N/A
Westlake Village.................... Cleveland, OH 246 54 -- 300 Oct-94 94 96
----- --- --- ----- --- ---
Subtotal/Average................ 2,358 455 253 3,066 94% 93%

LEASED:
Holley Court Terrace(9)............. Oak Park, IL 179 17 -- 196 Jul-93 81% 91%
Homewood Residence at Victoria(10).. Victoria, TX 60 30 -- 90 May-97 N/A 43
Imperial Plaza(11).................. Richmond, VA 778 139 -- 917 -- N/A N/A
Trinity Towers(9)................... Corpus Christi, TX 195 32 60 287 Jan-90 94 94
----- --- --- ----- --- ---
Subtotal/Average................ 1,212 218 60 1,490 89% 84%

MANAGED(12):
Burcham Hills....................... East Lansing, MI 138 71 133 342 Nov-78 92% 89%
Meadowood........................... Worcester, PA 355 51 59 465 Oct-89 94 96
Parklane West....................... San Antonio, TX -- 17 124 141 Oct-94 86 90
Reeds Landing....................... Springfield, MA 148 54 40 242 Aug-95 65(13) 91(13)
USAA Towers......................... San Antonio, TX 505 -- -- 505 Oct-94 100 100
Weinberg Village.................... Tampa, FL -- 75 -- 75 May-96 25 67
Williamsburg Landing................ Williamsburg, VA 345 7 37 389 Sept-85 98 98
----- --- --- ----- --- ---
Subtotal/Average................ 1,491 275 393 2,159 89% 93%
----- --- --- ----- --- ---
Grand Total/Average............. 5,061 948 706 6,715 92% 92%
===== === === ===== === ===
</TABLE>

<TABLE>
<CAPTION>
COMMENCEMENT
OF
HOME HEALTH CARE AGENCIES: LOCATION OPERATIONS
- -------------------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED(14):
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
Santa Catalina Villas................ Tucson, AZ August 1997
The Summit at Westlake Hills......... Austin, TX June 1997
Westlake Village..................... Westlake, OH January 1997
MANAGED(15):
Air Force Village.................... San Antonio, TX August 1997
Bibb County.......................... Centreville, AL March 1997
Burcham Hills........................ East Lansing, MI August 1997
Hale County.......................... Greensboro, AL May 1997
Meadowood............................ Worcestor, PA July 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).

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<PAGE> 49

(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 June 30, 1997, was
98%.

(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.

(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 June 30, 1997 would
have been 97% and 96%, respectively, at Carriage Club of Charlotte and 91%
and 93%, respectively, at Carriage Club of Jacksonville.

(7) The Company acquired the Homewood Residence at Corpus Christi community in
May 1997. See " -- Recent and Pending Acquisitions."

(8) The Company acquired the Homewood Residence at Tarpon Springs community in
May 1997 and commenced operations at the community in August 1997. See
"-- Recent and Pending Acquisitions."

(9) 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.

(10) The Company acquired a long-term leasehold in the Homewood Residence 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.

(11) In the fourth quarter of 1997, the Company expects to acquire the Imperial
Plaza community. See " -- Recent and Pending Acquisitions."

(12) 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.

(13) 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.

(14) Each of the home health care agencies owned by the Company is based at or
near one of the Company's senior living communities.

(15) Managed pursuant to management agreements with an initial term of three
years. The Company receives a contractual fee per visit. None of the home
health care agencies managed by the Company are owned by affiliates of the
Company.

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<PAGE> 50

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 64 residents. The
purchase price for the facility was $4.6 million and was financed primarily
through a $3.5 million mortgage loan provided by a bank. The Homewood Residence
at Tarpon Springs community commenced operations in August 1997.

In May 1997, the Company completed the acquisition of the Homewood
Residence 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
Homewood Residence 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 Homewood Residence 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 reached an agreement in principle to lease and operate
Imperial Plaza, a senior living community located in Richmond, Virginia with
capacity for 917 residents, and to acquire title to certain related assets.
Imperial Plaza has capacity for 778 independent living residents and 139
assisted living residents (including 32 assisted living units that are nearing
completion). The community is currently 99.2% occupied.

The Company will acquire a long-term operating lease, which has an initial
term of 20 years with a seven year renewal option. The Company will have the
option to acquire the community at its fair market value at the expiration of
the lease. In addition, the lessor is required to fund a $3.5 million capital
expenditure program for the community. In connection with the lease, the Company
will also purchase 12 acres of undeveloped land located on the Imperial Plaza
campus, which is zoned to allow for additional senior living capacity.

Expenditures by the Company for the acquisition of the leasehold, the
related property and the purchase option will aggregate approximately $13.1
million, which will be payable in varying amounts over the next three years. The
Company will be obligated to make annual rental payments of approximately $4.3
million under the lease. In addition, the Company will be required to maintain a
capital reserve account with payments of approximately $300,000 annually, and to
make a refundable deposit of $5.4 million to secure the performance of its
obligations under the lease.

Although the transaction is subject to a number of conditions and
approvals, the Company anticipates completing the acquisition in the fourth
quarter of 1997. In the event that the transaction is consummated, the Company
anticipates that Imperial Plaza will be profitable immediately.

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<PAGE> 51

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
Carriage Club of Charlotte, Charlotte, NC.................. 7/98 -- 30 -- 30 Development
Richmond Place, Lexington, KY.............................. 10/98 -- 73 -- 73 Development
The Hampton at Post Oak, Houston, TX....................... 11/98 -- 15 76 91 Development
The Summit at Westlake Hills, Austin, TX................... 5/99 -- 95 -- 95 Development
Westlake Village, Cleveland, OH............................ 6/99 -- 15 88 103 Development
Carriage Club of Jacksonville, Jacksonville, FL............ 10/99 -- 15 60 75 Development
-- ----- --- -----
Subtotal........................................... 57 439 303 799
-- ----- --- -----
DEVELOPMENT PROJECTS:
Lady Lake, FL(3)........................................... 12/97 -- 55 -- 55 Construction
Halls, TN(4)............................................... 3/98 -- 55 -- 55 Construction
Pearland, TX(5)............................................ 3/98 -- 82 -- 82 Construction
Marietta, GA............................................... 4/98 -- 60 -- 60 Construction
Houston, TX (Northwest)(5)................................. 5/98 -- 95 -- 95 Construction
Knoxville, TN (Deane Hill)(4).............................. 5/98 -- 108 -- 108 Construction
Houston, TX (Willowchase)(5)............................... 6/98 -- 67 -- 67 Construction
Spring Shadow, TX(5)....................................... 6/98 -- 67 -- 67 Construction
Houston, TX (West)(5)...................................... 7/98 -- 95 -- 95 Development
Lakeway, TX................................................ 7/98 -- 81 -- 81 Construction
Nashville, TN (West)(3).................................... 8/98 -- 90 -- 90 Development
Tampa, FL(3)............................................... 8/98 -- 90 -- 90 Development
Aurora, CO................................................. 10/98 -- 95 -- 95 Development
Lakewood, CO............................................... 10/98 -- 93 -- 93 Development
St. Petersburg, FL(6)...................................... 10/98 -- 100 -- 100 Development
Greenwood Village, CO...................................... 11/98 -- 90 90 180 Development
San Antonio, TX............................................ 11/98 -- 75 -- 75 Development
Boynton Beach, FL.......................................... 12/98 -- 95 -- 95 Development
Del Ray Beach, FL.......................................... 12/98 -- 81 -- 81 Development
Austin, TX................................................. 1/99 -- 95 -- 95 Development
Cleveland (Brooklyn Heights), OH........................... 4/99 -- 80 -- 80 Development
Flint, MI(3)............................................... 4/99 -- 95 -- 95 Development
Nashville, TN (Central).................................... 4/99 -- 115 -- 115 Development
Boca Raton, FL............................................. 5/99 -- 75 -- 75 Development
Clearwater, FL............................................. 5/99 -- 95 -- 95 Development
Cleveland (Heights), OH.................................... 6/99 -- 120 -- 120 Development
Houston, TX (West University).............................. 7/99 -- 85 -- 85 Development
-- ----- --- -----
Subtotal........................................... -- 2,334 90 2,424
-- ----- --- -----
Grand Total........................................ 57 2,773 393 3,223
== ===== === =====
</TABLE>

<TABLE>
<CAPTION>
ANTICIPATED COMMENCEMENT
HOME HEALTH CARE AGENCIES LOCATION OF OPERATIONS
- ------------------------- -------- ------------------------
<S> <C> <C>
Trinity Towers.......................................... Corpus Christi, TX April 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.

(2) Williamsburg Landing is a managed community. The Company is providing full
development services related to the expansion for the owner.

(3) Being developed by a joint venture in which the Company owns a 50% interest.

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<PAGE> 52

(4) Being developed by a joint venture in which the Company owns a 40% interest.

(5) Indicates a community at which the Company is providing full development
services for the owner, who is an affiliate of the Company. The Company will
manage the community after completion of construction. In each case, the
Company has an option to purchase the community. See "Certain
Transactions -- Management Agreements."

(6) Being developed by a joint venture in which the Company owns a 60% interest.

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. See "Certain Transactions -- Management Agreements."

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

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<PAGE> 53

other things, resident care and operations; (ii) performing accounting
functions; (iii) developing employee training programs and materials; (iv)
coordinating human resources, food service and marketing functions; and (v)
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 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.

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<PAGE> 54

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 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

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<PAGE> 55

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 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.

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<PAGE> 56

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 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

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<PAGE> 57

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 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

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<PAGE> 58

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 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

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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.

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 2,275 persons, of which approximately
1,390 are full-time employees (approximately 60 of whom are located at the
Company's corporate offices) and 885 are part-time employees. In addition, there
are approximately 500 full-time employees and 400 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........................... 40 Executive Vice President -- Finance, Chief Financial
Officer, Treasurer, and Secretary
H. Todd Kaestner.......................... 42 Executive Vice President -- Corporate Development
James T. Money............................ 50 Executive Vice President -- Development Services
Tom G. Downs.............................. 52 Senior Vice President -- Operations
Lee A. McKnight........................... 52 Senior Vice President -- Marketing
H. Lee Barfield II........................ 51 Director
Jack O. Bovender, Jr...................... 52 Director
Frank M. Bumstead......................... 55 Director
Robin G. Costa............................ 30 Director
Clarence Edmonds.......................... 64 Director
John A. Morris, Jr., M.D.................. 50 Director
Daniel K. O'Connell....................... 68 Director
Nadine C. Smith........................... 40 Director
Lawrence J. Stuesser...................... 55 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> 61

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 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. Mr. Bovender has been President and Chief Operating Officer of
Columbia/HCA Healthcare Corporation ("Columbia/HCA") since August 1997. From
March 1994 to August 1997, Mr. Bovender was retired. Prior to March 1994, Mr.
Bovender worked for Hospital Corporation of America, a predecessor to
Columbia/HCA, for over 18 years in various capacities, including Executive Vice
President and Chief Operating Officer.

Frank M. Bumstead has served as a director of the Company since its
inception. 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.
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 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. 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 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. Ms. Smith is President and Chief Executive Officer of Enidan Capital
Partners, L.P., an investment company that makes equity investments in public
and privately held companies ("Enidan"). Prior to co-founding Enidan, Ms. Smith
was managing general partner of NC Smith & Co., a financial and management

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<PAGE> 62

consulting firm, from 1990 to 1997. Ms. Smith also is President and Chief
Executive Officer of Sirrom Resource Funding L.P., which provides financing to
environmental companies.

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> 63

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"), which was approved by the Board of Directors and shareholder of the
Company in February 1997 and became effective on the date of the IPO. 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, 1,140,625 shares of Common Stock have been
reserved and will be available for issuance, which

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<PAGE> 64

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 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,
options to purchase 627,500 shares of Common Stock have been awarded to 115 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 were automatically granted to each
person serving as an Outside Director as of the date of the IPO. Any person who
was not previously a member of the Board of Directors and who is elected or
appointed an Outside Director following the consummation of the IPO 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

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<PAGE> 65

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 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") pursuant to which an aggregate of 250,000 shares of Common Stock
have been reserved for issuance. 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

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<PAGE> 66

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 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

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<PAGE> 67

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 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 IPO, 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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PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of the date hereof 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. 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>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED COMMON STOCK
---- --------------------- ------------
<S> <C> <C>
NAMED EXECUTIVE OFFICERS:
W.E. Sheriff................................................ 1,670,353(1)(2) 14.6%
Christopher J. Coates....................................... 242,603(3) 2.1
George T. Hicks............................................. 170,259(4) 1.5
H. Todd Kaestner............................................ 180,244(5) 1.6
James T. Money.............................................. 175,252(6) 1.5
DIRECTORS:
H. Lee Barfield II.......................................... 617,661(7)(8) 5.4
Jack O. Bovender, Jr........................................ -- --
Frank M. Bumstead........................................... 5,000 --
Robin G. Costa.............................................. 1,372,037(9)(10) 12.0
Clarence Edmonds............................................ 360,907(11) 3.2
John A. Morris, Jr., M.D.................................... 358,490(12) 3.1
Daniel K. O'Connell......................................... 13,285 *
Nadine C. Smith............................................. 29,956 *
Lawrence J. Stuesser........................................ 67,547(13) *
OTHER 5% SHAREHOLDERS:
American Retirement Communities, LLC........................ 1,350,000(14) 11.8
Dan Maddox.................................................. 1,420,259(9)(15) 12.5
DMAR Limited Partnership.................................... 1,372,037(16) 12.0
Mary Louise Frist Barfield.................................. 617,661(17)(18) 5.4
Robert A. Frist, M.D........................................ 573,872(19)(20) 5.0
All directors and executive officers as a group (16
persons).................................................. 4,565,497 40.0

</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.

(7) Address: 2700 First American Center, Nashville, Tennessee 37238.

(8) Includes 472,857 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.

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<PAGE> 69

(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 184,084 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
Predecessor Entities and,

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<PAGE> 70

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

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<PAGE> 71

Preferred Partnership Interests for an aggregate amount of $10.0 million. In
connection with the redemption of the 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 distributed, 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 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 received 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 distributed to a family limited partnership in which Mr. Sheriff is
a general partner.

(3) Does not include shares 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 distributed to Sylvester I.

(5) Does not include shares distributed to Robert A. Frist or an aggregate of
841,555 shares 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 distributed to Mr. Barfield's wife, Mary Louise Frist
Barfield, and an aggregate of $572,330.52 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 distributed to Robert A.
Frist and his wife, and children; Mr. Barfield's brother-in-law; or an

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<PAGE> 72

aggregate of $2,848,592.12 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.

(7) All amounts distributed to DMAR. Ms. Costa is a Vice President of Margaret
Energy, Inc., the general partner of DMAR.

(8) Includes $1,136,953.90 distributed to The Massey Foundation and $84,686.48
distributed to Mr. Edmonds' wife.

(9) All amounts distributed to partnerships owned and controlled by Dr. Morris,
his brother Alfred Morris, and members of Dr. Morris' family.

(10) Amounts received by B&W, of which Mr. Stuesser is a director and 50%
shareholder.

(11) Does not include an aggregate of 15,39 shares distributed to Mr. Maddox's
son.

(12) Includes $4,644,227.96 distributed to DMAR. Does not include an aggregate
of $443,495.52 distributed to Mr. Maddox's son.

(13) Does not include shares distributed to Robert A. Frist or an aggregate of
841,555 shares distributed to Ms. Barfield's father, sister, and trusts for
the benefit of Ms. Barfield's brother and nephews.

(14) Includes $490,148.41 distributed to Mrs. Barfield's husband, H. Lee
Barfield II, and an aggregate of $572,330.52 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 distributed to Robert A.
Frist and his wife, and children; Mrs. Barfield's brother; or an aggregate
of $2,848,592.12 distributed to Ms. Barfield's father, sister, and trusts
for the benefit of Ms. Barfield's brother and nephews.

(15) Does not include shares distributed to H. Lee Barfield II or Mary Louise
Frist Barfield, or an aggregate of 841,555 shares distributed to Dr.
Frist's father, sister, or trusts for the benefit of Dr. Frist's brother
and nephews.

(16) Includes $76,393.06 distributed to Dr. Frist's wife. Does not include an
aggregate of $648,394.62 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 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
distributed to Dr. Frist's father, sister, and trusts for the benefit of
Dr. Frist's brother and nephews.

MANAGEMENT AGREEMENTS

The Company is providing full development services related to and has
entered into management agreements to manage five assisted living residences
with an aggregate capacity for 399 residents, four of which are located in
Houston, Texas and one of which is located in Spring Shadow, Texas, owned by
affiliates of Jim Maddox, the son of Dan Maddox, a significant shareholder of
the Company. Three of the residences are currently under construction and two of
the residences are under development. Such management agreements provide for the
payment of management fees to the Company based on a percentage of each
facility's gross revenues and require the Company to pay operating deficits
above a specified amount. The management agreements also provide the Company
with the option to purchase the subject facilities. The Company expects to enter
into additional management agreements with Jim Maddox or his affiliates.

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> 73

DESCRIPTION OF DEBENTURES

The Debentures will be issued under an Indenture, to be dated as of
, 1997 (the "Indenture"), to be executed by the Company and IBJ
Schroder Bank and Trust Company, as the trustee under the Indenture (the
"Trustee"). The terms of the Debentures include those stated in the Indenture
and those made a part of the Indenture by reference to the Trust Indenture Act
of 1939, as amended. A copy of the Indenture has been filed as an exhibit to the
Registration Statement and is incorporated herein by reference.

The following is a summary of certain provisions of the Indenture, and does
not purport to be complete and is qualified in its entirety by reference to the
detailed provisions of the Indenture, including the definitions of certain terms
therein to which reference is hereby made. Wherever particular provisions or
sections of the Indenture or terms defined therein are referred to herein, such
provisions or definitions are incorporated herein by reference.

GENERAL

The Debentures are unsecured general obligations of the Company, subject to
the rights of holders of Senior Indebtedness of the Company, and will mature on
, 2004. The Debentures will be limited to $100.0 million aggregate
principal amount, and will bear interest payable semiannually on and
of each year, commencing , 1998, at the per annum rate of
%. The first payment will be for the period from the date of delivery to
, 1998. The Company will pay interest on the Debentures to the
persons who are registered holders of Debentures at the close of business on the
or preceding the interest payment date. Principal and
interest will be payable, the Debentures will be convertible and exchangeable,
and transfers thereof will be registerable, at the office or agency of the
Company maintained for such purposes, initially at the offices of the Trustee.
The Company may pay principal and interest by check and may mail an interest
check to a holder's registered address. Holders must surrender Debentures to a
Paying Agent to collect principal payments.

Initially, the Trustee will act as Paying Agent, Registrar, and Conversion
Agent. The Company may change any Paying Agent, Registrar, Conversion Agent, or
co-registrar upon prior written notice to the Trustee and may act in any such
capacity itself.

The Debentures will be in fully registered form without coupons in
denominations of $1,000 or integral multiples thereof. A holder may transfer or
exchange Debentures in accordance with the Indenture. No service charge will be
made for any registration or transfer, exchange, or conversion of Debentures,
except for any tax or other governmental charges that may be imposed in
connection therewith. The Registrar need not transfer or exchange any Debentures
selected for redemption. Also, in the event of a partial redemption, it need not
transfer or exchange any Debentures for a period of 15 days before selecting
Debentures to be redeemed. The Indenture does not contain any provision
requiring the Company to repurchase the Debentures at the option of the holders
thereof in the event of a leveraged buyout, recapitalization, or similar
restructuring of the Company, even though the Company's credit-worthiness and
the market value of the Debentures may decline significantly as a result of such
transaction. The Indenture does not protect holders of the Debentures against
any decline in credit quality, whether resulting from any such transaction or
from any other cause. The registered holder of a Debenture may be treated as its
owner for all purposes.

CONVERSION RIGHTS

The holders of the Debentures will be entitled at any time on or after
December 31, 1997 and prior to maturity, subject to prior redemption, to convert
the Debentures (or portions thereof that are $1,000 or integral multiples
thereof) into shares of Common Stock at the conversion price set forth on the
cover page of this Prospectus (subject to adjustments as described below). No
payment or adjustment will be made for accrued interest on a converted
Debenture. If any Debenture not called for redemption is converted between a
record date for the payment of interest and the next

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<PAGE> 74

succeeding interest payment date, such Debenture must be accompanied by funds
equal to the interest payable to the registered holder on such interest payment
date on the principal amount so converted. The Company will not issue fractional
interests in shares of Common Stock upon conversion of the Debentures and
instead will deliver a check for the fractional share based upon the market
value of the Common Stock on the last trading date prior to the conversion date.
If the Debentures are called for redemption, conversion rights will expire at
the close of business on the redemption date, unless the Company defaults in
payment due upon such redemption.

The conversion price is subject to adjustments in certain events, as set
forth in the Indenture, including the payment of dividends or distributions on
the Common Stock in shares of capital stock; subdivisions or combinations of the
Common Stock into a greater or smaller number of shares of Common Stock;
reclassification of the shares of Common Stock resulting in an issuance of any
shares of the Company's capital stock; distribution of rights or warrants to all
holders of Common Stock entitling them to purchase Common Stock at less than the
then-current price at that time; and the distribution to all holders of Common
Stock of assets, excluding certain cash dividends and distributions, or debt
securities, or any rights or warrants to purchase securities of the Company;
provided, however, that no adjustment will be required if holders of the
Debentures receive notice of and are allowed to participate in such
transactions. No adjustment will be required for rights to purchase Common Stock
pursuant to a Company plan for reinvestment of dividends or interest or the
Company's Employee Stock Purchase Plan, or for a change in the par value of the
Common Stock. To the extent that Debentures become convertible into cash, no
adjustment will be required thereafter as to cash. No adjustment in the
conversion price need be made unless such adjustment would require a change of
at least 1.0% in the conversion price; any adjustment that would otherwise be
required to be made, however, shall be carried forward and taken into account in
any subsequent adjustment. The Company may voluntarily reduce the conversion
price for a period of time.

If the Company pays dividends on the Common Stock in shares of capital
stock or subdivides or combines the Common Stock or issues by reclassification
of its Common Stock any shares of its capital stock or merges with, or transfers
or leases substantially all of its assets to, another corporation or trust, the
holders of the Debentures then outstanding will be entitled thereafter to
convert such Debentures into the kind and amount of shares of capital stock,
other securities, cash, or other assets that they would have owned immediately
after such event had such Debentures been converted before the effective date of
the transaction.

Any Debentures called for redemption, unless surrendered for conversion on
or before the close of business on the redemption date, are subject to being
purchased from the holder of such Debentures at the redemption price by one or
more investment banks or other purchasers who may agree with the Company to
purchase such Debentures and convert them into Common Stock of the Company.

SUBORDINATION OF DEBENTURES

The indebtedness evidenced by the Debentures will be subordinated and
junior in right of payment to the extent set forth in the Indenture to the prior
payment in full of amounts then due on all Senior Indebtedness. No payment shall
be made by the Company on account of principal of or interest on the Debentures
or on account of the purchase or other acquisition of Debentures, if there shall
have occurred and be continuing a default with respect to any Senior
Indebtedness permitting the holders to accelerate the maturity thereof, or with
respect to any Senior Indebtedness and such default shall be the subject of a
judicial proceeding, or the Company shall have received notice of such default
from certain persons, unless and until such default or event of default shall
have been cured or waived or shall have ceased to exist. In the event of default
on any Senior Indebtedness, whether now outstanding or hereafter issued,
payments of principal of and interest on the Debentures may not be permitted to
be made until such Senior Indebtedness is paid in full, or the event of default
on such Senior Indebtedness is cured or waived.

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<PAGE> 75

Upon any acceleration of the principal of the Debentures or any
distribution of assets of the Company upon any receivership, dissolution,
winding-up, liquidation, reorganization, or similar proceedings of the Company,
whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts
due or to become due upon all Senior Indebtedness must be paid in full before
the holders of the Debentures or the Trustee are entitled to receive or retain
any assets so distributed in respect of the Debentures. By reason of this
provision, in the event of insolvency, holders of the Debentures may recover
less, ratably, than holders of Senior Indebtedness.

"Senior Indebtedness" is defined to mean the principal, premium, if any,
and interest on, and all other amounts payable under or in respect of
Indebtedness of the Company (other than Indebtedness owed to a subsidiary of the
Company, Indebtedness of the Company that is expressly pari passu with the
Debentures, or Indebtedness that is expressly subordinated to the Debentures).
There is no limit on the amount of Senior Indebtedness that the Company may
incur. As of June 30, 1997, the Company's Senior Indebtedness totalled
approximately $90.9 million.

"Indebtedness" as applied to any person means, without duplication: (i) all
indebtedness for borrowed money whether or not evidenced by a promissory note,
draft, or similar instrument; (ii) that portion of obligations with respect to
any lease that is properly classified as a liability on a balance sheet in
accordance with generally accepted accounting principles; (iii) notes payable
and drafts accepted representing extensions of credit; (iv) any balance owed for
all or any part of the deferred purchase price of property or services, which
purchase price is due more than six months from the date of incurrence of the
obligation in respect thereof (except any such balance that constitutes (a) a
trade payable or an accrued liability arising in the ordinary course of business
or (b) a trade draft or note payable issued in the ordinary course of business
in connection with the purchase of goods or services), if and to the extent such
debt would appear as a liability upon a balance sheet of such person prepared in
accordance with generally accepted accounting principles; (v) tenant deposits;
(vi) any debt of others described in the preceding clauses (i) through (v) that
such person has guaranteed or for which it is otherwise liable; and (vii) any
deferral, amendment, renewal, extension, supplement, or refunding of any of the
foregoing indebtedness; provided, however, that, in computing the "Indebtedness"
of any person, there shall be excluded any particular indebtedness if, upon or
prior to the maturity thereof and at the time of determination of such
indebtedness, there shall have been deposited with a depository in trust money
(or evidences of indebtedness if permitted by the instrument creating such
indebtedness) in the necessary amount to pay, redeem, or satisfy such
indebtedness as it becomes due, and the amount so deposited shall not be
included in any computation of the assets of such person.

OPTIONAL REDEMPTION

The Debentures will be subject to redemption at the option of the Company,
in whole or in part, at any time or from time to time commencing on or after
, 2000 on at least 30 days' and not more than 60 days' prior notice
by mail, at a redemption price equal to 100% of the principal amount thereof,
plus interest accrued to the date of redemption.

MODIFICATION OF THE INDENTURE

Under the Indenture, the rights and obligations of the Company with respect
to the Debentures and the rights of holders of the Debentures may, with certain
exceptions, be modified by the Company and the Trustee with the written consent
of the holders of not less than 66 2/3% in principal amount of the outstanding
Debentures. Without the consent of each Holder of any Debenture affected,
however, an amendment, waiver, or supplement may not (a) reduce the principal
amount of outstanding Debentures whose holders may consent to an amendment; (b)
reduce the rate or change the time of payment of interest on any Debenture; (c)
reduce the principal of or change the fixed maturity of any Debenture; (d) make
any Debenture payable in money other than that stated in the Debenture; (e)
change the provisions of the Indenture regarding the right of the holders of a
majority of the Debenture to waive defaults under the Indenture or impair the
right of any holder of

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<PAGE> 76

Debentures to institute suit for the enforcement of any payment of principal and
interest on the Debentures on and after their respective due dates; or (f) make
any change that adversely affects the right to convert any Debenture. No consent
of the holders of the Debentures is required for any amendment of the Indenture
or the Debentures by the Company or the Trustee to cure any ambiguity, defect,
or inconsistency, or to provide for uncertificated Debentures in addition to
certificated Debentures, or to make any change that does not adversely affect
the right of a holder of a Debenture.

EVENTS OF DEFAULT, NOTICE, AND WAIVER

The following are Events of Default under the Indenture: (i) default in the
payment of interest on the Debentures when due and payable that continues for 30
days; (ii) default in the payment of principal of (and premium, if any) on the
Debentures when due and payable, at maturity, upon redemption, or otherwise,
that continues for five business days; (iii) failure to perform any other
covenant of the Company contained in the Indenture or the Debentures that
continues for 60 days after written notice to the Company as provided in the
Indenture; (iv) default under any bond, debenture, note, or other Indebtedness
of the Company or under any mortgage, indenture, or other instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company, whether any such Indebtedness exists as of the date
of the Indenture or is thereafter created, if (a) either (x) such event of
default results from the failure to pay any such Indebtedness at its maturity or
(y) as a result of such event of default, the maturity of such Indebtedness has
been accelerated prior to its expressed maturity and such acceleration shall not
be rescinded or annulled or the accelerated amount paid within ten days after
notice to the Company of such acceleration or such Indebtedness having been
discharged, and (b) the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to pay
principal or interest thereon, or the maturity of which has been so accelerated,
aggregates $10,000,000 or more; and (v) certain events of bankruptcy,
insolvency, or reorganization relating to the Company.

If an Event of Default occurs and is continuing with respect to the
Debentures, either the Trustee or the holders of at least a majority in
principal amount of the outstanding Debentures may declare all of the Debentures
to be due and payable immediately.

The Indenture provides that the Company will not (i) declare or pay any
dividends or make any distribution to holders of its capital stock (other than
dividends or distributions payable in shares of Common Stock) or (ii) purchase,
redeem, or otherwise acquire or retire for value any of its Common Stock, or any
warrants, rights, or options, to purchase or acquire any shares of its Common
Stock (other than the Debentures or any other convertible indebtedness of the
Company that is neither secured nor subordinated to the Debentures), if at the
time any Event of Default has occurred and is continuing or would exist
immediately after giving effect to such action.

The Trustee may require indemnity reasonably satisfactory to it before it
enforces the Indenture or the Debentures. Subject to certain limitations,
holders of a majority in principal amount of the outstanding Debentures may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from holders of the Debentures notice of any default (except a default
in payment of principal or interest) if it determines that withholding notice is
in their interests. The Company is required to file with the Trustee annually a
statement of certain officers as to the absence of defaults in fulfilling any of
the Company's obligations under the Indenture.

CERTAIN RIGHTS TO REQUIRE REPURCHASE OF DEBENTURES BY THE COMPANY

In the event of any Change in Control of the Company occurring after the
date of issuance of the Debentures and on or prior to maturity, each holder of
Debentures will have the right, at such holder's option, to require the Company
to repurchase all or any part of such holder's Debentures on the date (the
"Repurchase Date") that is 75 days after the date the Company gives notice of
the

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Change in Control (as described below) at a price (the "Repurchase Price") equal
to 101% of the principal amount thereof, together with accrued and unpaid
interest to the Repurchase Date. On or prior to the Repurchase Date, the Company
is required to deposit with the Trustee or a Paying Agent an amount of money
sufficient to pay the Repurchase Price of the Debentures that are to be repaid
on the Repurchase Date. Neither the Board of Directors of the Company nor the
Trustee, acting alone or together, can modify or waive this required repurchase
of the Debentures.

Failure by the Company to repurchase the Debentures when required under the
preceding paragraph will result in an event of default under the Indenture,
whether or not such repurchase is permitted by the subordination provisions of
the Indenture.

On or before the 15th day after the occurrence of a Change in Control, the
Company is obligated to mail to all holders a notice of the event constituting
and the date of such Change in Control, the Repurchase Date, the date by which
the repurchase right must be exercised, the Repurchase Price for Debentures, and
the procedures that a holder must follow to exercise a repurchase right. To
exercise the repurchase right, a holder of a Debenture must deliver, on or
before the 10th day prior to the Repurchase Date, written notice to the Company
(or an agent designated by the Company for such purpose) and to the Trustee of
the holder's exercise of such right, together with the certificates evidencing
the Debentures with respect to which the right is being duly exercised, duly
endorsed for transfer.

A "Change in Control" will occur when: (i) all or substantially all of the
Company's assets are sold as an entirety to any person or related group of
persons; (ii) there shall be consummated any consolidation or merger of the
Company (A) in which the Company is not the continuing or surviving corporation
(other than a consolidation or merger with a wholly-owned subsidiary of the
Company in which all Common Shares outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same consideration)
or (B) pursuant to which the Common Stock is converted into cash, securities, or
other property, in each case other than a consolidation or merger of the Company
in which the holders of the Common Stock immediately prior to the consolidation
or merger have, directly or indirectly, at least a majority of the common stock
of the continuing or surviving corporation immediately after such consolidation
or merger; or (iii) any person, or any persons acting together that would
constitute a "group" for purposes of Section 13(d) of the Exchange Act, together
with any affiliates thereof, acquires beneficial ownership (as defined in Rule
13d-3 under the Exchange Act) of at least 50% of the total voting power of all
classes of capital shares of the Company entitled to vote generally in the
election of directors of the Company. Notwithstanding clause (iii) of the
foregoing definition, a Change in Control will not be deemed to have occurred
solely by virtue of the Company; any Subsidiary; any employee share purchase
plan, share option plan, or other share incentive plan or program; retirement
plan or automatic dividend reinvestment plan; or any substantially similar plan
of the Company or any Subsidiary or any person holding securities of the Company
for or pursuant to the terms of any such employee benefit plan, filing or
becoming obligated to file a report under or in response to Schedule 13D or
Schedule 14D-1 (or any successor schedule, form, or report) under the Exchange
Act disclosing beneficial ownership by it of shares or securities of the
Company, whether at least 50% of the total voting power referred to in clause
(iii) of the foregoing definition or otherwise. (Section 14.5) A
recapitalization or a leveraged buyout or similar transaction involving members
of management or their affiliates will constitute a Change in Control if it
meets the foregoing definition.

Notwithstanding the foregoing, a Change in Control as described above will
not be deemed to have occurred if (i) the Current Market Price of the Common
Stock on the date of a Change in Control is at least equal to 105% of the
conversion price of the Debentures in effect immediately preceding the time of
such Change in Control; or (ii) all of the consideration (excluding cash
payments for fractional shares) in the transaction giving rise to such Change in
Control to the holders of Common Stock consists of shares of common stock that
are, or immediately upon issuance will be, listed on a national securities
exchange or quoted on the Nasdaq National Market, and as a result of such
transaction the Debentures will become convertible solely into such shares

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of common stock; or (iii) the consideration in the transaction giving rise to
such Change in Control to the holders of Common Stock consists of cash or
securities that are, or immediately upon issuance will be, listed on a national
securities exchange or quoted on the Nasdaq National Market, or a combination of
cash and such securities, and the aggregate fair market value of such
consideration (which, in the case of such securities, will be equal to the
average of the daily closing prices of such securities during the 10 consecutive
trading days commencing with the sixth trading day following consummation of
such transaction) is at least 105% of the conversion price of the Debentures in
effect on the date immediately preceding the closing date of such transaction.

There is no definition of the phrase "all or substantially all" as applied
to the Company's assets and used in the definition of Change in Control in the
Indenture, and there is no clear definition of the phrase under applicable law.
As a result of the uncertainty of the meaning of this phrase, in the event the
Company were to sell a significant amount of its assets, the holders and the
Company may disagree over whether the sale gives rise to the right of holders to
require the Company to repurchase the Debentures. In such event, the holders
would likely not be able to require the Company to repurchase unless and until
the disagreement were resolved in favor of the holders.

The right to require the Company to repurchase Debentures as a result of a
Change in Control could create an event of default under Senior Indebtedness, as
a result of which any repurchase could, absent a waiver, be blocked by the
subordination provisions of the Debentures. See "Subordination of Debentures."
The Company's ability to pay cash to the holders upon a repurchase may also be
limited by certain financial covenants contained in the Company's Senior
Indebtedness.

In the event a Change in Control occurs and the holders exercise their
rights to require the Company to repurchase Debentures, the Company intends to
comply with applicable tender offer rules under the Exchange Act, including
Rules 13e-4 and 14e-1, as then in effect, with respect to any such purchase. The
Change of Control purchase feature of the Debentures may in certain
circumstances make more difficult or discourage a takeover of the Company and,
thus, the removal of incumbent management. The Change in Control purchase
feature, however, is not the result of management's knowledge of any specific
effort to accumulate Common Stock or to obtain control of the Company by means
of a merger, tender offer, solicitation, or otherwise, or part of a plan by
management to adopt a series of anti-takeover provisions. Instead, the Change in
Control purchase feature is a standard term contained in other similar debt
offerings and the specific terms of this feature resulted from negotiations
between the Company and the Underwriter. Management has no present intention to
engage in a transaction involving a Change in Control.

The foregoing provisions would not necessarily afford holders protection in
the event of highly leveraged or other transactions involving the Company that
may adversely affect holders.

CONSOLIDATION, MERGER, SALE, OR CONVEYANCE

The Company may merge or consolidate with, or sell or convey all or
substantially all of its assets to, any other corporation or entity, provided
that (i) either the Company shall be the continuing entity, or the successor
entity (if other than the Company) shall be an entity organized and existing
under the laws of the United States or a state thereof or the District of
Columbia and such entity shall expressly assume by supplemental indenture all of
the obligations of the Company under the Debentures and the Indenture; (ii)
immediately after giving effect to such transactions no default or Event of
Default shall have occurred and be continuing; and (iii) the Company shall have
delivered to the Trustee an Officer's Certificate and opinion of counsel,
stating that the transaction and supplemental indenture comply with the
Indenture.

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MARKETABILITY

The Debentures are a new class of securities for which there is no
established trading market. Although the Debentures have been approved for
listing on the New York Stock Exchange, there can be no assurance that an active
trading market will develop after the Offering.

GOVERNING LAW

The Indenture and the Debentures will be governed by and construed in
accordance with the laws of the State of New York.

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<PAGE> 80

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"). Currently, 11,406,250 shares of Common Stock are
issued and outstanding, no shares of Preferred Stock are outstanding, and
627,500 shares of Common Stock are 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 is listed 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

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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.

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

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<PAGE> 82

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 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

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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.

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 May 30, 1998, 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 May 30, 1999, 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 to
issue Common Stock 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. Holders of Registrable Shares are not entitled to
request registration thereof in connection with this offering. 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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UNDERWRITING

Schroder & Co. Inc. (the "Underwriter") has agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase, and the Company has
agreed to sell to the Underwriter, $100,000,000 aggregate principal amount of
the Debentures.

The Underwriting Agreement provides that the Underwriter is obligated to
purchase all the Debentures offered hereby, if any such Debentures are
purchased.

The Underwriter has advised the Company that it proposes to offer the
Debentures directly to the public, initially at the public offering price set
forth on the cover page of this Prospectus; that the Underwriter proposes
initially to allow a concession not in excess of % of the principal amount
of the Debentures to certain dealers; and that the Underwriter and such dealers
may initially allow a concession not in excess of % of the principal amount
of the Debentures to other dealers. After the initial offering of the
Debentures, the public offering price and such concessions may be changed by the
Underwriter.

The Company has granted an option to the Underwriter, exercisable for 30
days from the date of this Prospectus, to purchase up to $15,000,000 additional
principal amount of the Debentures at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriter may exercise such option only to cover over-allotments in the sale
of the Debentures offered hereby.

The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.

The Company and its executive officers and directors will agree with the
Underwriter that, for a period of 90 days following the offering, they will not
offer, 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 the Underwriter
(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 Debentures are a new issue of securities with no existing market. The
Debentures have been approved for listing on the NYSE, but there can be no
assurance an active trading market in the Debentures will develop or be
sustained following the offering or that the purchasers of the Debentures in the
offering will be able to liquidate their investments or to resell such
Debentures at or above the initial offering price.

The Underwriter 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 Underwriter 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 $10,000,000 principal amount of
Debentures have been reserved for sale in the Offering to certain individuals,
including directors and employees of the

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Company, members of their families, and other persons having business
relationships with the Company. The price of such Debentures to such persons
will be the initial public offering price set forth on the cover of this
Prospectus. The principal amount of Debentures available for sale to the general
public will be reduced to the extent these persons purchase such reserved
Debentures. Any reserved Debentures not purchased will be offered by the
Underwriters to the general public on the same basis as the other Debentures
offered hereby.

LEGAL MATTERS

The validity of the Debentures 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 617,661 shares of Common Stock. See
"Principal Shareholders." Certain legal matters will be passed upon for the
Underwriter 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.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Debentures offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. Certain items are omitted in accordance with
the rules and regulations of the Commissions. Statements contained in this
Prospectus concerning the provisions or contents of any contract or other
document referred to herein are not necessarily complete. With respect to each
such contract, agreement, or document, reference is made to such document for a
more complete description, and each statement is deemed to be qualified in all
respects by such reference.

The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files proxy statements, reports, and other
information with the Commission. The Registration Statement (with exhibits), as
well as such proxy statements, reports, and other information, may be inspected
and copied at prescribed rates at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and Northwestern
Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants, including the Company,
at http://www.sec.gov. The Company's Common Stock is listed on the NYSE and
proxy statements, reports, and other information concerning the Company may be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.

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AMERICAN RETIREMENT CORPORATION

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... 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 and Year Ended December 31, 1996........ 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
and Year Ended December 31, 1996.......................... 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 and Year Ended December 31, 1996........ F-7
Notes to Combined and Consolidated Financial Statements..... F-9
AMERICAN RETIREMENT CORPORATION
Condensed Consolidated Balance Sheet -- June 30, 1997
(unaudited)............................................... F-22
Condensed Consolidated Statements of Operations -- Six
Months Ended June 30, 1996 and June 30, 1997
(unaudited)............................................... F-23
Condensed Consolidated Statements of Cash Flows -- Six
Months Ended June 30, 1996 and June 30, 1997
(unaudited)............................................... F-24
Notes to Condensed Consolidated Financial Statements........ F-25
CARRIAGE CLUB OF CHARLOTTE, LIMITED PARTNERSHIP AND CARRIAGE
CLUB OF JACKSONVILLE, LIMITED PARTNERSHIP
Independent Auditors' Report................................ F-28
Combined Statement of Operations -- Four Months Ended April
30, 1996.................................................. F-29
Combined Statement of Partners' Equity -- Four Months Ended
April 30, 1996............................................ F-29
Combined Statement of Cash Flows -- Four Months Ended April
30, 1996.................................................. F-30
Notes to Combined Financial Statements...................... F-31
</TABLE>

F-1
<PAGE> 87

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, except for
Note 16, which is as of
June 4, 1997.

F-2
<PAGE> 88

AMERICAN RETIREMENT COMMUNITIES, L.P.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

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

See accompanying notes to combined and consolidated financial statements.

F-3
<PAGE> 89

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

(Continued)

F-4
<PAGE> 90

AMERICAN RETIREMENT COMMUNITIES, L.P.

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

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Pro forma earnings data (unaudited) (note 16):
Income before income taxes and extraordinary items, as
reported.................................................. $4,613
Pro forma income taxes...................................... 820
------
Pro forma income before extraordinary item................ 3,793
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
======
Pro forma earnings per common share (note 16):
Pro forma income before extraordinary item................ $ 0.40
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
======
Shares used in computing pro forma income per common
share.................................................. 9,375
======
</TABLE>

See accompanying notes to combined and consolidated financial statements.

F-5
<PAGE> 91

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 AND YEAR ENDED DECEMBER 31, 1996
(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
======== ======= =======
</TABLE>

See accompanying notes to combined and consolidated financial statements.

F-6
<PAGE> 92

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
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 162 $(1,268) $ 3,296 $ 3,198
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
Deferred taxes..................................... -- -- -- (920)
Extraordinary loss on extinguishment of debt....... -- -- -- 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)
Inventory........................................ (67) (6) (21) (56)
Prepaid expenses................................. 27 (1,496) 1,894 (105)
Other assets..................................... (97) 382 -- 521
Accounts payable................................. 586 381 948 (249)
Accrued expenses................................. 1,004 (157) 487 1,130
Tenant deposits.................................. 344 60 279 202
Other long-term liabilities...................... (588) -- (87) (27)
-------- ------- ------- --------
Net cash provided (used) by operating
activities................................... 3,454 (1,880) 10,888 11,696
-------- ------- ------- --------
Cash flows from (used by) investing activities:
Additions to land, building and equipment............ (45,606) (3,237) (6,032) (71,545)
Proceeds from (purchases of) assets limited as to
use................................................ (904) 17 (2,915) 2,578
Proceeds from the sale of assets..................... 205 6 1,214 1,346
Proceeds from (purchases of) marketable securities... (52) -- (50) --
-------- ------- ------- --------
Net cash provided (used) by investing
activities................................... (46,357) (3,214) (7,783) (67,621)
-------- ------- ------- --------
</TABLE>

(Continued)

F-7
<PAGE> 93

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
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Contributions from partners.......................... -- 11,000 -- --
Distributions to partners............................ (2,580) (485) (4,659) (6,952)
Payment of redeemable preferred interests............ -- -- -- (4,805)
Proceeds from issuance of long-term debt............. 48,979 1,636 1,614 73,922
Principal payments on long-term debt................. (2,471) (628) (3,720) (5,479)
Expenditures for financing costs..................... (1,535) (130) (346) (1,364)
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
-------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents.................................. (311) 4,937 (4,006) (603)
Cash and cash equivalents at beginning of period....... 3,205 2,894 7,831 3,825
-------- ------- ------- --------
Cash and cash equivalents at end of period............. $ 2,894 $ 7,831 $ 3,825 $ 3,222
======== ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............. $ 4,946 $ 2,381 $ 7,772 $ 11,907
======== ======= ======= ========
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> 94

AMERICAN RETIREMENT COMMUNITIES, L.P.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995 AND 1996

(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
occurred in 1997.

(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.

F-9
<PAGE> 95

AMERICAN RETIREMENT COMMUNITIES, L.P.

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

(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.

(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

F-10
<PAGE> 96

AMERICAN RETIREMENT COMMUNITIES, L.P.

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

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.

F-11
<PAGE> 97

AMERICAN RETIREMENT COMMUNITIES, L.P.

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

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.

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,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Held-to-maturity:
U.S. Treasury securities....................... $ 52 $52
Exxon Capital Corporation marketable corporate
debt securities............................. 50 --
---- ---
$102 $52
==== ===
</TABLE>

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

F-12
<PAGE> 98

AMERICAN RETIREMENT COMMUNITIES, L.P.

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

(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 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,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Operating expense reserve........................ $ 349 $ 349
Tax escrow account............................... 1,904 285
Capital improvement escrow....................... 890 218
Bond principal and interest escrow............... 617 862
Tenant deposits.................................. 1,292 2,114
Collateral for letter of credit with bank........ 891 801
------ ------
5,943 4,629
Less amounts classified as current assets........ 2,411 1,022
------ ------
Assets limited as to use, excluding amounts
classified as current assets................... $3,532 $3,607
====== ======
</TABLE>

(6) LAND, BUILDINGS, AND EQUIPMENT

A summary of land, buildings and equipment is as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land............................................. $ 18,326 $ 26,519
Buildings and improvements....................... 132,775 187,239
Furniture, fixtures and equipment................ 8,960 11,512
-------- --------
160,061 225,270
Less accumulated depreciation.................... 11,141 17,423
-------- --------
148,920 207,847
Construction in progress......................... 162 5,277
-------- --------
Land, buildings and equipment, net............... $149,082 $213,124
======== ========
</TABLE>

F-13
<PAGE> 99

AMERICAN RETIREMENT COMMUNITIES, L.P.

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

(7) OTHER ASSETS

Other assets consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred financing costs, net of accumulated
amortization.................................... $2,649 $1,129
Long term investments............................. 435 --
Other............................................. 525 979
------ ------
$3,609 $2,108
====== ======
</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.

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,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Property taxes payable............................ $2,454 $2,550
Accrued payroll................................... 628 1,439
Other............................................. 1,360 2,250
------ ------
$4,442 $6,239
====== ======
</TABLE>

(9) LONG-TERM DEBT

A summary of long-term debt is as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <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
</TABLE>

F-14
<PAGE> 100

AMERICAN RETIREMENT COMMUNITIES, L.P.

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

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
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
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
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
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
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
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
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
</TABLE>

F-15
<PAGE> 101

AMERICAN RETIREMENT COMMUNITIES, L.P.

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

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
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
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
Other long-term debt, generally payable monthly............. 98 410
-------- --------
Total long-term debt...................................... 102,245 170,689
Less current portion...................................... 1,800 8,053
-------- --------
Long-term debt, excluding current portion......... $100,445 $162,636
======== ========
</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.

F-16
<PAGE> 102

AMERICAN RETIREMENT COMMUNITIES, L.P.

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

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.

(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:

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> 103

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:

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> 104

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.

F-19
<PAGE> 105

AMERICAN RETIREMENT COMMUNITIES, L.P.

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

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 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)

In connection with the initial public offering by American Retirement
Corporation (New ARC), the Partnership implemented a reorganization with New
ARC, such that all of the Partnership's assets and liabilities were contributed
to New ARC, a newly formed corporation, in exchange for common stock totaling
7,812,500 shares and a promissory note to the Partnership in the original
principal amount approximating $21.9 million. Immediately prior to the initial
public offering, which was completed on June 4, 1997, the Partnership
distributed its common stock of New ARC to its partners. New ARC sold an
additional 3,593,750 shares of its common stock in the initial public offering.
Total proceeds to New ARC from the initial public offering were $45.2 million,
after underwriting costs. A portion of the proceeds were utilized on June 4,
1997 to repay the approximately $21.9 million promissory note to the Partnership
and the Partnership distributed such amount to its limited partners. The
Partnership's historical carrying value for assets and liabilities were carried
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 received when the reorganization became
effective plus 1,562,500 shares for the approximately $21.9 million promissory
note at an offering price of $14.00 per share.

F-20
<PAGE> 106

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 recorded, as a one-time charge to
income, a deferred income tax liability of approximately $10.7 million resulting
from the difference between the accounting and tax bases of New ARC's assets and
liabilities.

F-21
<PAGE> 107

AMERICAN RETIREMENT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 21,863
Assets limited as to use.................................. 3,462
Resident and health care receivables...................... 3,912
Management services receivables........................... 719
Inventory................................................. 419
Prepaid expenses.......................................... 1,011
--------
Total current assets.............................. 31,386
Assets limited as to use, excluding amounts classified as
current................................................ 3,183
Land, buildings and equipment, net........................ 207,020
Marketable securities..................................... 52
Other assets.............................................. 4,431
--------
Total assets...................................... $246,072
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 5,935
Accounts payable.......................................... 3,042
Accrued expenses.......................................... 6,937
--------
Total current liabilities......................... 15,914
Tenant deposits............................................. 4,365
Long-term debt, excluding current portion................... 161,324
Deferred gain on sale-leaseback transactions................ 4,311
Deferred income taxes....................................... 9,807
Other long-term liabilities................................. 229
--------
Total liabilities................................. 195,950
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized,
no shares issued and outstanding....................... --
Common stock, $.01 par value; 50,000,000 shares
authorized, 11,406,250 shares issued and outstanding... 114
Additional paid-in capital................................ 60,213
Accumulated deficit....................................... (10,205)
--------
Total shareholders' equity........................ 50,122
--------
Total liabilities and shareholders' equity........ $246,072
========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-22
<PAGE> 108

AMERICAN RETIREMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Revenues:
Resident and health care revenue.......................... $33,888 $43,424
Management services revenue............................... 918 965
------- -------
Total revenues..................................... 34,806 44,389
Expenses:
Community operating expenses.............................. 21,727 27,519
Lease expense (net)....................................... -- 1,072
General and administrative................................ 2,421 4,070
Depreciation and amortization............................. 3,165 3,206
------- -------
Total operating expenses........................... 27,313 35,867
------- -------
Income from operations...................................... 7,493 8,522
Other income (expense):
Interest expense.......................................... (4,733) (6,611)
Interest income........................................... 132 364
Other..................................................... (8) (61)
------- -------
Other income (expense), net............................. (4,609) (6,308)
------- -------
Income before income taxes and extraordinary item....... 2,884 2,214
Income tax expense -- current............................... 92
Income tax expense -- deferred.............................. -- 10,728
------- -------
Income (loss) before extraordinary item................. 2,884 (8,606)
Extraordinary loss on extinguishment of debt................ 2,335 --
------- -------
Net income (loss)....................................... $ 549 $(8,606)
======= =======
Preferred return on special redeemable preferred limited
partnership interests..................................... 714 --
------- -------
Net income (loss) available for distribution to partners
and shareholders..................................... $ (165) $(8,606)
======= =======
Pro forma earnings data:
Income before income taxes and extraordinary item, as
reported................................................ $ 2,884 $ 2,214
Pro forma income tax expense.............................. 1,096 841
------- -------
Pro forma income before extraordinary item................ 1,788 1,373
Preferred return on special redeemable preferred
partnership interests................................... 714 --
------- -------
Pro forma income before extraordinary item available for
distribution to partners and shareholders............... $ 1,074 $ 1,373
======= =======
Pro forma earnings per common share:
Pro forma income before extraordinary item................ $ 0.19 $ 0.14
Preferred return on special redeemable preferred limited
partnership interests................................... 0.08 --
------- -------
Pro forma income before extraordinary item available for
distribution to partners and shareholders............... $ 0.11 $ 0.14
======= =======
Shares used in computing pro forma earnings per share
data.................................................... 9,375 9,752
======= =======
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-23
<PAGE> 109

AMERICAN RETIREMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 549 $ (8,606)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 3,165 3,206
Deferred income taxes.................................. -- 10,728
Extinguishment of debt................................. 2,335 --
Amortization of deferred gain.......................... -- (102)
Increase (decrease), net of acquisitions, in cash due to
changes in:
Receivables............................................ 190 (1,284)
Inventory.............................................. (17) 1
Prepaid expenses....................................... 39 (643)
Other assets........................................... (59) (333)
Accounts payable....................................... 248 601
Accrued expenses....................................... 1,812 620
Tenant deposits........................................ (17) 502
Other long-term liabilities............................ (74) (28)
-------- --------
Net cash provided by operating activities................... 8,171 4,662
Cash flows from investing activities:
Additions to land, building and equipment................. (2,125) (10,851)
Acquisition of retirement communities..................... (63,184) --
Acquisition of assisted living residences................. -- (11,524)
Investments in joint ventures............................. -- (1,030)
Proceeds from (purchases of) assets whose use is limit.... 289 (1,987)
Proceeds from the maturity of marketable securities....... 50 --
Proceeds from the sale of assets.......................... 437 28,789
-------- --------
Net cash provided (used) by investing activities............ (64,533) 3,397
Cash flows from financing activities:
Proceeds from initial public offering, net of expenses.... -- 45,221
Repayment of reorganization note.......................... -- (21,875)
Payment of redeemable preferred interests................. (4,805) (5,195)
Distributions to partners................................. (3,576) (4,132)
Expenditures for financing costs.......................... (341) (32)
Proceeds from the issuance of long-term debt.............. 68,948 17,132
Principal payments on long-term debt...................... (826) (20,537)
-------- --------
Net cash provided by financing activities................... 59,400 10,582
Net increase in cash and cash equivalents................. 3,038 18,641
-------- --------
Cash and cash equivalents at beginning of period............ 3,825 3,222
-------- --------
Cash and cash equivalents at end of period.................. $ 6,863 $ 21,863
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 3,356 $ 6,268
======== ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-24
<PAGE> 110

AMERICAN RETIREMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
American Retirement Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain 1996 amounts have been reclassified to conform with the 1997
presentation. Operating results for the six month period ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1997.

Prior to the IPO, the Company's facilities were owned, managed and/or
operated by one or more limited partnerships of the Company's predecessor,
American Retirement Communities, LP (the "Partnership" or "Predecessor"). As the
Company is newly formed, all references to the Company in connection with
historical financial data or otherwise include the Predecessor.

2. INITIAL PUBLIC OFFERING

On June 4, 1997, the Company completed an IPO of 3,593,750 shares of common
stock, the proceeds of which (after underwriting discounts and expenses)
amounted to approximately $45.2 million. The Company used approximately $21.9
million of the net proceeds from the IPO to repay the promissory note resulting
from the reorganization discussed below. The balance of the net proceeds are
being used for working capital purposes, including the development and
construction of free-standing assisted living residences and possible
acquisitions.

3. FORMATION OF AMERICAN RETIREMENT CORPORATION AND PRO FORMA ADJUSTMENTS

The Partnership was reorganized concurrent with the IPO such that all of
its assets and liabilities were contributed to the Company in exchange for
7,812,500 shares of common stock and a promissory note for approximately $21.9
million (the "Reorganization").

(a) Pro Forma Earnings Data: The pro forma adjustment reflected on the
statements of operations provides for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes, assuming
the Partnership was subject to taxes.

(b) Pro Forma Earnings per Share: Pro forma 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 shares received as a result
of the Reorganization plus 1,562,500 shares for the approximate $21.9 million
promissory note.

(c) Tax Expense Charge to Income: At the time of the Reorganization and as
a result of the conversion from a limited partnership to a corporation, the
Company recorded as a one-time charge to income a net deferred income tax
expense of approximately $10.7 million resulting from the difference between the
accounting and tax bases of the new corporation's assets and liabilities.

F-25
<PAGE> 111

AMERICAN RETIREMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. EQUITY

The following table summarizes the Company's equity transactions for the
six months ended June 30, 1997:

<TABLE>
<CAPTION>
ADDITIONAL
PARTNERS' COMMON PAID-IN RETAINED
EQUITY STOCK CAPITAL EARNINGS TOTAL
--------- ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... $ 37,882 $37,882
Net income (loss).................. 1,599 (10,205) (8,606)
Partner distributions.............. (2,500) (2,500)
Reorganization Note................ (21,875) (21,875)
Transfer of partnership equity for
7,812,500 shares of common
stock............................ (15,106) 78 15,028 0
Net proceeds from issuance of
3,593,750 shares of common
stock............................ 36 45,185 45,221
-------- ---- ------- -------- -------
Balance at June 30, 1997........... $ -- $114 $60,213 $(10,205) $50,122
======== ==== ======= ======== =======
</TABLE>

5. INCOME TAXES

The total provision for income taxes for the quarter ended June 30, 1997
was $10.8 million consisting of current income tax expense of $.1 million and
deferred tax expense of $10.7 million. The deferred tax expense includes an
increase in deferred income tax liabilities of $12.2 million primarily related
to the Reorganization. The increase in deferred income tax liabilities is
partially offset by an increase in deferred income tax assets of $2.3 million,
also related primarily to the Reorganization. The Company believes that it is
more likely than not that the benefits of the deferred income tax assets will be
realized. Accordingly, the Company has not established a valuation allowance
against the deferred tax assets. The net deferred income tax liability as of
June 30, 1997 was $9.8 million.

6. ACQUISITIONS

In May 1997, the Company acquired assisted living residences in Tarpon
Springs, Florida and Corpus Christi, Texas and a leasehold interest in an
assisted living residence in Victoria, Texas. The total consideration was
approximately $11.5 million, of which approximately $8.2 million was financed
through mortgage loans and the remaining $3.3 million was paid in cash.

7. RECENTLY ISSUED ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 , "Earnings Per
Share". This statement establishes and simplifies standards for computing and
presenting earnings per share. SFAS No. 128 will be effective beginning with the
Company's quarter ended December 31, 1997 and requires the restatement of all
previously reported earnings per share data that are presented. Early adoption
of SFAS No. 128 is not permitted. SFAS No. 128 replaces primary and fully
diluted earnings per share. There will be no impact on the calculation of basic
earnings per share for the quarters ended June 30, 1997 and 1996. Diluted
earnings per share is not expected to differ materially from basic earnings per
share.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". The statement establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise

F-26
<PAGE> 112

AMERICAN RETIREMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

during a period from transactions and other events and circumstances from
non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distribution to owners. SFAS No.
130 will be effective for the Company's fiscal year ending December 31, 1998.
Adoption of SFAS No. 130 is not expected to significantly impact the Company's
financial position or results of operations, including the required comparative
presentation for prior periods.

In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information" which supersedes SFAS No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
operating segments, in annual financial statements and would require that those
enterprises report selected segment information in interim financial reports to
shareholders. Operating segments are defined as revenue-producing components of
the enterprise which are generally used internally for evaluating segment
performance. SFAS No. 131 will be effective for the Company beginning with the
Company's first quarter of 1998. Adoption of SFAS No. 131 will not impact the
Company's financial position or results of operations.

F-27
<PAGE> 113

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-28
<PAGE> 114

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-29
<PAGE> 115

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-30
<PAGE> 116

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-31
<PAGE> 117

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-32
<PAGE> 118

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

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 THE 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......................... 9
The Company.......................... 17
Use of Proceeds...................... 18
Price Range of Common Stock.......... 19
Dividend Policy and Prior
Distributions...................... 19
Capitalization....................... 20
Unaudited Pro Forma Condensed
Combined Financial Information..... 21
Selected Combined and Consolidated
Financial Data..................... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 29
Business............................. 41
Management........................... 60
Principal Shareholders............... 68
Certain Transactions................. 69
Description of Debentures............ 73
Description of Capital Stock......... 80
Underwriting......................... 84
Legal Matters........................ 85
Experts.............................. 85
Available Information................ 85
Index to Consolidated Financial
Statements......................... F-1
</TABLE>

======================================================
======================================================
$100,000,000
[AMERICAN RETIREMENT CORPORATION LOGO]
% CONVERTIBLE SUBORDINATED

DEBENTURES DUE 2004

------------------------
PROSPECTUS
------------------------
SCHRODER & CO. INC.
, 1997

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