References in this report to "Alterra" refer to Alterra Healthcare Corporation and references to the "Company," "us" or "we" refer to Alterra and its subsidiaries.

We are a national assisted living company operating assisted living residences and providing assisted living services in 24 states. Our recent restructuring activities have had a significant impact on our results of operations and are important factors in explaining the changes in our results between 2002 and 2001. As of December 31, 2002 and 2001, we operated or managed 383 and 430 residences with aggregate capacity of approximately 18,200 and 20,200 residents, respectively. As of December 31, 2002, 20 of our residences were operated in joint venture arrangements with third parties, 18 of which were operated in unconsolidated joint ventures. During 2002, we generated operating revenue of $416.7 million and realized income from operations of $13.5 million and pretax loss from continuing operations of $82.2 million, both prior to gain on disposal of assets.

On January 22, 2003, in order to seek to facilitate and complete our on-going restructuring initiatives, the Company filed a voluntary petition for relief (the "Chapter 11 Filing") in the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") to reorganize under Chapter 11 of the United States Bankruptcy Code. None of the Company's subsidiaries or affiliates are included in the Chapter 11 Filing. The Company remains in possession of its assets and properties and continues to operate its business as a "debtor-in-possession" ("DIP") under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. On March 18, 2003, upon application of the American Stock Exchange ("AMEX"), the Securities and Exchange Commission struck the Company's common stock and other securities from listing and registration on the AMEX.

Our statements in this annual report relating to matters that are not historical facts are forward-looking statements based on our management's belief and assumptions based upon currently available information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we are unable to provide assurances that our expectations will prove to be correct. Such forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to the Company's operation and business environments which may cause the actual results of the Company to be materially different from any future results expressed or implied in such forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following: the ability of the Company to satisfy its operating and capital needs during the pendency of its Bankruptcy Case; the Company's abili ty to successfully negotiate necessary modifications and amendments with its secured lenders and lessors; the Company's ability to access financing needed to refinance significant pending debt maturities; the ability of the Company to continue as a going concern; the ability of the Company to develop, prosecute, confirm and consummate a Chapter 11 plan of reorganization; the Company's ability to identify and consummate a liquidity transaction providing net proceeds in amounts necessary to effectively address the projected capital and liquidity needs of the Company; risks associated with third parties seeking and obtaining court approval for the appointment of a Chapter 11 trustee or to convert the case to a Chapter 7 liquidation; the potential adverse impact of the Chapter 11 Filing on the Company's relationships with its residents, vendors and employees; competition and the ability of the Company to attract private pay residents to its residences; the Company's ability to fund and maintain self insurance p rograms at levels necessary to address potential liability claims and satisfy the requirements of lenders and lessors; government legislation and regulation; and other risks and uncertainties as may be set forth from time to time in the Company's reports filed with the Securities and Exchange Commission.

In February 2001 our overall cash position had declined to a level which we believed to be insufficient to operate the Company. Accordingly, in February 2001 we retained financial advisors and special reorganization counsel to assist us in evaluating alternatives to restore financial viability. To conserve cash and protect the financial integrity of our operations, beginning in March 2001 we elected not to make selected scheduled debt service and lease payments, of which $5.1 million remains unpaid as of December 31, 2002. As a result, we are in default under several of our principal credit facilities. Our operating cash flow has improved due to overhead reductions that have been implemented and increases in monthly rents that we charge to our residents which were effective in 2002. Nevertheless, we believe that our operations will not produce sufficient cash flow to satisfy all of our obligations until the conclusion of our restructuring activities.

In March of 2001 we began to implement a restructuring plan ("Restructuring Plan"), the principal objectives of which are:

The principal components of our Restructuring Plan are the disposition of selected assets and the restructuring of our capital structure, including our "senior capital" constituencies comprised principally of our secured indebtedness and leases (operating and capital), our "junior capital" constituencies comprised principally of our convertible pay-in-kind (PIK) debentures, our other convertible subordinated debentures and our equity capitalization, and our remaining joint venture relationships. Discussions with various senior capital structure constituencies commenced in the spring of 2001, and have resulted in a number of restructuring agreements with lenders and lessors with respect to individual credit and lease facilities.

On January 22, 2003, we filed a voluntary petition with the Bankruptcy Court to reorganize under Chapter 11 of the Bankruptcy Code (the "Bankruptcy" or the "Bankruptcy Case"). The Company believes that its Chapter 11 Filing is an appropriate and necessary step to conclude its reorganization initiatives commenced in 2001. The focus of our restructuring efforts in 2001 and 2002 has been portfolio rationalization and the restructuring of our senior financing obligations with our secured lenders and lessors. We believe the Bankruptcy will allow us to complete our restructuring of our senior financing obligations and to commence and complete the restructuring of our junior capital structure, which includes unsecured obligations and claims, our convertible subordinated debentures and our preferred and common stock.

In conjunction with our Chapter 11 Filing, we secured a $15 million debtor-in-possession ("DIP") credit facility from affiliates of certain principal holders of the Company's pay-in-kind securities issued in the summer of 2000. The Bankruptcy Court issued an order approving our borrowing up to $6.5 million under the DIP credit facility on an interim basis on January 24, 2003. Additional borrowings under the DIP credit facility will require further approval of the Bankruptcy Court.

On February 4, 2003, the Office of the U.S. Trustee for the District of Delaware appointed an official committee of unsecured creditors in our Bankruptcy Case.

On March 27, 2003, we filed with the Bankruptcy Court a Plan of Reorganization (the "Plan") and a Disclosure Statement Accompanying Plan of Reorganization (the "Disclosure Statement"). Immediately prior to the filing of our Plan and Disclosure Statement, we also filed a motion (the "Bidding Procedures Motion") with the Bankruptcy Court seeking approval of bidding procedures with respect to the solicitation and selection of a transaction contemplating either (i) the sale of capital stock of the reorganized Alterra to be effective and funded upon the confirmation and effectiveness of our Plan (an "Exit Equity Transaction") or (ii) the sale, as a going concern, of all or substantially all of the assets of Alterra to be effective and funded upon the confirmation and effectiveness of our Plan (an "Asset Sale Transaction," together with an Exit Equity Transaction, referred to herein as a "Liquidity Transaction").

Going forward, we will report our financial statements on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and in accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". Accordingly, all pre-petition liabilities subject to compromise will be segregated in the Consolidated Balance Sheets and classified as Liabilities subject to compromise, at the estimated amount of allowable claim. Liabilities not subject to compromise are separately classified as current and non-current. Revenues, expenses, realized gains and losses, and provisions for losses resulting from the reorganization are reported separately as Reorganization items. Cash used for reorganization items is disclosed separately in the Consolidated Statements of Cash Flows. Based on our Chapter 11 Filing, we estimate that $576.0 million of lia bilities as of December 31, 2002 would be deemed to be subject to compromise in accordance with SOP 90-7.

The principal components of our restructuring efforts to date and the further restructuring contemplated by the Plan are summarized below.

Portfolio Rationalization. The Restructuring Plan calls for the disposition of our residences (collectively, the "Disposition Assets") that we determined to be non-strategic for one or more of a variety of reasons. The disposition of the residences included in the Disposition Assets has been accomplished primarily by actively working with the lenders and lessors to identify new operators and selling assets through an organized sales process. During the year ended December 31, 2002 we recognized a net gain on disposal of $3.9 million, including a gain of $13.7 million in continuing operations and a loss of $9.8 million in discontinued operations, relating to the sale of 36 residences, 11 land parcels and four lease terminations. Additionally, as a result of various asset refinancings, six assets were removed from the Disposition Asset classification and a corresponding gain of $9.2 million was recognized in accordance with SFAS No. 121 and SFAS No. 144, resulting from the revers al of the related loss reserve estimates due to changes in valuations associated with those assets. As of December 31, 2002, 105 residences representing 4,692 resident capacity have either been sold or transferred to a new lessee. In addition, we sold 21 land parcels and transitioned ownership of 3 residences through deed-in-lieu of foreclosure transactions. As of December 31, 2002, approximately $68.3 million is reserved for losses relating to future asset sales, lease terminations and joint venture settlements. A condition to our disposing of the remaining Disposition Assets will be obtaining the consent of the applicable lender or lessor and, in certain cases, the consent of the applicable joint venture partner.

Restructuring of Our Senior Indebtedness and Leases. The Company has a complex senior capital structure, comprised of at least 15 significant multi-residence secured credit facilities and six significant portfolios of operating residences that are leased from real estate investment trusts (REITs). Many of our secured credit facilities are structured to incorporate various so-called "bankruptcy-remote" features (i.e., structures designed to improve the applicable lender's rights and leverage in the event of a bankruptcy of the parent company, Alterra), including structuring the credit facility such that the fee owner of the mortgaged residences and the borrower under the credit facility is a newly formed subsidiary of Alterra whose sole activity is to own and operate the residences financed under that credit facility. The structure of certain of these credit facilities serves to limit the Company's ability to restructure these facilities through a bankruptcy, making it generally preferable for the Company to negotiate consensual restructurings with each group of lenders providing secured financing to the Company.

The Company commenced negotiations with its secured lenders and lessors during 2001. Each separate negotiation has been unique and based on the characteristics of the underlying credit facility, including the credit facility's collateral, terms and structure. Accordingly, our restructuring needs and objectives have varied from one credit facility to the next. Depending on the particular credit facility, we have attempted to reset maturities, address any deficiencies, reset covenants, obtain waivers of default interest and penalties, and secure consent from the lenders and lessors for sales of residences included in their collateral or lease portfolio.

Secured Lender Negotiations. At the outset of our restructuring, management sought to restructure secured loan facilities that, in management's view, would generate significant deficiency claims (i.e., claims in excess of the value of the applicable mortgage portfolio) in the event the applicable lenders sought to call the loan and foreclose on their collateral. Four credit facilities, representing $215.3 million in aggregate financing at December 31, 2002 (secured by mortgages on 39 residences with an aggregate capacity of 2,696 beds) represent, in our view, significant potential deficiency claims in the range of $81.4 million to $99.6 million. In these negotiations, we sought to limit or eliminate these potential deficiency claims against the Company in exchange for our agreement to cooperate with the applicable lenders to facilitate an orderly transition of ownership (and, in certain cases, management) of the mortgaged residences to the lenders or their designees (through deed-in-lieu of fore closure transactions or so-called friendly foreclosures). In transitioning ownership of the mortgaged residences to the lenders, we offered to provide interim management services to the lenders with respect to the mortgaged residences. During 2002, we executed definitive agreements of this type with three different lender groups with regard to three of these "impaired" credit facilities, originally representing $104.2 million of financing secured by 31 residences with an aggregate capacity of 1,520 beds. As a result of refinancings, asset sales and foreclosures during 2002, $44.3 million of indebtedness secured by mortgages on 12 residences included in these three executed definitive agreements is remaining at December 31, 2002.

In May 2002, our one remaining significantly "impaired" lender group that provided $171.0 million in aggregate financing (secured by mortgages on 26 residences with an aggregate capacity of 2,154 beds) caused title to all of the stock of our subsidiary that operated these mortgaged residences to be transferred to a third party. Accordingly, we no longer own these residences, although we do currently serve as interim manager for this lender group. As a result of the stock transfer, these residences are no longer consolidated and operations related to these residences through May 31, 2002 are reported as discontinued operations. We have recorded $58.5 million related to our estimated liability associated with our guaranty (including payment of the termination fee due upon full payment of the mortgage obligations). The liability associated with our guaranty obligation was calculated as the difference between the fair market value of the assets and the underlying mortgage obligations. Also included in dis continued operations is a loss of approximately $24.0 million, which represents the write off of the net assets of our former subsidiary at the time of the transfer of the stock of that subsidiary.

For comparative purposes, the reconciliation between the December 31, 2001 and December 31, 2002 balance sheet to record the stock transfer of this former subsidiary, AHC Tenant, Inc. and the impact of other assets dispositions that we have completed are as follows:

In January 2003, we entered into agreements with this lender group pursuant to which: (i) we have agreed to manage these 26 residences on an interim basis without a management fee, and to cooperate in transitioning management to any successor manager appointed by the credit participants, and (ii) the Company is entitled to be released of its guaranty and other principal obligations (with the exception of certain environmental indemnities) under this financing structure upon the satisfaction of certain conditions, including the payment of $5.7 million of fees to the credit participants on or prior to the confirmation of a plan of reorganization in our Bankruptcy Case.

In addition to these impaired credit facilities, we are continuing to seek to negotiate amendments and modifications with the applicable lenders with respect to our other principal secured credit facilities in order to, depending on the specific case, reset covenants, obtain consent to sell certain mortgaged residences, secure waivers of prior defaults and, in certain cases, to extend scheduled maturities. These credit facilities represent $300.9 million of financing secured by an aggregate of 94 residences with an aggregate capacity of 4,502 beds as of December 31, 2002. Discussions with certain of these lenders have commenced, and we have executed definitive binding agreements with lenders with respect to $174.4 million of indebtedness secured by 60 residences with an aggregate capacity of 2,677 beds, providing for, among other things, extensions of debt maturities, waivers of prior defaults and amendments of certain covenants. In February 2003, we refinanced 31 residences previously financed pursuant t o two secured debt facilities, obtaining $61.0 million of sale leaseback financing related to 25 residences with a capacity of 894 beds and borrowing $6.9 million of secured debt secured by 6 residences with a capacity of 182 beds. (See "Subsequent Events Note 20 to the Consolidated Financial Statements" for further discussion). We anticipate that we will need to negotiate restructuring agreements and to secure waivers and amendments with certain of our secured lenders as a condition to confirming our Plan and consummating any Liquidity Transaction.

REIT Lessor Negotiations. At December 31, 2002, we had five multi-residence portfolios leased from various REITs, not including the 25 residences sale leaseback financing closed in February 2003. These portfolios include an aggregate of 200 residences with an aggregate capacity of 8,715 beds. We have entered into restructuring agreements with respect to each of these five multi-residence lease portfolios. These restructurings included the amendment of certain lease covenants and terms and, in three lease facilities, the conversion of individual leases into single master leases. The cash rent due under one lease facility was modified through the application of various deposits held by the landlord to satisfy a portion of the cash rent obligation in the early years of the restructured master lease.

Restructuring of Junior Capital Structure. As of December 31, 2002, the Company's junior capital structure is comprised of unsecured debt of approximately $439.7 million and equity capitalization consisting of $6.1 million aggregate principal amount of 9.75% Series A Cumulative Convertible Preferred Stock due May 30, 2007 (the "Series A Stock") and 22.2 million shares of Common Stock. The principal components of the Company's unsecured indebtedness as of December 31, 2002 (amounts exclude accrued but unpaid interest) include:

The outstanding 5.25% Debentures, 7.00% Debentures and 6.75% Debentures (collectively, the "Original Debentures") are subordinated to all other "senior indebtedness" of the Company (as defined in the applicable indenture governing such debentures), and the PIK Debentures are subordinated to all "senior indebtedness" of the Company (as defined in the applicable indentures governing such debentures), other than the Original Debentures. Although defined somewhat differently in the several indentures governing the Original Debentures and the PIK Debentures (collectively, the "Subordinated Debentures"), "senior indebtedness" is defined to generally include indebtedness for borrowed money and other similar obligations of Alterra (other than the other series of Original Debentures).

All of our Subordinated Debentures are currently in default due to our failure to make coupon payments on the Original Debentures and due to cross default provisions triggered by payment defaults on our secured debt.

As a result of several notices of default received by the Company with respect to secured indebtedness that by its terms may be accelerated by the applicable lenders, neither we nor the applicable indenture trustees for the Subordinated Debentures are permitted by the subordination provisions of the indentures governing the respective Subordinated Debentures to make any payment or distribution on account of the Subordinated Debentures (other than the payment of PIK coupons on the PIK Debentures). As a result, we did not make cash interest payments on the Original Debentures in 2001, 2002 and January 2003 of $5.5 million, $11.0 million and $5.5 million, respectively. In the event that the Company is dissolved, liquidated or reorganized, all amounts due in payment of the Company's "senior indebtedness" must be paid or provided for before any payment may be made on account of the Subordinated Debentures. Accordingly, unless and until we are able to restructure our "senior indebtedness" ob ligations (including, without limitation, our several secured credit facilities) and resolve all pending defaults related to this indebtedness, we will not be permitted to make any interest or other payments to the holders of the Subordinated Debentures (other than the payment of PIK coupons on the PIK Debentures) or to restructure the Subordinated Debentures. Accordingly, unless and until we are able to restructure our "senior indebtedness" obligations (including, without limitation, our several secured credit facilities) and resolve all pending defaults related to this indebtedness, we will not be permitted to make any interest or other payments to the holders of the Subordinated Debentures (other than the payment of PIK coupons on the PIK Debentures) or to restructure the Subordinated Debentures.

To the extent that the Company is not able to restructure its capital structure and is forced to liquidate, applicable principles of corporate law (specifically, the liquidation priority of debt over equity and the priority of preferred stock over common stock) and the subordination provisions governing the Subordinated Debentures would dictate that:

In restructuring our junior capital structure, the relative rights in liquidation of our various junior capital constituencies will be a significant factor in determining the extent to which the claims and interests of these various constituencies will need to be modified, exchanged or entitled to any distribution of value as the Company is restructured.

Our Plan, filed with the Bankruptcy Court on March 27, 2003, contemplates that the Company will conduct a marketing process to solicit and identify the "highest and best" proposal for a Liquidity Transaction, which could involve a sale of equity securities in the reorganized Alterra through an Exit Equity Transaction or a sale of all or substantially all of the assets of Alterra, as a going concern, pursuant to an Asset Sale Transaction. In either case, management believes that the Liquidity Transaction will provide a fair valuation of the reorganized Alterra that will facilitate the completion of the reorganization and will provide a source of liquidity to make distributions of cash, securities or other property to the holders of various junior capital structure constituents, all to the extent that such holders are entitled to a distribution pursuant to the Plan based on applicable principles of bankruptcy and corporate law and the subordination provisions governing the Subordinated Debentures.< /P>

Given the uncertainty as to the outcome of our remaining restructuring negotiations with senior capital constituencies, and given the impact of operative subordination provisions and corporate and bankruptcy law doctrines governing the relative rights of holders of debt and equity interests in the Company, it is very difficult for us to predict what value, if any, various junior capital constituencies will receive in the restructured Alterra. While it is management's intention, to the extent practicable, to seek to restore value to our junior capital, no assurances may be given as to what value, if any, various junior capital constituencies will have in the restructured Company. Based on our current estimates of value, it appears likely that no distribution of value would be made to certain classes of unsecured debt or any class of capital stock of the Company upon the conclusion of the Bankruptcy Case.

Joint Venture Arrangements. The Restructuring Plan calls for us to seek to acquire joint venture interests in certain of our residences in order to simplify our capital structure. In many cases, our acquisition of these joint venture interests (or termination of the applicable joint venture's interest in our residences) is necessary for us to satisfy restructuring requirements established by our senior lenders and lessors.

We have had buy-out or settlement negotiations with investors who currently have interests in an aggregate of 41 joint venture arrangements. As of December 31, 2002, 19 of those joint venture arrangements are associated with residences operating under lease or sublease agreements with the joint venture, while the lease or sublease agreements of the remaining 22 joint venture arrangements have been terminated. No assurance may be given as to whether these negotiations will result in an agreement which enables the Company to acquire 100% of these joint venture entities. If these negotiations fail, the Company's ability to restructure certain of its senior capital financing facilities may be adversely affected. If lenders or lessors providing financing to the Company with respect to residences operated by joint ventures seek to foreclose on their mortgages or to terminate their leases, and as a result joint venture entities have their right to operate such residences impaired, Alterra may be forced to defen d damage claims asserted by certain of its joint venture partners.

As of December 2002, we entered into an agreement with one of our joint venture partners pursuant to which we have agreed to purchase all of the remaining joint venture interests not held by the Company in eight residences and to acquire promissory notes previously issued by the Company aggregating approximately $3.6 million in exchange for the issuance of a 5-year unsecured promissory note for $7.2 million from the reorganized Alterra upon confirmation of our plan of reorganization by the Bankruptcy Court. Accordingly, the consummation of this transaction will be contingent upon, among other things, a successful Chapter 11 reorganization of the Company and Bankruptcy Court approval.

We offer a full range of assisted living services based upon individual resident needs. Prior to admission, residents are assessed by our staff to determine the appropriate level of personal care and service required. Subsequently, individual service agreements are developed by residence staff in conjunction with the residents, their families and their physicians. These plans are periodically reviewed, typically at six-month intervals, or when a change in medical or cognitive status occurs.

Frail-Elderly Services. We offer residents 24-hour assistance with activities of daily living ("ADLs"), ongoing health assessments, organized social activities, three meals a day plus snacks, housekeeping and personal laundry services. All residents are assessed at admission to determine the level of personal care and service required and placed in a care level ranging from basic care to different levels of advanced personal care. In addition, in some locations we offer our residents exercise programs and programs designed to address issues associated with early stages of Alzheimer's and other forms of dementia as more fully described below.

Personal care and supportive services are offered in different residence models which incorporate our philosophy of preserving residents' privacy, encouraging choice and fostering independence in a home-like setting.

Alzheimer's Dementia Services. We believe we are one of the leading providers of care to residents with cognitive impairments, including Alzheimer's and other dementias, in our freestanding Clare Bridge and Clare Bridge Cottage residences. Our programs provide the attention, personal care and services needed to help cognitively impaired residents maintain a higher quality of life. Specialized services include assistance with ADLs, behavior management and an activities program, the goal of which is to provide a normalized environment that supports residents' remaining functional abilities. Whenever possible, residents participate in all facets of daily life at the residence, such as assisting with meals, laundry and housekeeping.

Our specially designed, freestanding dementia residence models serve the programmatic needs of individuals with Alzheimer's disease and other dementias. Our dementia model residents typically require higher levels of personal care and services as a result of their progressive decline in cognitive abilities, including impaired memory, thinking and behavior. These residents require increased supervision because they are typically highly confused, wander prone and incontinent.

• Clare Bridge. Our Clare Bridge dementia residence model ranges in size from 20,500 to 28,000 square feet, is a single-story residence accommodating 38 to 52 residents, and is primarily located in metropolitan and suburban markets. We seek to create a "home-like" setting that addresses the resident's cognitive limitations using internal neighborhoods consisting of rooms which are scaled to the size typically found in an upper-income, single-family home with the same level of furniture, fixtures and carpeting. Key features specific to the needs of Clare Bridge residents generally include indoor wandering paths, a simulated "town-square" area, secure outdoor spaces with raised gardening beds, directional aids to assist in "wayfinding" such as signs, color-coded neighborhoods and memory boxes with the resident's photograph outside of their unit, and specifically designed furniture suitable for incontinent residents. The average monthly rate charged pe r resident in Clare Bridge residences during the fourth quarter of 2002 was approximately $3,700.

• Clare Bridge Cottage. During 1998 we introduced dementia residence models focused on smaller to medium-sized markets where income levels would not support a more upscale Clare Bridge model. These residences range from 20 to 40 residents and offer services similar to the Clare Bridge. These buildings resemble the Sterling House architectural styles with enhancements for wandering paths, security and other features associated with Clare Bridge. The average monthly rate charged per resident in Clare Bridge Cottage residences during the fourth quarter of 2002 was approximately $3,300.

Access to Specialized Medical Services. In addition to our care and supportive services, we assist our residents with the coordination of access to medical services from third parties, including home health care, rehabilitation therapy, pharmacy services and hospice care. These providers are often reimbursed directly by the resident or a third party payor, such as Medicare. In the future, we may elect to provide these services directly using our own employees or through contracts or joint venture agreements with other providers.

Historically, we formed strategic alliances and joint ventures with established real estate development and financial partners. These alliances and joint ventures enabled us to develop and construct additional residences while reducing our investment and the associated risk. Although we discontinued developing and financing new residences utilizing joint venture and other off-balance sheet ownership structures beginning in 2000, as of December 31, 2002 we continue to have interests in 41 joint venture arrangements, with 19 of those joint venture arrangements associated with 20 residences actively operating under lease or sublease agreements with the joint venture, while the lease or sublease agreements of the remaining 22 joint venture arrangements have been terminated.

During 2001 and 2002 the Company, as landlord, terminated lease or sublease agreements with 22 joint ventures in response to uncured rent defaults by the joint ventures under these agreements, or as a result of asset dispositions or deed-in-lieu foreclosure transactions. As of December 31, 2002 the Company has issued $2.8 million of promissory notes in connection with such terminations. During 2002 we negotiated an agreement that contemplates a final settlement with one investor group holding joint venture partner interests in 8 residences. The settlement contemplates the Company's purchase of the joint venture interests in these 8 residences and $3.3 million of existing Alterra notes in exchange for the issuance of a $7.2 million senior unsecured note upon the confirmation of a plan of reorganization in the Bankruptcy Case. Alterra's performance under the agreement is contingent upon Bankruptcy Court approval.

With respect to our remaining joint ventures, the Company and our joint venture partner generally formed and capitalized a limited partnership or a limited liability company that acquired a leasehold interest in an assisted living residence under development by us. Our percentage equity interests in these joint venture entities varies from joint venture to joint venture, ranging from 9.8% minority interests to 51.0% majority interests. These joint venture entities typically retain us as manager pursuant to a market rate management agreement. Under certain of these arrangements, we agreed to fund the operating deficit requirements of the applicable joint venture for a three year period once the available equity and debt financing was fully utilized. Pursuant to the operative agreements, we have the right to acquire (call option) the joint venture partner's equity interest in the joint venture entity at a price based upon an agreed upon return on investment or fair market value to the joint venture partne r. Similarly, after a specified waiting period, the joint venture partner has the right to require us to purchase (put option) the partner's equity interest in the joint venture entity at a price based upon the appraised fair market value of the residence operated by the joint venture entity. In certain circumstances, the purchase price payable upon an exercise of the put option is based upon a fair market value determination based on an assumption that the applicable residence has achieved and is maintaining stabilized occupancy. Any losses from the operation of residences owned or leased by these joint venture structures are generally allocated on a basis consistent with the respective partner's interest in overall cash distributions and the economic substance of the joint venture arrangement, which may result in losses being disproportionately allocated to the joint venture partners who made disproportionate contributions of invested capital. We are seeking to negotiate a conclusion of these remainting joint venture arrangements as a part of the Restructuring Plan.

Healthcare is an area of extensive and frequent regulatory change. The assisted living industry is relatively new and, accordingly, the manner and extent to which it is regulated at the federal and state levels is evolving.

Our assisted living residences are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities. In some states in which we operate, the term "assisted living" may have a statutory definition limited to a particular type of program or population. Some of our assisted living residences may fall into other licensing categories or may be independent apartments where services are provided by a licensed home healthcare agency. Although regulatory requirements vary from state to state, these requirements generally address, among other things: personnel education, training and records; staffing levels; facility services, including administration and assistance with self-administration of medication, and limited nursing services; physical residence specification; furnishing of residence units; food and housekeeping services; emergency evacuation plans; and residence rights and responsibilities. New Jersey requires each assisted living reside nce to obtain a Certificate of Need ("CON") prior to its opening. Our residences are also subject to various state or local building codes and other ordinances, including safety codes. We anticipate that the states which are establishing regulatory frameworks for assisted living residences will require licensing of assisted living residences and will establish varying requirements with respect to this licensing.

We have obtained all required licenses for each of our residences. Each of our licenses must be renewed annually or biannually.

Like other healthcare facilities, assisted living residences are subject to periodic survey or inspection by governmental authorities. From time to time in the ordinary course of business, government agencies issue deficiency reports and impose remedial action. We review these reports and remedial actions and seek to take appropriate corrective action. Although most inspection deficiencies are resolved through a plan of correction, the reviewing agency typically is authorized to take action against a licensed facility where deficiencies are noted in the inspection process. Action may include imposition of fines, imposition of a provisional or conditional license, or suspension or revocation of a license or other sanctions. Currently, two of the Company's residences are pending state license revocation proceedings, which the Company is vigorously contesting. Any failure by us to comply with applicable requirements could have a material adverse effect on our business, financial condition and results of op erations. Regulatory authorities in some of the states in which we operate have increased the frequency of their inspections due to our Chapter 11 filing. Two of the Company's residences are the subject of pending state license revocation proceedings, which the Company is vigorously contesting.

Federal and state anti-remuneration laws, such as the Medicare/Medicaid anti-kickback law, govern some financial arrangements among healthcare providers and others who may be in a position to refer or recommend patients to providers. These laws prohibit, among other things, 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 healthcare items or services. The Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to contractual relationships between healthcare providers and sources of patient referral. State anti-remuneration laws vary from state to state. Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion of healthcare providers or suppliers from participation in (i.e., furnishing covered items or services to beneficiaries) the Medicare and Medicaid programs. Although we receive only a minor portion of our total revenues fr om Medicaid waiver programs and are otherwise not a Medicare or Medicaid provider or supplier, we may be subject to these laws because (i) applicable state laws typically apply regardless of whether Medicare or Medicaid payments are at issue and, in certain cases, (ii) some of our assisted living residences maintain contracts with healthcare providers and practitioners, including pharmacies, home health organizations and hospices, through which the healthcare providers make their healthcare products or services (some of which may be covered by Medicare or Medicaid) available to our residents. There can be no assurance that these laws will be interpreted in a manner consistent with our practices.

In order to comply with the terms of the revenue bonds used to finance nine of our residences, we are required to lease a minimum of 20% of the apartments in each of the nine residences to low or moderate income persons as defined pursuant to the Internal Revenue Code of 1986, as amended.

We are subject to the Fair Labor Standards Act which governs matters including minimum wage, overtime and other working conditions. A portion of our personnel is paid at rates related to the federal minimum wage and, accordingly, increases in the minimum wage will result in an increase in our labor costs.

We are not aware of any non-compliance by the Company with applicable regulatory requirements that would have a material adverse effect on our financial condition or results of operations.

The long-term care industry is highly competitive and, given the relatively low barriers to entry and continuing healthcare costs containment pressures, we expect that the assisted living segment of the industry will become increasingly competitive in the future. We compete with other providers of elderly residential care on the basis of the breadth and quality of our services, the quality of our residences and, with respect to private pay patients or residents, price. Our current and potential competitors include national, regional and local operators of long-term care residences, extended care centers, assisted/independent living centers, retirement communities, home health agencies and similar providers, many of which have significantly greater financial and other resources than we have. In addition, we compete with a number of tax-exempt nonprofit organizations which can finance capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to us and which are generally exe mpt from income tax. While our competitive position varies from market to market, we believe that we compete favorably in substantially all of the markets in which we operate based on key competitive factors such as the breadth and quality of services offered, residence quality, recruitment and retention of qualified healthcare personnel, and reputation among local referral sources.

Alterra®, Crossings®, Wynwood®, Clare Bridge®, Sterling Cottage® and Clare Bridge Cottage® are registered service marks of ours.

At December 31, 2002, we employed approximately 7,900 full-time employees and 3,900 part-time employees. None of our employees are represented by a collective bargaining group.

Factors Affecting Future Results and Regarding Forward-Looking Statements

Our business, results of operations and financial condition are subject to many risks, including those set forth below. Through its Restructuring Plan and Bankruptcy Case, the Company is seeking to materially restructure many of its principal senior and junior credit instruments, the result of which restructurings are expected to have a material impact on the value attributable to and the rights of our various junior capital structure constituencies. In addition, the following important factors, among others, could cause our actual results to differ materially from those expressed in our forward-looking statements in this report and presented elsewhere by us from time to time. When used in this report, the words "believes," "anticipates" and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. The following discussion highlights some of these risks and others are discussed in other sections of this Form 10-K or in other documents filed by us with the Securities and Exchange Commission.

Uncertainty Regarding Consequences of Restructuring and Bankruptcy Case. On January 22, 2003, in order to facilitate and to seek to complete our on-going restructuring initiatives, the Company filed a voluntary petition with the Bankruptcy Court to reorganize under Chapter 11 of the Bankruptcy Code. In connection with the Chapter 11 Filing, there can be no assurance:

• That the amounts available to the Company through the DIP financing will be sufficient to fund the operating and capital needs of the Company until such time as the Company is able to propose and consummate a plan of reorganization that will be acceptable to the Company's creditors and confirmed by the Bankruptcy Court;
• That the Company will be able to successfully solicit and consummate a Liquidity Transaction that provides sufficient capital to the Company to facilitate confirmation of our Plan and to address our projected capital and liquidity needs;
• That any plan of reorganization confirmed in connection with the Bankruptcy Case will allow the Company to operate profitably or give the Company sufficient liquidity to meet its operational needs;
• That the Company will be able to successfully negotiate with its secured lenders and lessors further modifications and amendments to the Company's secured debt and lease facilities in order to facilitate consummation of the Plan and satisfy any conditions to funding a Liquidity Transaction imposed by the prospective investor group;
• Regarding the future availability or terms of financing in light of the Company's financial condition and need to address significant upcoming debt maturities in 2003 and 2004;
• Regarding any adverse actions which may be taken by creditors or lessors of the Company which may have the effect of preventing or unduly delaying confirmation of a plan of reorganization in connection with the Bankruptcy Case; and
• That third parties will not seek to obtain or in fact obtain Bankruptcy Court approval to terminate or shorten the exclusivity period for the Company to confirm a plan of reorganization, for the appointment of a trustee or to convert the Bankruptcy Case to a Chapter 7 liquidation.

• The Company's ability to access capital markets will likely be limited;
• The Company's senior management may be required to expend a substantial amount of time and effort structuring a plan of reorganization, which could have a disruptive impact on management's ability to focus on the operation of the Company's business;
• The Company may be unable to retain employees, including top management and other key personnel;
• The Company may experience a reduction in the census at its assisted living facilities; and
• Vendors and suppliers to the Company may stop providing services or supplies to the Company or provide such services or supplies only on "cash on delivery," "cash on order" or other terms that could have an adverse impact on the Company's liquidity.

While it is management's intention, to the extent practicable, to seek to restore value to the various constituencies comprising our junior capital structure, in light of uncertainty as to the fair value of a reorganized Alterra available for distribution to junior capital constituencies, the outcome of restructuring negotiations with our secured lenders and lessors and the impact of the subordination provisions governing our Subordinated Debentures and corporate and bankruptcy law doctrines relating to the relative rights of holders of debt and equity interests in the Company, no assurances may be given as to the value, if any, various junior capital structure constituencies will have in the restructured Company. Based on our current estimates of value, it appears likely that no distribution of value would be made to certain classes of unsecured debt or to any class of capital stock of the Comany upon conclusion of the Bankruptcy Case. Similary, as our Plan is largely dependent upon our ability to negotiat e and to comply with consensual restructuring arrangements with our principal lenders and lessors, no assurances may be given as to whether we will be able to restructure the Company.

Risks Associated with Continuing Defaults under Loan, Lease and Subordinated Debenture Obligations. We did not make loan and lease payments to many of our secured lenders and lessors during 2001 and are now in default with respect to certain of these obligations. Any payment default or other default with respect to outstanding obligations could cause the lender to foreclose upon the residences securing the indebtedness or, in the case of a lease, to terminate the lease, with a consequent loss of income and asset value to us. As the substantial majority of our secured debt relates to loans to our subsidiaries (who are not debtors in the Bankruptcy Case), the automatic stay of our Chapter 11 Filing would not stay foreclosure actions with respect to the majority of our mortgaged residences, if lenders were to elect to pursue such a remedy. Management believes that, despite the pendency of these defaults, during the near term the majority of these secured lenders and lessors will continue to p articipate in restructuring discussions with us. No assurances can be given, however, that this will be the case. In fact, one of our lessors has terminated our leases for 11 residences and other lenders and lessors have begun to exercise various remedies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" Liquidity and Capital Resources. As many of our principal credit, lease and other financing facilities are cross-defaulted to a material default occurring under other credit, lease or financing facilities, our continuing payment defaults under certain of our credit facilities has resulted in our being in default under many other loan and lease facilities. A component of our Restructuring Plan is seeking to secure waivers of these cross-defaults from the applicable lenders and lessors.

In addition, the Company's convertible debentures include subordination provisions that prohibit payments to the debenture holders (other than payment-in-kind coupon payments) after the occurrence of a payment default on the Company's senior indebtedness. As such, the Company is currently prohibited from making interest and principal payments related to its Subordinated Debentures until such time that no payment-related defaults exist related to its senior indebtedness. As a result of failing to make these payments due to the governing subordination provisions, the Company is in default of its outstanding Subordinated Debentures.

Risks Associated with Continuing Shortfall in Liquidity and Timing of Confirmation of our Plan. As a result of on-going operating losses and significant current or upcoming debt maturities, we expect that our projected cash needs will exceed our projected identified cash resources unless we are able to confirm our Plan and consummate a Liquidity Transaction in the second half of 2003. In light of our current financial condition and ongoing restructuring activities and the difficult financing and operating environment for healthcare service companies generally, our access to additional capital is significantly reduced. If we are unable to successfully identify and consummate a Liquidity Transaction and implement our Plan in a timely manner, we will not have sufficient liquidity to continue to operate as a going concern. See “Substantial Debt and Operating Lease Payment Obligations; Current and Pending Maturities,” and “Management's Discussion and Analysis and Results of Operations - - - Liquidity and Capital Resources.”

Substantial Debt and Operating Lease Payment Obligations; Current and Pending Maturities. We had lease expense of $58.7 million and $61.9 million for the years ended December 31, 2002 and 2001, respectively. Our total indebtedness as of December 31, 2002 was $980.5 million, and our net interest expense was $50.6 million and $62.0 million for the years ended December 31, 2002 and 2001, respectively. Approximately $808.9 million of our total indebtedness matures before December 31, 2003, or is in default as of December 31, 2002.

Joint Ventures. As of December 31, 2002, 20 of our operating residences were jointly owned or operated with venture partners. We are currently seeking to negotiate the buy-out of joint venture interests held by third parties in the majority of our remaining joint venture residences. If we are not able to negotiate the buy-out of these joint venture interests, our ability to restructure certain of our secured debt and lease facilities and to consummate a Liquidity Transaction may be adversely affected. To the extent that loan and lease arrangements financing joint venture residences are not restructured, the exercise of foreclosure, lease termination and other remedies by lenders and lessors will result in the forfeiture of such joint ventures' investment in our residences. In these circumstances, the Company may be forced to defend damage claims asserted by certain of its joint venture partners.

Liability and Insurance. The provision of personal and healthcare services entails an inherent risk of liability. In recent years, participants in the long-term care industry have become subject to an increasing number of lawsuits alleging malpractice or related legal theories, including criminal prosecutions, many of which involved large claims and resulted in the incurrence of significant defense costs. In addition, compared to more institutional long-term care facilities, assisted living residences (especially dementia care residences) of the type we operate offer residents a greater degree of independence in their daily lives. This increased level of independence, however, may create a greater risk of adverse events than would occur in more institutionalized settings. The rapidly escalating magnitude of tort claims and the resulting rapid increase in the cost of medical malpractice liability insurance have been significant issues for the assisted living industry in general for the last sever al years. Before 2000, Alterra was able to purchase “traditional” medical malpractice liability insurance at a much lower cost than current premium levels. For the coverage year ended June 30, 2000, Alterra paid a premium of approximately $1.5 million to insure its 17,000 beds under a policy with coverage limits of $22.0 million and a deductible of $25,000 per claim. For the coverage year ended June 30, 2001, the annual premium had increased to approximately $6.0 million under a policy with coverage limits of $15.0 million and a deductible of $250,000 per claim (an increase of more than six-fold including the projected impact of deductible payments). For periods after June 30, 2001, Alterra has been unable to purchase medical malpractice insurance in the traditional insurance market and therefore has resorted to various forms of self-insurance. In order to fund a self-insurance program upon consummation of its Plan, Alterra will need access to additional capital from a Liquidity Transaction. There can be no assurance that claims in excess of our current insurance programs or claims not covered by insurance, such as claims for punitive damages, will not be successfully asserted. A successful claim against us not covered by, or in excess of, our insurance could have a material adverse effect upon our financial condition and results of operations. Claims against us, regardless of their merit or eventual outcome, including pending criminal proceedings against the Company, may also have a material adverse effect upon our ability to attract or retain residents, to retain applicable licenses, or to expand our business, and may require us to devote substantial time to matters unrelated to day-to-day operations. Similarly, there can be no assurance that we will be able to obtain liability insurance in the future or that, if insurance is available, it will be available on acceptable economic terms or with coverages we or our lenders and lessors require, in light of our current financial circumstance.

ITEM 3.            LEGAL PROCEEDINGS

From time to time, we are involved in various legal proceedings relating to claims arising in the ordinary course of our business. Neither we nor any of our subsidiaries is a party to any legal proceeding, other than the Bankruptcy Case, the outcome of which, individually or in the aggregate, is expected to have a material adverse affect on our financial condition or results of operations, with the possible exception of the matters described below. As a result of the Chapter 11 Filing, each of these matters has been stayed as against the Company pending further relief from the Bankruptcy Court. Pending litigation against the Company's subsidiaries and other affiliates has not been stayed by the Bankruptcy Case.

As previously described, on January 22, 2003, the Company filed the Chapter 11 Filing with the Bankruptcy Court (Case No. 03-10254).

We elected not to fund certain debt service and lease payment obligations due during 2001 and 2002 without the consent of the applicable lender or lessor. Through additional payments, prepayments associated with asset sales and application of escrowed amounts, as of December 31, 2002, we had $5.1 million of delinquent outstanding scheduled debt service to lenders or lessors who hold mortgages on, or from whom we lease, 36 residences in the aggregate (1,564 resident capacity). We have received a written notice of acceleration from lenders with respect to indebtedness aggregating $51.7 million as of December 31, 2002. Additionally, indebtedness of approximately $136.7 million has fully matured and is past due. Many of our other credit and lease facilities are in technical default as a result of these payment defaults associated with other loan and lease facilities, but several of these lenders and lessors have executed limited in time waivers. We are also in default under various financial and other coven ants contained in certain of our credit and lease arrangements. We have received written notices of default from most of these lenders or lessors, three lessors have terminated leases for 17 residences (940 resident capacity) and other lenders have elected to apply deposits and reserve funds of ours held by such lenders against the past due payments. Five lenders have activated or are in the process of activating "cash traps" of bank accounts relating to the operation of residences mortgaged to such lenders, either pursuant to arrangements set forth in the applicable loan documents or as subsequently negotiated with the Company. We are also in litigation commenced in 2001 in the Chancery Court of Davidson County, Tennessee, with a former lessor who has asserted a damage claim arising out of the early termination of its 11 residence lease portfolio.

The Company's Subordinated Debentures include subordination provisions that prohibit the Company from making interest payments to the debenture holders (other than payment-in-kind coupon payments) after the occurrence of payment defaults on the Company's senior indebtedness. As such, we defaulted in making coupon payments on our 5.25%, 6.75% and 7.00% Debentures aggregating approximately $5.5 million in July 2001, $11.0 million in 2002 and $5.5 million in January 2003.

We are seeking to address all of our pending defaults of our senior and junior capital structure obligations through our Restructuring Plan and Bankruptcy Case. However, our Restructuring Plan is dependent upon our ability to negotiate consensual modifications and waivers with certain of our senior capital structure constituents. Absent an agreed upon resolution with these third parties and assuming, in certain cases to the extent applicable, such parties secure relief from the stay of the Bankruptcy Case from the Bankruptcy Court, our lenders and lessors may begin exercising remedies under their applicable financing agreements that could substantially hinder or disrupt our efforts to restructure the Company and result in a liquidation of the Company.

We are also subject to various professional and liability claims. Since July 1, 2001, due to our limited cash resources and a general lack of availability of traditional professional and general liability insurance products, we have maintained levels of liability insurance than are substantially lower than would be desirable given actuarial estimates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for further discussion.

We did not submit any matters to a vote of security holders during the fourth quarter of our fiscal year ended December 31, 2002.

Our Common Stock was listed and traded on the American Stock Exchange (AMEX) under the symbol "ALI." The number of holders of record of the Common Stock as of March 24, 2003, was approximately 314. On March 18, 2003, the Securities and Exchange Commission struck the Company's common stock and other securities from listing and registration on the AMEX. As a result, there is no established trading market for the Company's Common Stock.

The following table sets forth, for the periods indicated, the high and low closing prices for the Common Stock as reported on AMEX.

We have never paid or declared cash dividends and currently intend to retain any future earnings for the operation of our business. Due to the absence of legal capital under applicable Delaware law, we have not declared or paid pay-in-kind dividends on our outstanding Series A Stock since January 2001. In light of pending defaults under various of our loan, lease, and debenture obligations, we are contractually prohibited from paying dividends on our outstanding capital stock until such time as such defaults are cured or waived. Any determination to pay cash dividends in the future will be at the discretion of the Board of Directors and will be dependent on our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, restrictive debt covenants and other factors as the Board of Directors deems relevant.

The following table sets forth information regarding compensation plans under which the Common Stock is authorized for issuance as of December 31, 2002.

ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated historical financial data presented below for each of the five years ended December 31, 2002 has been derived from our audited consolidated financial statements appearing elsewhere in this report. The selected consolidated financial data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and notes thereto included in this report (in thousands, except per share data).

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

Overview

We are a national assisted living company operating assisted living residences and providing assisted living services in 24 states. Our growth in recent years and ongoing restructuring activities have had a significant impact on our results of operations and are an important factor in explaining the changes in our results between 2002 and 2001. As of December 31, 2002 and 2001, we operated or managed 383 and 430 residences with aggregate capacity of approximately 18,200 and 20,200 residents, respectively. During 2002 we generated operating revenue of $416.7 million and realized income from operations of $13.5 million and a pretax loss of $82.2 million, both prior to loss on disposal of assets.

On January 22, 2003, we filed a voluntary petition with the Bankruptcy Court to reorganize under Chapter 11 of the Bankruptcy Code. The Company believes that its Chapter 11 Filing is an appropriate and necessary step to seek to conclude its reorganization initiatives commenced in 2001. The focus of our restructuring efforts in 2001 and 2002 has been portfolio rationalization and the restructuring of our senior financing obligations with our secured lenders and lessors. We believe the Bankruptcy will allow us to complete our restructuring of our senior financing obligations and to commence and complete the restructuring of our junior capital structure, which includes unsecured obligations and claims, our convertible subordinated debentures and our preferred and common stock. In addition, interim or permanent restructuring agreements have been reached with a number of our joint venture partners.

In conjunction with our Chapter 11 Filing, we secured a $15 million credit facility from affiliates of certain principal holders of the Company's pay-in-kind securities issued in the summer of 2000. The Bankruptcy Court issued an order approving our borrowing up to $6.5 million under the DIP credit facility on an interim basis on January 24, 2003. Additional borrowings under the DIP credit facility will require further approval of the Bankruptcy Court which we expect to obtain in April 2003.

On March 27, 2003, we filed with the Bankruptcy Court a Plan of Reorganization and a Disclosure Statement Accompanying Plan of Reorganization. Immediately prior to the filing of our Plan and Disclosure Statement, we also filed a "Bidding Procedures Motion" with the Bankruptcy Court seeking approval of bidding procedures with respect to the solicitation and selection of a transaction contemplating either (i) the sale of capital stock of the reorganized Alterra to be effective and funded upon the confirmation and effectiveness of our Plan or (ii) the sale, as a going concern, of all or substantially all of the assets of Alterra to be effective and funded upon the confirmation and effectiveness of our Plan.

Going forward, we will report our financial statements on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and in accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". Accordingly, all pre-petition liabilities subject to compromise will be segregated in the Consolidated Balance Sheets and classified as liabilities subject to compromise, at the estimated amount of allowable claim. Liabilities not subject to compromise are separately classified as current and non-current. Revenues, expenses, realized gains and losses, and provisions for losses resulting from the reorganization are reported separately as reorganization items. Cash used for reorganization items is disclosed separately in the Consolidated Statements of Cash Flows. Based on our Chapter 11 Filing, we estimate that $576.0 million of liabil ities as of December 31, 2002 would be deemed to be subject to compromise in accordance with SOP 90-7.

In response to the Securities and Exchange Commission's Release Numbers 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, and 33-8056, Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations, we have identified the following critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and the allowance for doubtful accounts receivable and asset impairment. We state these accounting policies in the notes to our consolidated financial statements and at relevant sections in this discussion and analysis. Our estimates are based on information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary from those estimates and those estimates could be different under different assumptions or conditions.

The consolidated financial statements include the accounts of the Alterra Healthcare Corporation and its majority-owned subsidiaries. Results of operations of the majority-owned subsidiaries are included from the date of acquisition. All significant inter-company balances and transactions with such subsidiaries have been eliminated in the consolidation. Investments in other affiliated companies in which we have a minority ownership position are accounted for on the equity method.

Resident service fee revenue, which is recorded when services are rendered, consists primarily of resident service fees that are reported at net realizable amounts.

We must make estimates of the uncollectibility of our accounts receivable related deferred rent and other revenue or income. We specifically analyze accounts receivable and historical bad debts when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on our net income, because a higher bad debt allowance would result in lower net income. The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.

Property and equipment are stated at cost, net of accumulated depreciation. Property and equipment under capital leases are stated at the present value of minimum lease payments. Depreciation is computed over the estimated lives of the assets using the straight-line method. Buildings and improvements are depreciated over 20 to 40 years, and furniture, fixtures, and equipment are depreciated over three to seven years. Maintenance and repairs are expensed as incurred.

We apply Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to recognize and measure impairment of long-lived assets. We review each long-lived asset for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the real estate investment's use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair market value.

Assets held for sale are carried at the lower of carrying amount or fair value, less costs to sell. Depreciation and amortization are suspended during the period held for sale. We are required to make subjective assessments as to whether there are impairments in the value of our real estate properties. These assessments have a direct impact on our net income, because taking an impairment loss results in an immediate negative adjustment to net income.

The Company is seeking to negotiate restructurings of several of its principal secured debt and lease obligations and, upon completing these negotiations, will seek to restructure its principal unsecured debt obligations, comprised primarily of the outstanding convertible debentures. Furthermore, at December 31, 2002, the Company was in violation of certain debt covenants. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary 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.

Residence Service Fees. Residence service fees for the year ended December 31, 2002 were $413.6 million representing a decrease of $13.7 million, or 3.2%, from the $427.3 million for the comparable 2001 period. This decrease resulted primarily from a decrease in the number of residences operated in 2002, with a decline in occupancy rates offset by rate increases instituted during the past 12 months. Average rates were $2,826 and $2,710 as of December 31, 2002 and 2001, respectively. Company-wide occupancy was 83.5% and 84.9% as of December 31, 2002 and 2001, respectively.

Other Revenues. Other revenues for the year ended December 31, 2002 were $3.2 million, a decrease of $3.0 million over the $6.2 million of other revenue for the year ended December 31, 2001. The decrease is attributable to reduced development and franchise activity and a reduction in management fees on residences which were either managed for third parties or for entities in which we held a minority ownership position. Management fees include charges for transitional services to recruit and train staff, initial and recurring fees for use of our name and branding, initial and recurring fees for use of our methodologies, services for assisting with finance processing, and ongoing management services provided to operate the residence.

Residence Operating Expenses. Residence operating expenses for the year ended December 31, 2002 decreased to $287.4 million from $290.7 million in the year ended December 31, 2001. Operating expenses as a percentage of resident service fees for the year ended December 31, 2002 and 2001 were 69.5% and 68.0%, respectively. This percentage increase resulted primarily from increases in labor and employee benefit related costs due to increased competition for personnel and an increase in insurance costs.

Lease Expense. Lease expense for the year ended December 31, 2002 was $58.7 million, compared to $61.9 million in the comparable period in 2001. This decrease is the result of lease terminations and restructurings that occurred during the past 12 months.

Gain on Lease Termination. The $6.2 million gain on lease termination consists of deferred gains recognized due to a new master lease completed during the three months ended June 30, 2002.

Lease Income. We earned $13.8 million of lease income for the year ended December 31, 2002, compared to $21.3 million for the comparable period in 2001, on residences owned or leased by us and leased or subleased to unconsolidated joint ventures. This decrease in lease income occurred due to a reduction in the number of unconsolidated joint ventures from 42 to 18 as of December 31, 2001 and 2002, respectively. Lease payment obligations of the unconsolidated joint venture entities are generally equivalent to the debt service payable by us on the leased residences, and thereby offset our costs associated with obtaining and maintaining financing for such residences.

General and Administrative Expense. For the year ended December 31, 2002, on-going general and administrative expenses were $38.1 million, before $8.4 million in legal and consulting restructuring costs, compared to $42.4 million prior to $6.5 million in restructuring costs for the comparable 2001 period, representing a decrease of general and administrative expense as a percentage of operating revenue from 9.8% in 2001 to 9.1% in 2002. The $4.3 million decrease in on-going expenses in the 2002 period was primarily attributable to cost reductions which we have implemented to improve corporate efficiencies.

Loss on Disposal. The Company adopted a plan to dispose of 136 residences with aggregate capacity of 6,150 residents and 33 parcels of land. During the year ended December 31, 2001, the Company recognized a pre-tax loss of $163.5 million (net of $3.6 million gain on sale) to reflect the Disposition Assets at the lower of carrying value or estimated fair value less costs to sell and to write off the carrying value of assets associated with terminated residence leases. As of December 31, 2001, 59 residences and ten land parcels had either been sold or transferred to a new lessee. The Company recognized an additional pre-tax loss of $25.8 million upon sale or transfer of these assets. As of December 31, 2001, approximately $150.5 million is reserved for losses relating to future asset sales or lease terminations.

Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2002 was $25.8 million, representing a decrease of $8.7 million, or 25.2%, from the $34.5 million of depreciation and amortization for the comparable 2001 period. This decrease resulted primarily from the sale of 36 assets during the past 12 months, the assets classified as held for sale which are not depreciated, and the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," eliminates ongoing depreciation of goodwill and other intangible assets.

Impairment Charge. The Company recognized an impairment charge of $4.8 million in accordance with SFAS No. 144 for the year ended December 31, 2002. This impairment charge was based on the difference between an asset's carrying amount and fair value, where the fair value was determined by estimating the present value of estimated cash flows.

Interest Expense, Net. Interest expense, net of interest income, was $49.6 million for the year ended December 31, 2002, prior to $973,000 of bank penalties compared to $57.2 million of interest expense prior to $4.8 million of bank penalties for 2001. Gross interest expense (before interest capitalization and interest income) for the 2002 period was $49.9 million prior to bank penalties compared to $59.2 million for the 2001 period, a decrease of $9.3 million. As a result of our decision to reduce development and construction activity beginning in 2001, as of December 31, 2002 all construction activity has stopped and no capitalized interest has been recorded. For the year ended December 31, 2001, we capitalized $1.9 million of interest expense relating to an average construction in progress balance of $16.3 million in the 2001 period. Interest income for the 2002 period was $328,000 as compared to $2.0 million for the 2001 period. This decrease was due primarily to lower restricted cash balances in place in 2002 related primarily to lease financing transactions.

Amortization of Financing Costs. Amortization of financing costs for the year ended December 31, 2002 was $5.0 million, representing a decrease of $4.8 million from the $9.8 million of amortized financing costs for the comparable 2001 period. This decrease is the result of debt retirements and fully amortized financing costs.

PIK Interest, Net. "Pay-In-Kind" (PIK) interest for the years ended December 31, 2002 and 2001 was $25.8 million and $24.3 million, respectively, and includes interest expense on the various PIK Debentures which were issued in May and August 2000.

Equity in Losses of Unconsolidated Affiliates. Equity in losses of unconsolidated affiliates for the twelve months ended December 31, 2002, was $4.9 million, representing a decrease of $9.4 million from $14.3 million of losses for the comparable 2001 period. Our joint venture partners have not made substantial capital contributions to a number of joint ventures for several quarters. Therefore, we have absorbed the losses of those unconsolidated joint ventures in excess of capital contributed by the joint venture partner. The decrease in equity in losses of unconsolidated affiliates is due to a reduction in the number of unconsolidated joint ventures from 42 to 18 as of December 31, 2001 and 2002, respectively, resulting from joint venture and lease terminations that occurred during 2002.

Minority Interest in Losses of Consolidated Subsidiaries. Minority interest in losses of consolidated subsidiaries for the year ended December 31, 2001 was $426,000. As a result of joint venture settlements completed during 2001, we no longer have any residences owned by us in consolidated joint venture arrangements and subsequently, have no minority interest in losses of consolidated subsidiaries for the year ended December 31, 2002.

Goodwill Impairment Loss. The Company adopted the provisions of SFAS No. 142, as of January 1, 2002. Under the transitional provisions of SFAS No. 142, the Company identified its reporting units and performed impairment tests on the net goodwill associated with each of these reporting units. The fair value of the owned reporting units was determined by estimating the terminal value of the future cash flows. The fair value of the leased reporting units was determined by estimating the present value of the cash flows for the life of the lease. Based on this impairment testing, the Company recorded an impairment loss of $54.7 million in the first quarter of 2002. The impairment loss has been recorded as a cumulative effect of change in accounting principle and as loss on discontinued operations in the accompanying condensed consolidated statements of operations for the year ended December 31, 2002. As of December 31, 2002, the Company performed its annual impairment test required by the provisions of SFAS No. 142 in which an additional impairment loss of $9.5 million was identified based on revised cash flow projections. The $9.5 million annual impairment loss has been recorded in other expenses in the accompanying consolidated statements of operations for the year ended December 31, 2002.

Income Taxes. For the period ended December 31, 2002, we recorded a current state and local income tax provision of $100,000. The income tax expense for the period ended December 31, 2002 reflects the treatment of PIK interest as non-deductible interest. We do not currently anticipate that the interest expense which we will incur in the future related to the PIK debentures will be deductible for income tax purposes.

As of December 31, 2002, we do not have a deferred tax asset. In accordance with Statement of Financial Accounting Standards No. 109, we are required to continuously evaluate the recoverability of deferred tax assets based on the criteria that it is "more likely than not" that the deferred taxes will be recoverable through future taxable income. This evaluation is made based on our internal projections which are routinely updated to reflect more recent operating trends. Based on our current financial projections, we are uncertain that we will recover these net deferred tax assets through future taxable income. In addition, the utilization of the $419.4 million Net Operating Loss "NOL" carryforward could be subject to limitations based on the change of control provisions in the Internal Revenue Code which may become operative in a liquidity transaction or through the implementation of our Plan. Accordingly, we have established a valuation allowance against the entire net deferred tax assets.

Loss on Discontinued Operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lives Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." We adopted SFAS No. 144 beginning on January 1, 2002. As a result of the adoption of SFAS No. 144, during the year ended December 31, 2002 we reclassified to discontinued operations the revenues and expenses of 19 residences with a capacity of 929 beds that were part of executed deed in lieu restructuring agreements or are leased residences pending sale. Included in discontinued operations for the year ended December 31, 2002 is an impairment loss of $12.9 million which represents the difference between the nineteen residences' carrying value and the residences' estimated fair value less costs to sell. Additionally, three residences with a capacity of 114 beds were reclassified to discontinued operations resul ting from their sale or lease termination in 2002.

In May 2002, one lender group transferred to a third party title to all of the outstanding common stock of our then subsidiary which operated 26 residences serving as collateral for $171.0 million of indebtedness. Accordingly, we no longer operate these residences, although we serve as interim manager for the lender group. As a result of the stock transfer, these residences are no longer consolidated and operations related to these residences through May 31, 2002 are reported as discontinued operations. We have recorded a reserve of $58.5 million related to our estimated liability associated with our guaranty (including payment of the termination fee due upon full payment of the mortgage obligations). The liability associated with our guaranty obligation was calculated as the difference between the approximate fair market value of the assets and the underlying mortgage obligations. Also included in discontinued operations is a loss of approximately $24.0 million, which represents the write off of the net assets of our former subsidiary at the time of the transfer of the stock of the subsidiary.

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," having a required effective date for fiscal years beginning after December 15, 2001. Under SFAS No. 142, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. Under the transitional provisions of SFAS No. 142, we identified reporting units and performed impairment tests on the net goodwill associated with each of these reporting units. The fair value of the reporting units was determined by estimating the present value of future cash flows. Based on this impairment testing, we recorded an impairment loss of $8.8 million associated with those residences classified as discontinued operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," related to the accounting for debt extinguishments, leases, and intangible assets of motor carriers. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002 with earlier adoption encouraged. The Company adopted FASB 145 and as a result of the early adoption, we recognized a gain of $6.0 million related to a debt extinguishment that was paid on our behalf as a result of a restructuring settlement. This gain was recognized in discontinued operations consistent with the classification of the related assets.

For comparative purposes and in accordance with SFAS No. 144, the December 31, 2001 and 2000 financial statements have been reclassified for the comparable residences to reflect the above reclassifications.

Cumulative Effect of Change in Accounting Principle. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," having a required effective date for fiscal years beginning after December 15, 2001. Under SFAS No. 142, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. Under the transitional provisions of SFAS No. 142, we identified reporting units and performed impairment tests on the net goodwill associated with each of these reporting units. The fair value of the reporting units was determined by estimating the present value of future cash flows. Based on this impairment testing, we recorded an impairment loss of $54.7 million in the first quarter of 2002, o f which $8.8 million is associated and reported with those residences classified as discontinued operations. The remaining $45.9 million impairment loss has been recorded as a cumulative effect of change in accounting principle in the accompanying consolidated statements of operations for the year ended December 31, 2002.

Residence Service Fees. Residence service fees for the year ended December 31, 2001 were $427.3 million representing an increase of $17.3 million, or 4.2%, from the $410.0 million for the comparable 2000 period. This increase resulted primarily from rate increases instituted during the past 12 months. Average rates were $2,710 and $2,402 as of December 31, 2001 and 2000, respectively. Company-wide occupancy was 84.9% and 88.3% as of December 31, 2001 and 2000, respectively.

Other Revenues. Other revenues for the year ended December 31, 2001 were $6.2 million, a decrease of $7.4 million over the $13.6 million of other revenue for the year ended December 31, 2000. The decrease is attributable to reduced development and franchise activity and a reduction in management fees on residences which were either managed for third parties or for entities in which we held a minority ownership position. Management fees include charges for transitional services to recruit and train staff, initial and recurring fees for use of our name and branding, initial and recurring fees for use of our methodologies, services for assisting with finance processing, and ongoing management services provided to operate the residence.

Residence Operating Expenses. Residence operating expenses for the year ended December 31, 2001 increased to $290.7 million from $277.5 million in the year ended December 31, 2000. Operating expenses as a percentage of resident service fees for the year ended December 31, 2001 and 2000 were 68.0% and 67.7%, respectively. This percentage increase resulted primarily from increases in labor and employee benefit related costs due to increased competition for personnel, an increase in insurance costs, and increases in utility costs.

Lease Expense. Lease expense for the year ended December 31, 2001 was $61.9 million, compared to $71.6 million in the comparable period in 2000. This decrease is the result of lease terminations that occurred during the last 12 months.

Lease Income. We earned $21.3 million of lease income for year ended December 31, 2001, compared to $28.2 million for the comparable period in 2000, on residences owned or leased by us and leased or subleased to unconsolidated joint ventures. This decrease in lease income occurred due to a reduction in the number of unconsolidated joint ventures from 84 to 42 as of December 31, 2000 and 2001, respectively. Lease payment obligations of the unconsolidated joint venture entities are generally equivalent to the debt service payable by us on the leased residences, and thereby offset our costs associated with obtaining and maintaining financing for such residences.

General and Administrative Expense. For the year ended December 31, 2001, general and administrative expenses were $42.4 million prior to $6.5 million of restructuring costs, compared to $45.3 million before $5.1 million of non-recurring expenses for the comparable 2000 period, representing a decrease of on-going general and administrative expense as a percentage of operating revenue from 10.7% in 2000 to 9.8% in 2001. The $6.5 million of restructuring costs represents fees and other costs associated with the retention of restructuring professionals and associated activities. The $5.1 million of non-recurring expenses in 2000 consisted of $3.3 million related to employee severance costs and the termination of several internal software development and systems projects associated with our corporate downsizing and a $1.8 million bad debt expense related to a management fee note which was deemed to be uncollectible due to the acquisition of the related residences in the second quarter of 2000.

Loss on Disposal. During the year ended December 31, 2001, the Company's Board of Directors adopted a plan to dispose of 82 residences representing 130 beds. During the second quarter of 2001, the Company recognized a pre-tax loss of $163.5 million (net of $3.6 million gain on sale) to reflect the Disposition Assets at the lower of carrying value or estimated fair value less costs to sell and to write off the carrying value of assets associated with terminated residence leases. As of December 31, 2001, 59 residences and ten land parcels have either been sold or transferred to a new lessee. The Company recognized an additional pre-tax loss of $25.8 million upon sale or transfer of these assets. As of December 31, 2001, approximately $150.5 million is reserved for losses relating to future asset sales or lease terminations.

During the year ended December 31, 2000, the Company's Board of Directors adopted a plan to dispose of 67 residences with aggregate capacity of 2,377 residents and 33 parcels of land. In accordance with SFAS 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," we recorded a loss on disposal on 31 of the 67 residences where we estimated net sales proceeds using undiscounted cash flows, net of disposal costs, were less than the book value by $22.2 million net of subsequent gains.

Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2001 was $34.5 million, representing an increase of $1.5 million, or 4.5%, from the $33.0 million of depreciation and amortization for the comparable 2000 period. This increase is the result of a change during the second quarter in the accounting for the corporate office building synthetic lease where the synthetic lessor no longer bears economic risk and, as a result, this previously unconsolidated synthetic lease SPE was consolidated through May 2002.

Non-recurring Charge. A non-recurring charge of $4.2 million was recorded in the fourth quarter of 2000 relating to severance related to the elimination of various general and administrative positions of $1.1 million, the termination of a management contract of $2.0 million and the discontinuance of our pharmacy joint venture of $1.1 million. No similar charge was recorded in 2001.

Interest Expense, Net. Interest expense, net of interest income, was $57.2 million for the year ended December 31, 2001, prior to $4.8 million of bank penalties compared to $56.7 million of interest expense prior to $1.4 million of bank amendment fees for 2000. Gross interest expense (before interest capitalization and interest income) for the 2001 period was $59.2 million prior to the bank penalties compared to $62.6 million for the 2000 period, an increase of $2.1 million. We capitalized $1.9 million of interest expense in the 2001 period compared to $4.0 million in the 2000 period. This decrease in capitalized interest is a result of our decision to reduce development and construction activity in 2001. Our average construction in progress balance was $16.3 million during the twelve months ended December 31, 2001, compared to $65.1 million in the 2000 period. Interest income for the 2001 period was $2.0 million as compared to $5.9 million for the 2000 period. This decrease was due primarily to l ower restricted cash balances in place in 2001 related primarily to lease financing transactions.

Amortization of Financing Costs. Amortization of financing costs for the year ended December 31, 2001 was $9.8 million, representing an increase of $1.2 million from the $8.6 million of amortized financing costs for the comparable 2000 period. This increase resulted primarily from recognizing a full year of amortization associated with the PIK Debentures during 2001 versus four months of amortization in the prior year.

Gain on Debt Extinguishment. During the year ended December 31, 2000, we recorded a gain on the early extinguishment of debt of $13.8 million (net of tax) relating to our retirement of $41.4 million of convertible debt related to the Equity Transaction. This transaction is recognized in other operating expenses in accordance with SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which the Company adopted in 2002.

PIK Interest, Net. "Pay-In-Kind" (PIK) interest for the year ended December 31, 2001 includes $24.3 million of interest expense on the various PIK Debentures which were issued in May and August 2000. This is an increase of $11.8 million from the $12.5 million of PIK interest expense for the year ended December 31, 2000. This increase resulted primarily from recognizing a full year of interest expense in 2001 versus a partial year in 2000.

Equity in Losses of Unconsolidated Affiliates. Equity in losses of unconsolidated affiliates for the twelve months ended December 31, 2001, was $14.3 million, representing an increase of $1.5 million from $12.8 million of losses for the comparable 2000 period. Our joint venture partners have not made substantial capital contributions to a number of joint ventures for several quarters. Therefore, we have absorbed the losses of those unconsolidated joint ventures in excess of capital contributed by the joint venture partner. The increase in equity in losses of unconsolidated affiliates was also impacted by a slower lease-up of residences which are held in unconsolidated joint ventures.

Minority Interest in Profits/Losses of Consolidated Subsidiaries. Minority interest in profits of consolidated subsidiaries for the year ended December 31, 2001 was $426,000, representing a decrease of $838,000 from $1.3 million for the comparable period in 2000. The decrease was primarily attributable to the decrease in the number of residences that were owned by us in consolidated joint venture arrangements resulting from the joint venture settlements completed during 2001.

Loss on Discontinued Operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lives Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." We adopted SFAS No. 144 beginning on January 1, 2002. As a result of the adoption of SFAS No. 144, during the year ended December 31, 2002 we reclassified to discontinued operations the revenues and expenses of 19 residences with a capacity of 929 beds that were part of executed deed in lieu restructuring agreements or are leased residences pending sale. Additionally, three residences with a capacity of 114 beds were reclassified to discontinued operations resulting from their sale or lease termination in 2002.

For comparative purposes and in accordance with SFAS No. 144, the December 31, 2001 and 2000 financial statements have been reclassified for the comparable residences to reflect the above reclassifications.

Income Taxes. For the period ended December 31, 2001, we recorded a current state and local income tax provision of $120,000. The income tax expense for the period ended December 31, 2001 reflects the treatment of PIK interest as non-deductible interest. We do not currently anticipate that the interest expense which we will incur in the future related to the PIK debentures will be deductible for income tax purposes.

As of December 31, 2001, we do not have a deferred tax asset. In accordance with Statement of Financial Accounting Standards No. 109, we are required to continuously evaluate the recoverability of deferred tax assets based on the criteria that it is "more likely than not" that the deferred taxes will be recoverable through future taxable income. This evaluation is made based on our internal projections which are routinely updated to reflect more recent operating trends. Based on our current financial projections, we are uncertain that we will recover these net deferred tax assets through future taxable income. In addition, the utilization of the $299.3 million Net Operating Loss "NOL" carryforward could be subject to limitations based on the change of control provisions in the Internal Revenue Code which may become operative in a liquidity transaction or through the implementation of our Plan. Accordingly, we have established a valuation allowance against the entire net deferred tax assets.

At December 31, 2002, we had $13.8 million in unrestricted cash and cash equivalents and an $874.2 million working capital deficit compared to unrestricted cash and cash equivalents of $20.0 million and a $1.1 billion working capital at December 31, 2001.

For the year ended December 31, 2002, operating cash flow was $20.9 million compared to $9.7 million for the year ended December 31, 2001. The cash flow for the 2001 and 2002 periods reflect our decision to defer debt service and lease payments to selected lenders and lessors.

In conjunction with our Chapter 11 Filing, in January 2003 we secured a $15 million DIP credit facility from affiliates of certain principal holders of the Company's pay-in-kind securities issued in the summer of 2000. The Bankruptcy Court issued an order approving our borrowing up to $6.5 million under the DIP credit facility on an interim basis on January 24, 2003. Additional borrowings under the DIP credit facility will require further approval of the Bankruptcy Court., which we expect to obtain in April 2003.

During 2001 we completed a sale/leaseback refinancing transaction with one of our major REITs relating to wven residences for an aggregate purchase price of $26.5 million. The proceeds of these refinancings were used principally to retire mortgage and accrued interest obligations. We also negotiated extensions of loan maturities of between one to four years with respect to approximately $72.3 million of our secured debt during 2001.

During 2002 we completed a sale/leaseback transaction accounted for as a financing of three residences with one of our REITs for an aggregate purchase price of $11.8 million. The proceeds of this refinancing were used principally to retire mortgage loan and accrued interest obligations. We also entered into a settlement agreement with two lender groups with respect to defaulted "impaired" secured indebtedness originally aggregating $76.6 million (plus $4.3 million of accrued and unpaid interest and late fees and approximately $4.0 million due under an interest rate cap agreement that was terminated in March 2001) under credit facilities secured by mortgages on 22 residences. These settlements are structured to immediately shift the economics of ownership and control over the disposition of the mortgaged residences to the lenders. Subsequent to executing the applicable settlement agreement, we exercised refinancing options on three residences and now operate those residences pursuant to a sale-l easeback agreement. In exchange, we received the lenders' binding commitment to execute and deliver a waiver of any deficiency claims (including accrued interest and obligations related to the terminated interest rate cap agreement) and release of our guaranty with respect to this indebtedness upon satisfaction of certain conditions. Until March 31, 2003 (as to 11 residences) and June 30, 2003 (as to 12 residences), or such earlier time as the lenders sell a residence or replace the Company as manager, we are obligated to manage the residences for a management fee equal to six percent of facility revenue for the first six months after the closing date of the applicable settlement agreement and seven percent thereafter. Any net operating income from the residences is paid to the lenders as debt service. As a result of asset sales during the third and fourth quarters, a remaining $25.7 million of indebtedness is secured by mortgages on six residences originally included in the two settlement agreements. W e have estimated the potential deficiency claims related to the remaining residences associated with these credit facilities to be in the range of $19.8 million to $20.8 million as of December 31, 2002. We executed a settlement agreement with another of our impaired lender groups with regard to a credit facility representing $42.1 million of financing secured by 15 residences with an aggregate capacity of 675 beds. In exchange for a conditional release of any deficiency claims, we have agreed to cooperate in the transition of ownership of the mortgaged residences to the lenders or their designees (through deed-in-lieu of foreclosure transactions or so-called friendly foreclosures). Specifically, as these residences are transferred by the Company, we receive a release with respect to a pro-rata portion of the allocated loan amount and related penalties and interest. In transitioning ownership of the mortgaged residences to the lenders, we are offering to provide interim management services. Contemporane ous with the execution of this settlement agreement, we closed on a sale-leaseback financing representing $28.8 million with respect to nine residences with an aggregate capacity of 342 beds, including six residences originally financed by this lender group. Subsequent to this settlement, the Company participated in the transition of 3 residences through deed-in-lieu of foreclosures.

In an effort to retain sufficient cash to fund operations of all our residences and address our short-term liquidity needs, in March 2001 we obtained a $7.5 million bridge loan provided by certain of our principal stock and convertible debenture holders (the "Bridge Loan") and elected not to fund certain of our debt service and lease payment obligations. As a result, we are currently in default under many of our credit and sale/leaseback facilities.

Historically, we financed our operations and growth through a combination of various forms of real estate financing (mortgage, synthetic lease and sale/leaseback financing), capital contributions from joint venture partners and the sale of our securities (Common Stock, preferred stock and Subordinated Debentures) and, to a lesser extent, cash from operations. At December 31, 2002, we had $980.5 million of outstanding debt principally consisting of $439.7 million of Subordinated Debentures having a weighted average interest rate of 8.11%, $107.0 million of fixed rate debt having a weighted average interest rate of 7.41%, capitalized and financing lease obligations of $76.9 million having a weighted average interest rate of 10.98%, $334.6 million of variable rate debt having a weighted average interest rate of 6.01%, and $15.2 million and $7.1 million of notes payable and short-term borrowings, respectively. Through December 31, 2002, we have also entered into approximately $550.9 million of sale/leaseback f inancings.

Our principal credit and financing agreements, including our Subordinated Debentures and our lease agreements, include cross-default provisions that provide that a material default under our other credit facilities constitutes a default under that credit or financing agreement. Accordingly, any material default arising under one of our credit or financing agreements could result (and, as discussed below, has resulted) in many of our other major credit and financing arrangements being in default. In addition, our principal credit and financing agreements include various financial covenants and other restrictions, including: (i) fixed charge coverage requirements, typically measured on a trailing four quarter basis and which generally increase over the term of the applicable credit agreement; (ii) maximum leverage ratios which limit our aggregate senior indebtedness to total capitalization; (iii) various minimum net worth or tangible net worth requirements; (iv) in some cases, property specific debt service coverage requirements and similar financial covenants of the type referenced above applicable to individual properties or to the pool of residences financed by the applicable lender; and (v) the maintenance of operating and other reserves for the benefit of the residences serving as collateral for the applicable lender. We are currently not in compliance with certain of these covenants, although we have negotiated limited in time waivers with certain lenders and lessors. Additionally, under some of our credit and sale/leaseback facilities we are required to secure lender or lessor consent prior to engaging in mergers, business combinations or change in control transactions.

We elected not to fund certain debt service and lease payment obligations due in 2001 and 2002 without the consent of the applicable lender or lessor. Through additional payments, prepayments associated with asset sales and application of escrowed amounts, as of December 31, 2002, we had $5.1 million of delinquent outstanding scheduled debt service to lenders or lessors who hold mortgages on, or from whom we lease 36 residences in the aggregate (1,564 resident capacity). We have received a written notice of acceleration from lenders with respect to indebtedness aggregating $51.7 million at December 31, 2002. In addition, indebtedness of approximately $136.7 million has fully matured during 2002 and is past due. Many of our other credit and lease facilities are in technical default as a result of these payment defaults associated with other loan and lease facilities, but several of these lenders and lessors have executed limited in time waivers. We have received written notices of default from most of th ese lenders or lessors, three lessors have terminated leases for 17 residences (940 resident capacity) and other lenders have elected to apply deposits and reserve funds of ours held by such lenders against the past due payments. Five lenders have activated or are in the process of activating "cash traps" of bank accounts relating to the operation of residences mortgaged to such lenders, either pursuant to arrangements set forth in the applicable loan documents or as negotiated with the Company. We are also in litigation with a former lessor with respect to their damage claim associated with the early termination of their 11 residence lease portfolio.

Our operations will require significant additional capital resources in the future in order to fund: (i) the professional fees and other related costs associated with our Bankruptcy Case and Restructuring Plan; (ii) our ongoing debt service and lease obligations, including repayment of our DIP credit facility and maturities of our long-term debt and refinancing of short term debt; (iii) deferred capital expenditures; (iv) normalizing our professional and general liability insurance programs; and (v) general working capital needs. Since July 1, 2001, due to our limited cash resources and a general lack of availability of traditional professional and general liability insurance products, we have maintained substantially lower levels of liability insurance than would be desirable given actuarial estimates. Accordingly, our Restructuring Plan contemplates higher cash requirements for insurance in the future than we have incurred in the recent past.

At the outset of our restructuring, management sought to restructure secured loan facilities that, in management's view, would generate significant deficiency claims (i.e., claims in excess of the value of the applicable mortgage portfolio) in the event the applicable lenders sought to call the loan and foreclose on their collateral. Management believes that four credit facilities representing $215.3 million in aggregate financing at December 31, 2002 (secured by mortgages on 39 residences with a capacity of 2,696 beds) appear to represent significant potential deficiency claims in the range of $81.4 million to $99.6 million. In these negotiations, we sought to limit or eliminate these potential deficiency claims against the Company in exchange for our agreement to cooperate with the applicable lenders to facilitate an orderly transition of ownership (and, in certain cases, management) of the mortgaged residences to the lenders or their designees (through deed-in-lieu of foreclosure transactions or so-call ed friendly foreclosures). In transitioning ownership of the mortgaged residences to the lenders, we offered to provide interim or long-term management services to the lenders with respect to the mortgaged residences. As noted above, during 2002, we executed definitive agreements of this type with three different lender groups with regard to three of these "impaired" credit facilities, originally representing $104.2 million of financing secured by 31 residences with an aggregate capacity of 1,520 beds. As a result of refinancings, asset sales and foreclosures during the third and fourth quarters, $44.3 million of indebtedness secured by mortgages on 12 residences included in the three executed definitive agreements is remaining at December 31, 2002.

In May 2002, the lender group for our remaining "impaired" facility, representing $171.0 million in aggregate financing (secured by mortgages on 26 residences with an aggregate capacity of 2,154 beds) caused title to all of the stock of our subsidiary that operated these mortgaged residences to be transferred to a third party. Accordingly, we no longer own these residences, although we do currently manage these residences for this lender group and are actively negotiating with the lender group seeking to limit or eliminate any deficiency claim arising under our guaranty of this financing. As a result of the stock transfer, these residences are no longer consolidated and operations related to these residences through May 31, 2002 are reported as discontinued operations. We have recorded $58.5 million related to our estimated liability associated with our guaranty (including payment of the termination fee due upon full payment of the mortgage obligations). The liability associated with our guaranty obligat ion was calculated as the difference between the fair market value of the assets and the underlying mortgage obligations. Also included in discontinued operations is a loss of approximately $24.0 million, which represents the write off of the net assets of our former subsidiary at the time of the transfer of the stock of that subsidiary.

In January 2003, we entered into agreements with this lender group pursuant to which: (i) we have agreed to manage these 26 residences on an interim basis without a management fee, and to cooperate in transitioning management to any successor manager appointed by the credit participants, and (ii) the Company is entitled to be released of its guaranty and other principal obligations (with the exception of certain environmental indemnities) under this financing structure upon the satisfaction of certain conditions, including the payment of $5.7 million of fees to the credit participants on or prior to the confirmation of a plan of reorganization in our Bankruptcy Case.

In addition to these impaired credit facilities, we are continuing to seek to negotiate amendments and modifications with the applicable lenders with respect to our other principal secured credit facilities in order to, depending on the specific case, reset covenants, obtain consent to sell certain mortgaged residences, secure waivers of prior defaults and, in certain cases, to extend scheduled maturities. These credit facilities represent $300.9 million of financing secured by an aggregate of 94 residences with an aggregate capacity of 4,502 beds as of December 31, 2002. Discussions with certain of these lenders have commenced, and we have executed definitive binding agreements with lenders with respect to $174.4 million of indebtedness secured by 60 residences with an aggregate capacity of 2,677 beds, providing for, among other things, extensions of debt maturities, waivers of prior defaults and amendments of certain covenants. In February 2003, we refinanced 32 residences previously financed pursuant t o two secured debt facilities, obtaining $61.0 million of sale leaseback financing related to 25 residences with a capacity of 894 beds and borrowing $6.9 million of secured debt secured by six residences with a capacity of 182 beds. (See "Subsequent Events Note 20 to the Consolidated Financial Statements" for further discussion). We anticipate that we will need to negotiate restructuring agreements and to secure waivers and amendments with certain of our secured lenders as a condition to confirming our Plan and consummating any Liquidity Transaction.

As of December 31, 2002, we had five multi-residence portfolios leased with various REITs not including the 25 residence sale/leaseback financing closed in Febraury 2003. These portfolios include an aggregate of 200 residences with a capacity of 8,715 beds. We have entered into restructuring agreements with respect to each of these lease portfolios. These restructurings included the amendment of certain lease covenants and terms and, in three lease facilities, the conversion of individual leases into single master leases. The cash rent due under one lease facility was modified through the application of various deposits held by the landlord to satisfy a portion of the cash rent obligation in the early years of the restructured master lease.

As of December 31, 2002, the Company's junior capital structure is comprised of unsecured debt of approximately $439.7 million and equity capitalization consisting of $6.1 million aggregate principal amount of 9.75% Series A Cumulative Convertible Preferred Stock due May 30, 2007 and 22.2 million shares of Common Stock. The principal components of the Company's unsecured indebtedness as of December 31, 2002 (amounts exclude accrued but unpaid interest) include:

The outstanding 5.25% Debentures, 7.00% Debentures and 6.75% Debentures (collectively, the "Original Debentures") are subordinated to all other "senior indebtedness" of the Company (as defined in the applicable indenture governing such debentures), and the PIK Debentures are subordinated to all "senior indebtedness" of the Company (as defined in the applicable indentures governing such debentures), other than the Original Debentures. Although defined somewhat differently in the several indentures governing the Original Debentures and the PIK Debentures (collectively, the "Subordinated Debentures"), "senior indebtedness" is defined to generally include indebtedness for borrowed money and other similar obligations of Alterra (other than the other series of Original Debentures).

All of our Subordinated Debentures are currently in default due to our failure to make coupon payments on the Original Debentures and due to cross default provisions triggered by payment defaults on our secured debt.

As a result of several notices of default received by the Company with respect to secured indebtedness that by its terms may be accelerated by the applicable lenders, neither we nor the applicable indenture trustees for the Subordinated Debentures are permitted by the subordination provisions of the indentures governing the respective Subordinated Debentures to make any payment or distribution on account of the Subordinated Debentures (other than the payment of PIK coupons on the PIK Debentures). As a result, we did not make cash interest payments on the Original Debentures in 2001, 2002 and January 2003 of $5.5 million, $11.0 million and $5.5 million, respectively. In the event that the Company is dissolved, liquidated or reorganized, all amounts due in payment of the Company's "senior indebtedness" must be paid or provided for before any payment may be made on account of the Subordinated Debentures. Accordingly, unless and until we are able to restructure our "senior indebtedness" ob ligations (including, without limitation, our several secured credit facilities) and resolve all pending defaults related to this indebtedness, we will not be permitted to make any interest or other payments to the holders of the Subordinated Debentures (other than the payment of PIK coupons on the PIK Debentures) or to restructure the Subordinated Debentures.

To the extent that the Company is not able to restructure its capital structure and is forced to liquidate, applicable principles of corporate law (specifically, the liquidation priority of debt over equity and the priority of preferred stock over common stock) and the subordination provisions governing the Subordinated Debentures would dictate that:

In restructuring our junior capital structure, the relative rights in liquidation of our various junior capital constituencies will be a significant factor in determining the extent to which the claims and interests of these various constituencies will need to be modified, exchanged or entitled to any distribution of value as the Company is restructured.

Our Plan, filed with the Bankruptcy Court on March 27, 2003, contemplates that the Company will conduct a marketing process in order to solicit and identify the "highest and best" proposal for a Liquidity Transaction, which could involve a sale of equity securities in the reorganized Alterra through an Exit Equity Transaction or a sale of all or substantially all of the assets of Alterra, as a going concern, pursuant to an Asset Sale Transaction. In either case, management believes that the Liquidity Transaction will provide a fair valuation of the reorganized Alterra that will facilitate the completion of the reorganization and will provide a source of liquidity to make distributions of cash, securities or other property to the holders of various junior capital structure constituents, all to the extent that such holders are entitled to a distribution pursuant to applicable principals of bankruptcy law and the subordination provisions governing the Subordinated Debentures.

Given the uncertainty as to the outcome of our remaining restructuring negotiations with senior capital constituencies, and given the impact of operative subordination provisions and corporate and bankruptcy law doctrines governing the relative rights of holders of debt and equity interests in the Company, it is very difficult for us to predict what value, if any, various junior capital constituencies will receive in the restructured Alterra. While it is management's intention, to the extent practicable, to seek to restore value to our junior capital, no assurances may be given as to what value, if any, various junior capital constituencies will have in the restructured Company. Based on our current estimates of value, i appears that no distribution of value would be made to certain classes of unsecured debt or to any class of capital stock of the Company upon the conclusion of the Bankruptcy Case.

The Restructuring Plan calls for us to seek to acquire joint venture interests in certain of our residences in order to simplify our capital structure. In many cases, our acquisition of these joint venture interests (or termination of the applicable joint venture's interest in our residences) is necessary for us to satisfy restructuring requirements established by our senior lenders and lessors.

We have had buy-out or settlement negotiations with investors who currently have interests in an aggregate of 41 joint venture arrangements. As of December 31, 2002, 19 of those joint venture arrangements are associated with residences operating under lease or sublease agreements with the joint venture, while the lease or sublease agreements of the remaining 22 joint venture arrangements have been terminated. No assurance may be given as to whether these negotiations will result in an agreement which enables the Company to acquire 100% of these joint venture entities. If these negotiations fail, the Company's ability to restructure certain of its senior capital financing facilities may be adversely affected. If lenders or lessors providing financing to the Company with respect to residences operated by joint ventures seek to foreclose on their mortgages or to terminate their leases, and as a result joint venture entities have their right to operate such residences impaired, Alterra may be forced to defen d damage claims asserted by certain of its joint venture partners.

As of December 2002, we entered into an agreement with one of our joint venture partners pursuant to which we have agreed to purchase all of the remaining joint venture interests not held by the Company in eight residences and to acquire promissory notes previously issued by the Company aggregating approximately $3.6 million in exchange for the issuance of a 5-year unsecured promissory note for $7.2 million from the reorganized Alterra upon confirmation of our plan or reorganization by the Bankruptcy Court. Accordingly, the consummation of this transaction will be contingent upon, among other things, a successful Chapter 11 reorganization of the Company and Bankruptcy Court approval.

As of December 31, 2002, our current portion of long-term debt and short-term notes payable totaled $808.9 million. These current maturities include $362.1 million of debt and lease obligations, $439.7 million of PIK Debentures and other Subordinated Debentures that are in default or pursuant to cross-default provisions may be declared in default and may be accelerated at the lender's election, and $7.1 million of short-term notes payable and borrowings. In 2003 our scheduled debt maturities include $51.2 million of secured debt and $136.7 million of indebtedness which has fully matured and is past due as of December 31, 2002.

To address our long-term liquidity and capital needs, including our upcoming debt maturities, we intend to (i) seek to identify and consummate a Liquidity Transaction in connection with confirming our Plan; (ii) continue our negotiations with our lenders, lessors, joint venture partners, and to seek to implement the Restructuring Plan and the Plan; (iii) continue to implement operating initiatives focused on overall rate and occupancy improvement and overhead reductions; (iv) dispose of under-performing and non-strategic residences in order to reduce associated financing costs, operating expenses and to generate cash; and (v) seek to identify sources of financing to refince pending and near term debt maturities. As our Restructuring Plan and the Plan are largely dependent upon our ability to implement negotiated consensual restructuring arrangements with our various capital structure constituencies, no assurances may be given as to whether we will be able to restructure the Company or to restore value t o various of our capital structure constituencies.

To date, inflation has not had a significant impact on us. Inflation could, however, affect our results of operations due to our dependence on our senior resident population who rely on liquid assets and relatively fixed incomes to pay for our services. As a result, we may not be able to increase residence service fees to account fully for increased operating expenses. In structuring our fees we attempt to anticipate inflation levels, but there can be no assurance that we will be able to anticipate fully or otherwise respond to any future inflationary pressures.

Item 7A.           Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors cause fluctuations in our earnings and cash flows.

We performed a sensitivity analysis that presents the hypothetical change in fair value of those financial instruments held by us at December 31, 2002 which are sensitive to changes in interest rates. Market risk is estimated as the potential change in fair value resulting from an immediate hypothetical one-percentage point parallel shift in the yield curve. The fair value of the debt included in the analysis is $334.6 million. Although not expected, a one-percentage point change in the interest rates would have caused our annual interest expense to change by approximately $3.3 million. Accordingly, a significant increase in London Inter Bank Offered Rate ("LIBOR") could have a material adverse effect on our earnings.

Although a majority of the debt and lease payment obligations we have as of or during the twelve months ended December 31, 2002 are not subject to floating interest rates, indebtedness that we may incur in the future may bear interest at a floating rate.

We do not presently use financial derivative instruments to manage our interest costs. We do not use foreign currency exchange rate forward contracts or commodity contracts and do not have foreign currency exposure as of December 31, 2002.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.