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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

American Retirement Corporation

Registrant’s Telephone Number, Including Area Code: (615) 221-2250

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
NONE

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  o      No  x

The aggregate market value of common stock held by non-affiliates of the registrant as of June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $34.9 million. The market value calculation was determined using a per share price of $2.50, the price at which the common stock was last sold on the New York Stock Exchange on such date. For purposes of this calculation, shares held by non-affiliates excludes only those shares beneficially owned by officers, directors, and shareholders owning 10% or more of the outstanding common stock (and, in each case, their immediate family members and affiliates).

As of March 3, 2003, 17,341,191 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for use in connection with the Annual Meeting of Shareholders to be held on May 20, 2003 are incorporated by reference into Part III, items 10, 11, 12 and 13 of this Form 10-K.

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CONTENTS:

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PART I

Item 1. Business

The Company

American Retirement Corporation (collectively with its wholly-owned and majority owned subsidiaries, the “Company”) is a national senior living and health care services provider offering a broad range of care and services to seniors, including independent living, assisted living, skilled nursing and therapy services. Established in 1978, the Company believes that it is a leader in the management of senior living communities, including independent living communities, continuing care retirement communities (“CCRCs”), free-standing assisted living communities (“Free-standing ALs”), and the development of specialized care programs for residents with Alzheimer’s and other forms of dementia. The Company’s operating philosophy was inspired by the vision of its founders, Dr. Thomas F. Frist, Sr. and Jack C. Massey, to enhance the lives of seniors 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 currently operates 65 senior living communities in 14 states, with an aggregate unit capacity of approximately 12,900 units and resident capacity of approximately 14,400. The Company owns 24 communities, leases 35 communities, and manages six communities pursuant to management agreements.

Since its inception, the Company has developed expertise in operating senior living communities throughout the United States. The Company operates large CCRCs and independent living communities (“Retirement Centers”) that provide an array of services, including independent living, assisted living and skilled nursing care in large, often campus style settings. The Company’s Retirement Centers are established communities with an average unit capacity of 309 units, and generally maintain high and consistent occupancy levels, many with waiting lists of prospective residents. The Company’s Retirement Centers are the core segment of the Company’s business and comprise 32 of the 65 communities that the Company operates, representing approximately 77% of the total unit capacity of the Company’s communities.

The Company has also developed and acquired a number of Free-standing ALs, most of which began operations during 1999 and 2000. The Company’s Free-standing ALs have an average unit capacity of 91 units. Most Free-standing ALs provide specialized care such as Alzheimer’s, memory enhancement and other dementia programs. The Company currently operates 33 Free-standing ALs, representing approximately 23% of the total unit capacity of the Company’s communities.

Care and Services Programs

The Company provides a wide array of senior living and health care services at its communities, including independent living, assisted living and memory enhanced services (with special programs and living units for residents with Alzheimer’s and other forms of dementia), skilled nursing services, and therapy 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 plans 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 for seniors that offers health care and other services. Independent living services provided by the Company include daily meals and dining programs, transportation, social and recreational activities, laundry, housekeeping, security, and health care monitoring. The Company employs health care professionals to foster the wellness of its residents by offering health screenings, ongoing dietary, exercise and fitness classes, and chronic disease management (such as diabetes with its attendant blood glucose monitoring). Subject to applicable government regulation, personal care and medical services are available to independent living residents. The Company’s residency agreements with its independent living residents (other than entrance fee contracts) are generally for a term of one year (terminable by the resident upon 30 to 60 days notice), although most residents remain for many years. The agreements generally provide for increases in billing rates each year (subject to specified ceilings at certain of our communities). Residents are also billed monthly for ancillary services utilized over and above those included in their recurring monthly service fees. These revenues are generally from private pay sources and are recognized monthly when the services are provided.

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Assisted Living and Memory Enhanced Services

Residents who receive the Company’s assisted living services generally need assistance with some or all ADLs, but do not require the more acute medical care traditionally given in nursing homes. Upon admission, in consultation with the resident and the resident’s family and medical consultants, each assisted living resident is assessed to determine his or her health status, including functional abilities and need for personal care services. Each resident also completes a lifestyles assessment to determine the resident’s preferences. From these assessments, a care plan is developed for each resident to ensure that all staff members who render care meet the specific needs and preferences of each resident whenever possible. Each resident’s care plan is reviewed periodically to determine when a change in care is needed.

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

•		Personal Care Services, which include assistance with ADLs such as ambulation, bathing, dressing, eating, grooming, personal hygiene, monitoring or assistance with medications, and confusion management,
•		Support Services, such as meals, assistance with social and recreational activities, laundry services, general housekeeping, maintenance services and transportation services, and
•		Special Care Services, such as the Arbors memory enhanced programs and other specialized services to care for residents with Alzheimer’s and other forms of dementia in a comfortable, homelike setting.

The Company maintains programs and special Arbors units at most of its assisted living communities for residents with Alzheimer’s and other forms of dementia that 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. These special units are located in a separate area of the community and have their own dining and lounge facilities, and specially trained staff.

Agreements for these services are month to month and provide for annual or other periodic increases to the monthly service fees. Monthly fees are based on size of unit selected, additional services provided, and level of care required. Specialized units for those with Alzheimer’s or other forms of dementia have higher billing rates to cover the increased staffing and program costs associated with these services. These revenues, generally from private pay sources, are recognized as revenue on a monthly basis when the services are provided.

Skilled Nursing

The Company operates seventeen skilled nursing centers located on its Retirement Center campuses, providing traditional skilled nursing care by registered nurses, licensed practical nurses, and certified nursing aides. The Company also offers a range of rehabilitation services in these communities. Rehabilitation services are typically rendered immediately after, or in lieu of, acute hospitalization in order to treat specific medical conditions. The residents are primarily the Company’s independent and assisted living residents utilizing the skilled nursing centers on a temporary or long-term basis, in addition to others from outside the community who may have temporary stays following hospitalization or other health issues, some of which also become long-term residents. These skilled nursing and rehabilitation services are provided to the individuals on a daily fee basis, with additional charges for specialized equipment, therapy, medications or medical supplies in many cases. These services are paid for primarily by private pay sources including long-term care insurance and Medicare, and in some cases Medicaid. Daily rates are revised periodically in response to cost changes and market conditions. These daily revenues are recognized when the services are provided.

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Therapy Services

The Company historically contracted with independent third parties to provide therapy services to its residents. Beginning in 2000, the Company began staffing therapy services itself and greatly expanded its in-house therapy programs and now provides a range of therapy services to its independent living, assisted living, and skilled nursing residents. The therapy services provided by the Company include physical, occupational, and speech therapy services. The Company believes that by providing these in-house therapy services, it is able to maintain a consistent, high level of care to its residents, provide a closer relationship between the therapist and the resident, and provide many continuing education opportunities for residents and their families through health fairs, seminars, and other consultative interactions. In addition, programs focused on wellness and physical fitness allow residents to maintain maximum independence. These services may be reimbursed under Medicare or paid directly by residents from private sources. Revenue is recognized as services are provided.

Entrance Fee Agreements

Six of the Company’s Retirement Centers (four owned, one leased and one managed) are CCRC’s that provide housing and health care services through entrance fee agreements with residents (the “EF Communities”). Under these agreements, residents pay an entrance fee, typically $100,000 to $150,000 or more. The amount of the entrance fee varies depending upon the type and size of the dwelling unit selected, the resident’s lifecare benefit election and other variables.

These entrance fee agreements include limited lifecare benefits which are typically (a) a certain number of free days in the community’s health center during the resident’s lifetime, (b) a discounted rate for such services, or (c) a combination of the two. In addition, a portion of the entrance fee is refundable to the resident or the resident’s estate upon termination of the entrance fee contract. The limited lifecare benefit varies based upon the extent to which the resident’s entrance fee is refundable.

The entrance fee agreements typically contain provisions which reduce the Company’s legal obligation to the resident to a stated percentage of the entrance fee that is refundable to the resident which is reduced to a fixed minimum over a relatively short period (generally three to five years). However, for accounting purposes, these revenues are recognized over a longer period based on actuarial projections. The refundable amount of the entrance fee is a long-term liability and is recorded by the Company as refundable portion of entrance fees, until termination of the agreement. The non-refundable portion of the fee is recorded as deferred entrance fee income and is amortized into revenue using the straight-line method over the estimated remaining life expectancy of the resident, based upon actuarial projections.

At certain of its EF Communities, the Company offers an entrance fee program that allows the resident to participate in the appreciation in the value of the resident’s unit (the “Partners Plan”). Under the Partners Plan, the entrance fee is refundable to the resident or the resident’s estate only upon the sale of the unit to a succeeding resident unless otherwise required by applicable state law. Typically, Partner Plan residents receive priority access to assisted living and skilled nursing services, but no discounted or other lifecare benefits. The resident shares in a specified percentage, typically 50%, of any appreciation in the entrance fee paid by the succeeding resident. The entrance fees payable under the Partners Plan are recorded by the Company as refundable entrance fees and are amortized into revenue using the straight-line method over the remaining life of the building.

The residents under entrance fee agreements also pay a monthly service fee which entitles them to the use of certain amenities and certain services. Residents may also elect to obtain additional services, which are billed on a monthly basis or as the services are provided. The Company recognizes these additional fees as revenue on a monthly basis when these services are provided. If a resident terminates the agreement, they are required to continue to pay their monthly service fee for the lesser of a specified time period (typically one year) or until the unit is reoccupied.

Proceeds from entrance fee sales, net of refunds paid on contract terminations, provided $19.2 million of cash to the Company in 2002.

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Business Operations and Marketing

Management Structure

The Retirement Centers are managed by an Executive Director, with various department heads responsible for functional areas such as human resources, accounting, dining services, and maintenance. Within the Retirement Centers, healthcare professionals manage the assisted living and memory enhanced programs, as well as wellness and other programs. Licensed professionals also manage each of the skilled nursing centers on these campuses and direct the nursing staff.

The Free-standing ALs are managed by residents managers who focus on resident care. These communities receive daily administrative central support for accounting and finance, human resources, dining and maintenance. By providing strong program, management and administrative support from the home office and the regional level, the staff at the Free-standing ALs can focus on care of the residents and interaction with their families or other caregivers.

The Retirement Centers and Free-standing ALs report to various operations Vice Presidents. These regional managers and their staff regularly visit the communities, providing inspection of the physical facilities, staff development and training, financial and program reviews, regulatory and compliance support, and quality assurance reviews.

The home office provides central support to the communities in various areas, including information technology, human resources, training, accounting, finance, insurance, legal, development, sales and marketing, dining services, therapy services, operations and program support, and national purchasing programs. Home office staff also provide support for budgeting, financial analysis and strategic planning. In addition, quality assurance and risk management staff review and monitor key safety and quality measurements, train community staff, and visit communities regularly for regulatory and other compliance programs. Human resource programs are developed for staff training and retention in the communities, and are implemented by home office and regional staff.

The Company believes that, through its regional and central staff, it is able to provide strong support by experts in each functional area on a cost effective basis, which provides an advantage over many other smaller or local competitors. In addition, by providing daily administrative support to its Free-standing ALs, the company believes that its community staff are able to stay focused on resident care and provide a higher level of service to the residents and their families.

Marketing

Each community has an on-site marketing director, and additional marketing staff based on its size. These community based marketing personnel are involved in daily activities with prospective residents and key referral sources including current residents and their families. Home office and regional marketing directors assist each community in developing, implementing and monitoring their detailed marketing plan. The marketing plans include goals for lead generation, wait lists, referrals, community outreach, awareness events, prospect follow-up, and monthly move-ins. Competitive analyses are also updated regularly. Home office marketing staff provide coordination and monitoring of these marketing plans, development of pricing strategies and overall marketing plans, assistance with creative media, and selection and training of regional and community staff. The Company believes that this locally based marketing approach, with strong regional and central monitoring and support, provides an advantage over many smaller or regional competitors.

Feedback and Quality Assurance

The Company solicits regular feedback from its residents, their families, and its employees through various satisfaction surveys. It also regularly performs quality assurance reviews by community, regional and home office staff, in addition to being subject to surveys and reviews by various local, state and federal regulatory agencies. The Company believes that each of these activities provides important feedback which can be used by management to maintain high levels of safety and quality, and to continue to look for opportunities to improve its procedures and programs.

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Managed Communities

The Company manages several communities under management agreements with terms of three to 20 years. The Company may be responsible for providing all employees, marketing and operations of the community at the owners’ expense, and receive a monthly fee for its services based either on a contractually fixed amount or a percentage of revenues or income. In other agreements, the Company may provide management personnel only, and provide assistance with marketing, finance and other operations. The Company’s existing management agreements expire at various times through June 2018, but certain agreements may be canceled by the owner of the community, without cause, on three to six months’ notice.

Business Strategy

Except for its six EF Communities, the Company’s Retirement Centers all operate entirely on a monthly service fee (“MSF”) basis. The Company acquired most of its MSF Retirement Centers between 1990 and 1996. The Company was able to acquire many of these at below historical cost because they had not met the initial development projections of their respective developers. The Company’s MSF Retirement Centers had an average aggregate occupancy level in excess of 95% during 2002. The Company acquired its EF Communities, which the Company acquired in July 1998. The Company’s EF Communities during 2002 had an aggregate occupancy level of 91% (IL 93%, AL 90%, SNF 89% and ME 84%). The Company developed the majority of its Free-standing ALs, most of which were opened during 1999 and 2000. The Company’s Free-standing ALs during 2002 achieved an aggregate average occupancy level of 73% and an ending occupancy of 80%. The Company incurred approximately $360 million of costs in the development and/or acquisition of its Free-standing AL business segment, a significant portion of which was financed by the proceeds of short term construction debt and by the proceeds of the 1997 issuance of $138 million of subordinated bonds (the “Old Debentures” — see Note 10 to the consolidated financial statements) that were due in October 2002. The Company developed and acquired its portfolio of Free-standing ALs at a time in which the assisted living industry was experiencing a building boom that resulted in significant overcapacity. Consequently, its Free-standing ALs have not achieved aggregate stabilized occupancy as quickly as anticipated, and the Company entered 2002 with approximately $371.7 million of current debt maturities at a time when its Free-standing ALs were not yet stabilized and operating at levels originally anticipated by the Company.

The Company responded to the large amount of debt maturing in 2002 by developing and executing a Refinancing Plan (see “Completion of Refinancing Plan, HCPI Transactions and Exchange Offer” and Note 10 to the consolidated financial statements). The plan consisted of a series of refinancings and sale lease-back transactions involving both Retirement Centers and Free-standing ALs. As a result of completing the Refinancing Plan, the Company has extended the maturity of substantially all of its debt arrangements to January 2004 or later, and is now devoting its full attention to increasing the operating cash flow of its two business segments. The Company’s strategies for improving its operating cash flow include the following steps:

Increase Retirement Center Occupancy and Margins:

The Company’s Retirement Centers, which represent approximately 77% of its total unit capacity, are well-established communities with strong reputations within their respective markets. They generally sustain high occupancy levels and most maintain waiting lists of prospective residents. At December 31, 2002 and 2001, the Company’s Retirement Centers had occupancy rates of 94% and 93%, respectively. Over one-half of the Retirement Centers currently have occupancies that are in excess of 96%, and the Company believes that it will be able to increase the occupancy levels of the remaining Retirement Centers above that level. Therefore, despite the current high level of Retirement Center occupancy, the Company expects to achieve improved operating results from its Retirement Centers through incremental occupancy increases as a result of increased sales and marketing programs, control of operating expenses, and increased revenues from ancillary services (such as therapy) and selective price increases.

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Increase Entrance Fee Sales:

The Company’s six EF Communities have 3,174 total units, of which 2,067 are independent living. Based upon current entrance fee prices, the estimated sales price for these 2,067 units (including both occupied and vacant units) is approximately $329 million. The current aggregate occupancy of the IL units within the EF Communities is 93%, and the 141 independent living units available at December 31, 2002 represent approximately $22.6 million of the total $329 million, based upon current entrance fee prices. The entrance fee paid by residents who enter EF Communities represents a significant financial investment for prospective residents. Accordingly, recent economic conditions and the declining stock market have had a pronounced, negative effect on the marketing of the Company’s EF Communities. This has been mitigated by the relatively strong resale housing market in many areas, since many people utilize the equity in their homes to fund retirement housing. Furthermore, the Company’s significant debt obligations maturing in 2002 had a more negative impact on the marketing of the EF Communities during 2001 and 2002 than on the marketing of the MSF Retirement Centers. With the completion of the Refinancing Plan and increased sales and marketing efforts at these EF Communities, the Company experienced stronger sales during the second half of 2002 and anticipates continued progress during 2003 in the marketing of its entrance fee units, resulting in higher cash flows from entrance fee sales. The Company’s five owned and leased EF Communities recorded $26.2 million of entrance fee sales, and paid refunds as a result of contract terminations of $9.4 million, resulting in $16.8 million net proceeds from entry fee sales during 2002. In addition, Freedom Square, the EF Community managed by the Company, recorded $7.2 million of entrance fee sales, paid refunds as a result of contract terminations of $1.9 million, resulting in $5.3 million net proceeds from entry fee sales during 2002. Approximately $7.8 million of the $26.2 million of entrance fee sales occurred during the three months ended December 31, 2002.

Increase Cash Flow from Maturing EF Communities:

The majority of the Company’s six EF Communities were opened in the early 1990’s and one opened in 1998. As entrance fee communities mature (typically a ten to twelve year process), the annual turnover of residents increases, typically at a rate of approximately 1% per year, until turnover stabilizes at a rate of approximately 12-15% per year. As a resident of an entrance fee community vacates his or her independent unit (often to move to AL or SNF), the community re-sells the unit to a new resident. When the former resident leaves the community, he or she (or their estate) receives a refund which is typically a percentage of the initial entrance fee that he or she paid. Consequently, the turnover of residents results in new entrance fee sales and partial entrance fee refunds. As the Company’s EF communities mature, resident turnover increases and this turnover produces an increasing stream of cash flow generated by the sale and refund of entrance fees.

In addition, there typically is a gap between the monthly service fee billing rates paid by a current resident and the current market rate payable by a new resident. As new residents enter the EF Communities at current market rates, replacing former residents at lower billing rates, the Company is able to generate additional revenues at the same level of occupancy. This dynamic is more pronounced at the Company’s six EF Communities than it is at the MSF Retirement Centers, and represents a significant source of improved economics as the Company’s EF Communities continue to mature and reach stabilized levels of resident turnover.

Improve Results from Free-standing ALs:

The Company’s Free-standing ALs, which represent approximately 23% of the Company’s total unit capacity, are in the latter stages of fill-up. The free-standing AL marketplace continues to suffer from adverse market conditions primarily related to overcapacity and lack of product familiarity. These conditions have contributed to longer than anticipated fill-up periods, price discounting and competition for experienced staff. The Company’s Free-standing ALs are experiencing steady occupancy gains having increased from an aggregate occupancy of 63% at December 31, 2001 to 80% as of December 31, 2002. The early stages of fill-up for Free-standing ALs typically produce operating losses as a result of high fixed costs and limited revenues associated with low levels of occupancy. At occupancy levels between 70-80% the Company’s Free-standing ALs incur all of the fixed and most of the variable costs required to operate at full occupancy. Therefore, as occupancy moves from 80% to 90% or better, the Company expects its operating margins to improve. Furthermore, there has been a substantial reduction in new free-standing AL development over the last few years, and as product familiarity and market demand come back into balance with supply, the Company expects that price discounting will be a less significant factor in the economics of assisted living. Because of the effects of price discounting in the current assisted living marketplace, the process of increasing operating margins is often two-stage. A Free-standing AL completes the first stage when it attains and maintains an occupancy level of 90% or better. The second stage entails increasing selling prices to new residents so that over a one to three year period, discounted rates are replaced by undiscounted rates. Accordingly, the Company expects its future Free-standing AL operating margins to benefit from higher

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occupancy, lower marketing costs associated with stabilized census, the expiration of existing incentive pricing arrangements, and higher pricing generally.

Control Operating Expenses:

The Company has focused on reducing certain costs, such as contract labor and insurance and liability costs, through extensive quality assurance and risk management efforts as well as other operating costs reduction programs. In addition, the Company will continue to focus on its overhead and administrative costs for savings opportunities in areas such as telecommunications, utilities and staffing.

Operating Segments

The Company operates in two business segments: Retirement Centers and Free-standing ALs. The Retirement Centers include CCRCs, EF Communities and congregate living residences. The Retirement Centers are established communities with strong reputations within their respective markets and generally maintain high and consistent occupancy levels, most with waiting lists of prospective residents. Free-standing ALs are smaller than Retirement Centers and provide assisted living and specialized care such as Alzheimer’s and memory enhancement programs. Most of the Company’s Free-standing ALs began operations during 1999 and 2000 and are in the fill-up stage.

The following table presents the number, total unit capacity and total occupancy of the Company’s communities at December 31, 2002 and 2001.

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Completion of Refinancing Plan, HCPI Transactions and Exchange Offer

During 2001, the Company developed its Refinancing Plan to address its debt and lease obligations which matured during 2002, including $132.9 million of its Old Debentures. Between November 2001 and September 2002, the Company consummated sale lease-back transactions relating to 16 communities and various other mortgage refinancing and capital raising transactions. In addition, on September 30, 2002, the Company completed the Refinancing Plan and repaid the Old Debentures primarily through the completion of the HCPI Transactions and the Exchange Offer described below.

On August 14, 2002, the Company entered into a loan agreement with Health Care Property Investors, Inc. (“HCPI”), a real estate investment trust, pursuant to which HCPI agreed to loan one of the Company’s subsidiaries $112.8 million (the “HCPI Loan”). The Company also contemporaneously entered into a contribution agreement with HCPI (the “HCPI Investment Agreement”) under which HCPI agreed to make a $12.2 million equity investment in certain other subsidiaries of the Company (the “HCPI Equity Investment”). The HCPI Loan and the HCPI Equity Investment are collectively referred to as the “HCPI Transactions.”

HCPI’s obligation to consummate the HCPI Transactions was subject to a number of conditions and contingencies, including the requirement that the Company successfully complete an exchange offer with the holders of the Old Debentures (the “Exchange Offer”). On September 26, 2002, the Company completed the Exchange Offer by exchanging $99.8 million aggregate principal amount of its Old Debentures for approximately $86.8 million aggregate principal amount of the Company’s new 5 3/4% Series A Senior Subordinated Notes Due September 30, 2002 (the “Series A Notes”) and approximately $16.0 million aggregate principal amount of its new 10% Series B Convertible Senior Subordinated Notes Due April 1, 2008 (the “Series B Notes”). For each $1,000 principal amount of Old Debentures exchanged, the Company issued $869 principal amount Series A Notes and $160 principal amount of Series B Notes. Following completion of the Exchange Offer, approximately $33.1 million aggregate principal amount of Old Debentures were outstanding. The Series A Notes and the Series B Notes are unsecured and subordinated to all of the Company’s existing and future indebtedness and lease financing obligations. Interest on the Series B Notes is due semiannually. The Company has the option to pay up to 2% interest per year on the Series B Notes through the issuance of additional Series B Notes rather than in cash. The Company’s Series B Notes are convertible at any time into shares of the Company’s common stock at a conversion price of $2.25 per share at the option of the holder.

On September 30, 2002 the Company completed the HCPI Transactions, paying approximately $5.2 million of transaction costs and receiving approximately $119.8 million of net proceeds, which were used to repay the $86.8 million of Series A Notes and the $33.1 million of Old Debentures that were not exchanged in the Exchange Offer. Approximately $4.3 million of the transaction costs have been capitalized as debt financing costs in other assets and will be amortized over the five year term of the HCPI Loan.

The HCPI Loan matures on September 30, 2007 and has a cash interest payment rate of 9% per year, plus additional accrued interest (which converts to principal) to its stated interest rate of 19.5%. The Company will only be required to pay in cash 9% interest per year until April 2004. Thereafter, the cash interest payment rate will increase each year by fifty-five basis points. The cash portion of interest is payable quarterly, with any unpaid interest accruing and compounding quarterly. The Company will be permitted to repay the loan in whole or in part at any time after September 30, 2005. The $112.8 million principal balance and all accrued interest will be payable at the maturity of the loan.

The $12.2 million HCPI Equity Investment was made in return for a 9.8% ownership interest in certain subsidiaries (the “Real Estate Companies”) of the Company’s subsidiary that is the borrower under the HCPI Loan. The Real Estate Companies function solely as passive real estate holding companies owning the real property and improvements of nine of the Company’s Retirement Centers. These Retirement Centers are leased to, and operated by, other operating subsidiaries of the borrower subsidiary in which HCPI has no interest. During the term of its investment in each Real Estate Company, HCPI and the borrower subsidiary will have mutual decision making authority with respect to the Real Estate Companies. HCPI has the right to receive certain preferred distributions from any cash generated by the Real Estate Companies. The borrower subsidiary has the right to repurchase HCPI’s minority interest in the Real Estate Companies for one year beginning September 30, 2006. HCPI has the right to purchase the borrower subsidiary’s interests in the Real Estate Companies beginning September 30, 2007.

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The HCPI Loan is secured by a first-priority security interest in the borrower subsidiary’s 90.2% ownership interests in the Real Estate Companies, and in certain cash reserve accounts. If the borrower subsidiary defaults or fails to repay the loan at maturity, HCPI’s initial claim against that subsidiary, absent fraud or certain other customary events of malfeasance, will be to exercise its security interests. If the foreclosure does not fully satisfy the HCPI Loan, the borrower subsidiary’s personal liability for the remainder of the HCPI Loan is limited to an amount equal to the equity value of one of the borrower’s subsidiaries other properties. In the event of a default under the HCPI Loan, the operating subsidiaries will continue to operate these communities under a master lease, which has an initial term of 15 years, commencing September 30, 2002, with two ten-year extensions that are exercisable at the Company’s option.

Between November 2001 and September 2002, pursuant to the Refinancing Plan, the Company consummated sale lease-back transactions relating to 16 communities and various other mortgage refinancing and capital raising transactions, which in the aggregate generated gross proceeds of approximately $362.0 million. The Company used approximately $327.2 million of the proceeds to repay related debt and to fund related reserve and escrow requirements. The Company used the remaining $34.8 million of proceeds to pay transaction costs associated with the Refinancing Plan and for working capital. As a result of the completion of the Refinancing Plan, the Company has extended the maturity of substantially all of its debt arrangements to January 2004 or later. The Company has debt maturities totaling $50.5 million due in the first two quarters of 2004. Expected cash flows from operations will not be sufficient to meet these requirements. The Company plans to refinance or extend this debt during 2003. The failure to extend, refinance or repay the debt due in 2004 will have a material adverse effect upon the Company.

Synthetic Lease Communities

At December 31, 2001, the Company operated 14 of its communities (two Retirement Centers and 12 Free-standing ALs) under a lease structure commonly referred to as a synthetic lease. The Company’s synthetic leases were treated as operating leases for accounting purposes and financing leases for income tax purposes.

The synthetic leases contained termination rights whereby the Company as lessee had the right to terminate the leases and acquire the leased assets in exchange for the assumption of related debt, forgiveness of note receivables, and the repayment of lessor equity. Upon termination or expiration of the synthetic leases, the Company could either purchase the property from the lessor at a predetermined amount, sell the property to a third party, or request a renewal of the lease agreement. If the property was sold to a third party for less than the original cost, the Company was obligated, under residual value guarantees, to pay the lessor an amount equal to any shortfall, not to exceed approximately 85% of the original cost of the communities.

During the fourth quarter of 2001, the Company determined that in order to simplify its financial structure, and as a condition of certain elements of its Refinancing Plan, it would terminate all synthetic leases during 2002. The Company’s synthetic leases were structured such that upon the termination of these synthetic leases, the Company became the owner of each community. The Company did not incur any cash costs in connection with the termination of the synthetic leases other than transaction costs and does not have any remaining synthetic leases. See Note 17 to Consolidated Financial Statements.

Off-Balance Sheet Assets — Leased and Managed Communities

As of December 31, 2002, the Company operates 32 Retirement Centers and 33 Free-standing ALs. Of the 32 Retirement Centers, the Company owns 11, operates three pursuant to lease financing obligations (which include purchase options) and 12 pursuant to operating leases. The Company manages six Retirement Centers for third parties and has invested $6.0 million in purchase options for two of the six managed communities. Of the remaining four managed communities, two are cooperatives that are owned by their residents and one is owned by a not-for-profit sponsor. The Company’s remaining management agreement relates to the Freedom Square Retirement Center (“Freedom Square”), which the Company operates pursuant to a long-term management contract. The initial term of the management contract has 16 years remaining, and there is an additional extension term of 20 years, exercisable at the Company’s option. Freedom Square is a 730 unit entrance fee community and the Company earns a management fee pursuant to the Freedom Square management contract that is equal to all of the cash flow generated by the community, including entrance fee sales proceeds, that is in excess of its operating costs, capital expenditures, mortgage payment and a fixed $3.0 million annual distribution to the owner, which escalates 3% annually. The Company has guaranteed the $17.4 million first mortgage debt secured by the land, and certain buildings and equipment at Freedom Square.

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Of the 33 Free-standing ALs operated by the Company as of December 31, 2002, 11 were owned, seven were operated pursuant to lease financing obligations, and 13 were operated pursuant to operating leases. The two remaining free-standing assisted living residences are non-consolidated and owned by joint ventures. ARC owns 50% of one of the joint ventures and 37.5% of the other and has joined with its venture partners in guaranteeing $12.1 million of first mortgage debt secured by the two joint venture assets.

Sale Lease-back Transactions

Pursuant to the Refinancing Plan, the Company completed 16 sale lease-back transactions, including the sale of 11 pre-stable Free-standing ALs and five Retirement Centers. During 2002, the Company recorded losses related to the 11 Free-standing AL sale lease-back transactions totaling $30.8 million. In addition, during 2001, the Company recorded losses of $7.9 million during the quarter ended December 31, 2001 bringing the total loss on the sale lease-back Refinancing Plan transactions to $38.7 million. These losses are considered residual value guarantee amounts and have been fully recognized as lease expense. The Company does not expect to incur any additional residual value guarantee amounts. Several of the sale lease-back agreements contain provisions for future earn-out payments to the Company in excess of the original sales prices, dependent on future operating results.

In addition, because the Company’s sale lease-back transactions resulted in the early termination of certain existing synthetic leases, the Company accelerated the amortization of leasehold acquisition costs beginning in the fourth quarter of 2001. As a result of this acceleration, the Company recorded additional amortization costs of $472,000 during the quarter ended December 31, 2001 and $8.8 million during the year ended December 31, 2002, bringing the total amount of accelerated amortization related to these sale lease-back transactions to $9.3 million.

The Company recorded a total of approximately $48.0 million in losses related to the sale lease-backs of the 11 pre-stable Free-standing ALs. The Company did not incur any cash costs other than transaction costs in connection with these transactions. Given the long-term nature of the lease-back arrangements and the earn-out provisions in the sales contracts, the Company recorded these transactions as long-term financings. Although lease accounting rules require the recognition of a loss in the amount of the difference between the sales prices and the Company’s cost basis in the assets (including the leasehold acquisition costs of its synthetic leases) and the residual value guarantees in the synthetic leases, the Company believes it will continue to derive economic benefits from the assets in the form of future payments under the earn-out provisions in excess of the amounts currently included in the sales price, as well as from any improvement in operating results as the communities increase occupancy and improve performance.

During 2002, the Company recorded deferred gains of $17.6 million on the five Retirement Center sale lease-back transactions. The deferred gain is being amortized over the 15 year term of the initial lease periods, increasing the Company’s deferred gain on sale lease-back transactions to $27.6 million at December 31, 2002, net of amortization. See Note 11 to the consolidated financial statements.

Managed SPE Communities

During 1998 and 1999, the Company entered into a number of agreements with special purpose entities (“SPEs”) for the development and management of 26 Free-standing ALs (“Managed SPE Communities”). Under the terms of these agreements, following development and construction, the Managed SPE Communities leased the communities from third-party lessors. The Company managed each of the Managed SPE Communities pursuant to a management agreement that provided for the payment of management fees to the Company based on a percentage of each community’s gross revenues, and required the Managed SPE Communities to fund all costs associated with the operations of the communities up to certain specified limits. The Company was responsible for paying operating costs that exceeded the Managed SPE Community funding limits.

The Company had options to purchase or rights of first refusal to acquire the leasehold interests in the Managed SPE Communities from the SPE owners, but was under no obligation to do so. During 2000, the Company acquired 13 leasehold interests in Managed SPE Communities and acquired fee simple title to one Managed SPE Community. During 2001, the Company acquired the leasehold interests in the remaining 12 Managed SPE Communities for an aggregate purchase price of

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$19.2 million. In connection with the 2001 acquisitions, the Company accrued $2.0 million for payments due in 2002, and issued approximately $17.2 million of interest-only notes, due October 1, 2008, bearing interest at 9.58% per annum. The notes are secured by the Company’s interest in a Retirement Center located in Richmond, Virginia and a Free-standing AL in San Antonio, Texas. Six of these leasehold interests were acquired from entities affiliated with John Morris, a director of the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Related Party Transactions” and notes 17 and 20 of the Consolidated Financial Statements.

The results of the operations of the Managed SPE Communities are not included in the Consolidated Financial Statements prior to their purchase by the Company. To the extent that the Company funded costs above the SPE owners’ funding limits, the Company recorded these costs using a modified equity method of accounting. During 2001 and 2000, the Company recorded $5.0 million and $2.2 million, respectively, of these costs as Equity in Losses of Managed SPE Communities in the Statement of Operations. At December 31, 2001, the Company had no further Managed SPE Communities or operating deficit agreements.

Government Regulation

The Companies facilities are subject to various extensive federal, state and local requirements, and are subject to frequent regulatory change. While such requirements vary by state, they typically relate to licensure, staffing, physical design, required services, and resident characteristics. The Company’s communities are also subject to various zoning restrictions, local building codes, and other ordinances, such as fire safety codes. Certain states require certificate of need review in order to provide certain services. Currently, independent living and assisted living senior residences are only subject to limited federal and state laws. While a number of states have not yet enacted statutes or regulations specifically governing assisted living facilities, the Company’s communities are subject to regulation, licensing, and permitting by state and local health and social service agencies and other regulatory authorities. The Company believes that such regulation will increase in the future, and that regulation of the assisted living industry is evolving and is likely to become more burdensome, although the Company is unable to predict the content of new regulations or their effect on its business.

The Company’s skilled nursing centers and home health agencies are subject to federal certification requirements in order to participate in the Medicare and Medicaid programs. Approximately 10.5%, 8.5%, and 5.0% of the Company’s total revenues for the years ended December 31, 2002, 2001, and 2000, respectively, were attributable to Medicare, including Medicare-related private co-insurance, and Medicaid. These reimbursement programs are subject to extensive regulation and frequent change, which may be beneficial or detrimental to the Company. Certain temporary rate add-ons for the Company’s skilled nursing Medicare reimbursement rates expired effective October 1, 2002, reducing the Company’s revenue by approximately $400,000 per quarter. In addition, certain per person annual limits on therapy services, which have been temporarily suspended, will become effective again on July 1, 2003, unless Congress takes additional action before that date. Such limits are not expected to have a significant impact on the Company.

The Company’s EF Communities are subject to regulation by certain state departments of insurance and various state agencies, and must meet various guidelines and disclosure requirements in order to operate and market entrance fee contracts.

Many of the Company’s communities are subject to periodic survey or inspection by governmental authorities. From time to time in the ordinary course of business, one or more of the Company’s communities may be cited for operating or other deficiencies by regulatory authorities. Although most inspection deficiencies can be resolved through a plan of correction, the regulatory agency may have the right to levy fines, impose conditions on operating licenses, suspend licenses, or propose other sanctions for the facility. These actions could have an adverse impact on the Company’s business, operating results or financial condition.

There are currently numerous legislative and regulatory initiatives at the state and Federal levels addressing patient privacy concerns. In particular, the Department of Health and Human Services (“DHHS”) has released final privacy regulations implementing portions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). Compliance with these privacy regulations generally becomes mandatory April 14, 2003. These privacy regulations restrict how health care providers use and disclose individually identifiable health information and grant patients certain rights related to their health information. Under HIPAA, DHHS also has recently issued final security regulations that become mandatory in April 2005 and govern the security of individually identifiable health information that is electronically maintained or transmitted. Further, DHHS has

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issued final regulations establishing standards and code sets that healthcare providers must use when conducting certain healthcare transactions electronically. Compliance with these standards is required by October 16, 2003 for providers such as the Company, that filed for an extension in 2002. Failure to comply with the privacy, security or transaction standard regulations enacted under HIPAA could result in civil and criminal penalties. The Company will continue to remain subject to any Federal or state laws that are more restrictive than the privacy regulations issued under HIPAA. These statutes vary and could impose additional penalties. The Company’s management believes that the Company should be able to replace or modify its systems and procedures to ensure compliance with HIPAA and such other legislation or regulations. Management does not expect costs incurred to comply with HIPAA to have a material impact on the Company’s operating results.

Federal and state anti-remuneration and self-referral 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, and have often been broadly interpreted to apply to certain contractual relationships between health care providers and sources of patient referrals. In addition, there are various Federal and state laws prohibiting other types of fraud and abuse by health care providers, including criminal and civil provisions that prohibit filing false claims or making false statements to receive payment or certification under Medicare or Medicaid and failing to refund overpayments or improper payments. 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 Medicare, Medicaid, and other state and Federal reimbursement programs. There can be no assurance that such laws will be interpreted in a manner consistent with current or past practices of the Company.

Some of the Company’s communities generate medical waste which may contain infectious diseases. Disposal of medical waste is subject to various regulations including permits, transportation, disposal and recordkeeping. The Company contracts with licensed third-parties to properly dispose of these items. Any finding that the Company is not in full compliance with these environmental laws and regulations could have an adverse impact on the Company.

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

Competition

The senior living and health care services industry is highly competitive and the Company expects that providers within the industry will continue to be competitive in the future. During the mid- to late-1990’s, a large number of assisted living units were developed. This additional capacity has had the effect of increasing the time required to fill assisted living units in most markets and has resulted in significant pricing pressures in those markets. 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; (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, and other similar service and care alternatives, many of whom may have greater financial resources than the Company. In addition, the Company competes with many assisted living companies that are currently insolvent or that are experiencing financial difficulties. These competitors may gain a competitive advantage over the Company as a result of the effect of bankruptcy, reorganization or other insolvency proceedings.

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The Company believes it has a reputation as a leader in the industry and as a provider of high quality services. Because seniors tend to choose senior living communities near their homes or their families, the Company’s principal competitors are other senior living and long-term care communities in the same local geographic areas as the Company’s communities. The Company is one of the largest companies in the senior living health care industry and is not limited to a single geographic region. The Company’s size has also allowed it to centralize administrative functions that give the decentralized managerial operations cost-efficient support. 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. The market for these professionals has become very competitive, with resulting pressure on salaries and compensation levels. However, the Company believes it is able to attract and retain quality managers through its reputation, and through its incentive compensation system that directly rewards successful efforts and places a premium on profitable growth.

Insurance

The delivery 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 and significant exposure. As a result, the Company has significantly increased the staff and resources involved in quality assurance, compliance and risk management. The Company currently maintains property, liability and professional medical malpractice insurance policies for the Company’s owned, leased and certain of its managed communities under a master insurance program. The number of insurance companies willing to provide general and professional liability insurance for the nursing and assisted living industry has declined dramatically and the premiums and deductibles associated with such insurance have risen substantially in recent years.

Effective January 1, 2003, the Company renewed its general and professional liability policy, resulting in lower premiums but increased retention levels ranging from $1,000,000 to $5,000,000. The Company currently maintains single incident and aggregate liability protection in the amount of $15.0 million. During the year ended December 31, 2002, the Company expensed $2.6 million of property, general liability, and professional medical malpractice insurance claims, including legal costs, related to multiple insurance years. Additionally, the Company has accrued amounts to cover open claims not yet settled and incurred but not reported claims as of December 31, 2002 of $4.2 million.

The Company operates under a large deductible workers’ compensation program, with excess loss coverage provided by third party carriers. During July 2002, the Company renewed its workers’ compensation program with excess loss coverage of $350,000 per individual claim and approximately $7.25 million in the aggregate. As of December 31, 2002, the Company provided cash collateralized letters of credit in the aggregate amount of $4.7 million related to this program, which is reflected as assets limited as to use on the Company’s balance sheet. During the year ended December 31, 2002, the Company expensed $3.2 million of workers’ compensation claims, which includes legal costs related to multiple insurance years. The Company has accrued amounts to cover open claims not yet settled and incurred but not reported claims as of December 31, 2002 of $3.8 million.

On January 1, 2002, the Company initiated a self-insurance program for employee medical coverage. The Company maintains stop loss insurance coverage of approximately $150,000 per employee and approximately $17.7 million for aggregate calendar 2002 claims. Estimated costs related to these self-insurance programs are accrued based on known claims and projected settlements of unasserted claims incurred but not yet reported to the Company. Subsequent changes in actual experience (including claim costs, claim frequency, and other factors) could result in additional costs to the Company. During the year ended December 31, 2002, the Company expensed $15.0 million of employee medical insurance claims and costs. The Company has accrued amounts to cover open claims not yet settled and incurred but not reported claims as of December 31, 2002 of $3.8 million.

There can be no assurance that a claim in excess of the Company’s insurance coverage limits will not arise. A claim against the Company not covered by, or in excess of, the Company’s coverage limits could have a material adverse effect upon the Company. Furthermore, 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.

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Employees

The Company employs approximately 8,100 persons. As of December 31, 2002, an aggregate of approximately 120 employees at two Free-standing ALs were represented by a labor union. The Company believes that its relationship with its employees is good.

Executive Officers

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

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.

Christopher J. Coates has served as President and Chief Operating Officer of the Company and its predecessors since January 1993 and as a director of the Company since January 1998. From 1988 to 1993, Mr. Coates served as Chairman of National Retirement Company, 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 the current Chairman of the Assisted Living Federation of America, and a former Chairman of the Board of Directors of the American Senior Housing Association.

George T. Hicks has served as Executive Vice President — Finance, Chief Financial Officer, Secretary and Treasurer 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 — Sales and Marketing 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.

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Gregory B. Richard has served as Executive Vice President — Community Operations since January 2000. Mr. Richard was previously with a pediatric practice management company from May 1997 to May 1999, serving as President and Chief Executive Officer from October 1997 to May 1999. Prior to this Mr. Richard was with Rehability Corporation, a publicly traded outpatient physical rehabilitation service provider, from July 1986 to October 1996, serving as Senior Vice President of Operations and Chief Operating Officer from September 1992 to October 1996.

Terry L. Frisby has served as Senior Vice President — Human Resources/Corporate Culture and Compliance since January 1999. Mr. Frisby served as Vice President - - Corporate Culture and Compliance from July 1998 to January 1999. Prior to this Mr. Frisby was principal of a healthcare consulting business located in Nashville, Tennessee, from 1988 to 1998. Mr. Frisby serves on the Executive Council for Human Resources with the Assisted Living Federation of America.

Bryan D. Richardson has served as Senior Vice President — Finance since April 2000. Mr. Richardson was previously with a graphic arts company from 1984 to 1999 serving in various capacities, including Senior Vice President of Finance of a digital prepress division from May 1994 to October 1999, and Senior Vice President of Finance and Chief Financial Officer from 1989 to 1994.

Ross C. Roadman has served as Senior Vice President — Strategic Planning and Investor Relations since May 1999. Previously, Mr. Roadman served in various capacities, since 1980, at Ryder System, Inc., including as Group Director of Investor and Community Relations, Assistant Treasurer, Division Controller, and Director of Planning. Before joining Ryder, he held positions with Ernst & Young and the International Monetary Fund. He serves on the boards of several educational and charitable organizations as well as being active in various professional organizations.

Available Information

The Company’s Internet web site is http://www.arclp.com. The Company makes available free of charge through its website the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after it electronically files or furnishes such materials to the Securities and Exchange Commission. Information contained on the Company’s website is not part of this report.

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Item 2. Properties

The table below sets forth certain information with respect to the senior living communities currently operated by the Company.

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Item 3. Legal Proceedings

The ownership of property and provision of services related to the retirement industry entails an inherent risk of liability. Although the Company is engaged in routine litigation incidental to its business, there is no legal proceeding to which the Company is a party, which, in the opinion of management, will have a material adverse effect upon the Company’s financial condition, results of operations, or liquidity. The Company carries liability insurance against certain types of claims that management believes meets industry standards. The Company believes these liabilities have been adequately accrued for as of December 31, 2002. See “Business — Insurance.” There can be no assurance that the Company will continue to maintain such insurance, or that any future legal proceedings (including any related judgments, settlements or costs) will not have a material adverse effect on the Company’s financial condition, liquidity, or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

The Company’s Common Stock trades on the New York Stock Exchange under the symbol “ACR.” The following table sets forth, for the periods indicated, the high and low sales prices for the Company’s Common Stock as reported on the NYSE.