Alterra Healthcare 10-K/A 2001 FY Annual report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A
Amendment No. 3

(Mark One)

[X]         Amendment to Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001

OR

[ ]         Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______________ to _______________.

Commission File Number 1-11999

ALTERRA HEALTHCARE CORPORATION
(Exact Name of Registrant as Specified in its Charter)

DELAWARE
(State of Incorporation) 10000 Innovation Drive
Milwaukee, WI
(Address of Principal Executive Offices) 39-1771281
(I.R.S. Employer Identification No.)
  53226
(Zip Code)

(414) 918-5000
(Registrant's Telephone Number)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

TITLE OF EACH CLASS	NAME OF EXCHANGE ON WHICH REGISTERED
Common Stock, Par Value $.01 Per Share	American Stock Exchange
5.25% Convertible Subordinated Debenture Due 2002	American Stock Exchange
Series A Junior Preferred Stock Purchase Rights	American Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

NONE

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

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

         The aggregate market value of the voting stock held by non-affiliates of the Registrant was $3,110,684 as of March 29, 2002. The number of outstanding shares of the Registrant's Common Stock was 22,219,168 shares as of March 29, 2002.

Explanatory Note

      This Report on Form 10-K/A amends and restates in their entirety the following Items of the Annual Report on Form 10-K of Alterra Healthcare Corporation (the "Company") for the fiscal year ended December 31, 2001 (the "2001 Form 10-K"):

      Item 8 of the 2001 Form 10-K has been amended to provide corrected information for the line item "Changes in investments in and advances to unconsolidated affiliates" for year 2001 on the "Consolidated Statements of Cash Flows."

     Item 11 has been amended to provide additional disclosure regarding 2001 option grants under the subsection entitled "Option Grants in Last Fiscal Year."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Alterra Healthcare Corporation and Subsidiaries:
	Independent Auditors' Report	31
	Consolidated Balance Sheets as of December 31, 2001 and 2000	32
	Consolidated Statements of Operations for Years Ended December 31, 2001, 2000 and 1999	33
	Consolidated Statements of Changes in Stockholders' Equity for Years Ended December 31,
	2001, 2000 and 1999	34
	Consolidated Statements of Cash Flows for Years Ended December 31, 2001, 2000 and 1999	35
	Notes to Consolidated Financial Statements	36-52

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INDEPENDENT AUDITORS' REPORT

The Board of Directors
Alterra Healthcare Corporation

We have audited the accompanying consolidated balance sheets of Alterra Healthcare Corporation and subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on the results of our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and was in violation of certain debt covenants and cross covenants as of December 31, 2001. As a result of the covenant violations and cross covenant violations, the Company is in default on the related debt. Additionally, the Company did not make certain scheduled loan principal and lease payments beginning in March of 2001. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

KPMG LLP

Chicago, Illinois
March 29, 2002

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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In thousands except share data)

		2001			2000
ASSETS
Current assets:
Cash and cash equivalents	$	19,996		$	23,688
Accounts receivable, net		10,539			11,782
Notes receivable, net		500			4,963
Assets held for sale		88,166			154,775
Other current assets		31,346			56,832
Total current assets		150,547			252,040
Property and equipment, net		727,416			786,439
Restricted cash and investments		3,312			21,507
Goodwill, net		104,915			115,717
Other assets		52,010			52,062
Total assets	$	1,038,200		$	1,227,765
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term obligations, including convertible debt	$	977,651		$	214,890
Current debt maturities on assets held for sale		140,054			98,828
Short-term notes payable		10,753			9,986
Accounts payable - trade		4,450			10,805
Accounts payable - construction		--			1,049
Accrued expenses		62,336			42,778
Deferred rent and refundable deposits		16,048			2,930
Total current liabilities		1,211,292			381,266
Long-term obligations, less current installments		82,752			403,036
Convertible debt		--			395,914
Deferred gain on sale and other		5,593			5,286
Minority interest		--			4,506
Redeemable preferred stock		5,489			4,898
Stockholders' equity (deficit):
Preferred stock, 2,500,000 shares authorized; 1,550,000 and 1,250,000 of which have been designated at December 31, 2001 and 2000, respectively, none of which are outstanding		--			--
Common stock, $.01 par value; 100,000,000 shares authorized; of which 22,111,671 and 22,219,168 were issued and outstanding, respectively, on December 31, 2001, and 22,111,671 and 22,109,810 were issued and outstanding, respectively, on December 31, 2000		221			221
Treasury stock, $.01 par value; 11,639 shares in 2001 and 2000		(163	)		(163	)
Additional paid-in capital		179,526			179,384
Accumulated deficit		( 446,510	)		(146,583	)
Total stockholders' equity (deficit)		(266,926	)		32,859
Total liabilities and stockholders' equity (deficit)	$	1,038,200		$	1,227,765
See accompanying notes to consolidated financial statements.

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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2001, 2000 and 1999
(In thousands, except per share data)

		2001			2000			1999
Revenue:
Resident service fees	$	502,670		$	452,880		$	349,770
Other		6,152			13,615			26,411
Operating revenue		508,822			466,495			376,181
Operating expenses (income):
Residence operations		351,707			313,514			224,213
Lease expense		69,445			82,352			69,375
Lease income		(21,336	)		(28,222	)		(25,507	)
General and administrative		48,881			50,360			44,898
Loss on disposal		189,287			22,515			--
Depreciation and amortization		42,198			36,210			21,178
Non-recurring charge		--			4,232			47,280
Total operating expenses		680,182			480,961			381,437
Operating loss		(171,360	)		(14,466	)		(5,256	)
Other (expense) income:
Interest expense, net		(77,882	)		(62,628	)		(32,259	)
Amortization of financing costs		(9,786	)		(8,595	)		(3,679	)
Convertible debt paid in kind ("PIK") interest		(24,303	)		(12,483	)		--
Equity in losses of unconsolidated affiliates		(16,902	)		(14,762	)		(1,462	)
Minority interest in profits of consolidated subsidiaries		426			1,264			4,018
Total other expense, net		(128,447	)		(97,204	)		(33,382	)
Loss before income taxes, extraordinary gain and the cumulative effect of a change in accounting principle		(299,807	)		(111,670	)		(38,638	)
Income tax (expense) benefit		(120	)		(14,672	)		14,669
Loss before extraordinary gain and cumulative effect of a change in accounting principle	$	(299,927	)	$	(126,342	)	$	(23,969	)
Extraordinary gain on early extinguishment of debt (net of $5,232 tax expense)		--			8,536			--
Cumulative effect of change in accounting principle (net of $2,509 tax benefit)		--			--			(3,837	)
Net loss	$	(299,927	)	$	(117,806	)	$	(27,806	)
Basic loss per common share:
Loss before extraordinary item , and a change in accounting principle	$	(13.52	)	$	(5.71	)	$	(1.09	)
Extraordinary item		--			0.39			--
Change in accounting principle		--			--			(0.17	)
Basic loss per common share	$	(13.52	)	$	(5.33	)	$	(1.26	)
Diluted loss per common share:
Loss before extraordinary item , and a change in accounting principle	$	(13.52	)	$	(5.71	)	$	(1.09	)
Extraordinary item		--			0.39			--
Change in accounting principle		--			--			(0.17	)
Diluted loss per common share	$	(13.52	)	$	(5.33	)	$	(1.26	)
Weighted average common shares outstanding:
Basic		22,192			22,108			22,088
Diluted		22,192			22,108			22,088
See accompanying notes to consolidated financial statements.

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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
(In thousands)

	Common Stock, Treasury Stock And Additional Paid-In Capital
	Shares Outstanding		Amounts		Accumulated Deficit			Total
Balances at December 31, 1998	22,019	$	178,083	$	(971	)	$	177,112
Shares issued - options exercised	81		1,337		--			1,337
Net loss	--		--		(27,806	)		(27,806	)
Balances at December 31, 1999	22,100	$	179,420	$	(28,777	)	$	150,643
Shares issued - options exercised	10		22		--			22
Net loss	--		--		(117,806	)		(117,806	)
Balances at December 31, 2000	22,110	$	179,442	$	(146,583	)	$	32,859
Shares issued - restricted stock grant	109		142		--			142
Net loss	--		--		(299,927	)		(299,927	)
Balances at December 31, 2001	22,219	$	179,584	$	(446,510	)	$	(266,926	)

See accompanying notes to consolidated financial statements.

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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
(In thousands)

		2001			2000			1999
Cash flows from operating activities:
Net loss	$	(299,927	)	$	(117,806	)	$	(27,806	)
Adjustment to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		42,198			36,210			21,178
PIK interest		24,303			12,483			--
Amortization of deferred financing costs		9,786			8,595			3,679
Extraordinary gain on extinguishment of debt		--			(13,768	)		--
Loss on disposal		189,287			22,515			--
Deferred income taxes		120			19,904			(16,732	)
Equity in net loss from investments in unconsolidated affiliates		16,902			14,762			1,442
Minority interest in losses of consolidated subsidiaries		(426	)		(1,264	)		(4,018	)
(Decrease) increase in net resident receivable		350			(4,633	)		(3,106	)
Decrease in pre-opening costs		--			--			7,856
Decrease (increase) in income tax receivable		42			5,438			(5,557	)
Decrease (increase) in other current assets		7,176			(12,912	)		(7,569	)
(Decrease) increase in accounts payable		(12,723	)		(231	)		1,082
Increase in accrued expenses and deferred rent		4,161			8,653			10,011
Increase in past due interest and late fees		17,900			--			--
(Decrease) increase in accrued development reserve costs		(1,147	)		(11,555	)		13,348
Changes in other assets and liabilities, net		11,683			5,018			11,550
Net cash (used in) provided by operating activities		9,685			(28,591	)		5,358
Cash flows (used in) from investing activities:
Payments for property, equipment and project development costs		(23,932	)		(86,092	)		(181,794	)
Net proceeds from sale of property and equipment		73,926			2,217			18,263
Decrease (increase) in notes receivable, net of reserve		4,463			(9,349	)		(21,544	)
Acquisitions of facilities, net of cash		--			(20,896	)		(21,806	)
Changes in investments in and advances to unconsolidated affiliates		188			(4,126	)		--
Purchase of limited partnership interests		(782	)		(35,742	)		(64,355	)
Increase in long-term investments		--			--			(23,821	)
Net cash provided by (used in) investing activities		53,863			(153,988	)		(295,057	)
Cash flows from financing activities:
Proceeds (repayments) of short-term borrowings		767			(19,228	)		(1,130	)
Repayments of long-term obligations		(99,050	)		(106,980	)		(78,258	)
Proceeds from issuance of debt		5,491			127,432			273,049
Proceeds from issuance of convertible debt		--			197,926			--
Payments for financing costs		(1,068	)		(18,427	)		(8,550	)
Proceeds from sale/leaseback transactions		26,458			--			78,387
Issuance of preferred stock, common stock and other capital contributions		142			4,568			797
Contributions by minority partners and minority stockholders		20			2,248			3,511
Net cash provided by financing activities		(67,240	)		187,539			267,806
Net (decrease) increase in cash and cash equivalents		(3,692	)		4,960			(21,893	)
Cash and cash equivalents:
Beginning of year		23,688			18,728			40,621
End of year	$	19,996		$	23,688		$	18,728
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	89,887		$	79,898		$	46,523
Cash (refunded) paid during year for income taxes	$	(50	)	$	(4,596	)	$	1,424
Debt assumed	$	--		$	48,887		$	--
Non cash items:
Synthetic lease assets consolidated	$	112,236		$	--		$	--
Synthetic lease debt consolidation	$	119,726		$	--		$	--
Notes issued in exchange for joint venture interests	$	14,565	1	$	--		$	--

See accompanying notes to consolidated financial statements.

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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001, 2000 and 1999

1.         Nature of Business and Summary of Significant Accounting Policies

1. Business

Alterra Healthcare Corporation (the "Company") develops, owns, and operates assisted living residences. As of December 31, 2001, the Company operated and managed 430 residences located throughout the United States with approximate capacity to accommodate 20,200 residents.

2. Going Concern

Throughout 2000 and 2001, the Company sought to implement several strategic initiatives designed to strengthen its balance sheet and to enable management to focus on stabilizing and enhancing its core business operations. The principal components of these strategic initiatives included (i) discontinuing its development activity; (ii) a reduction in utilization of and reliance upon the use of joint venture arrangements; (iii) de-leveraging the balance sheet; and (iv) focusing activities on improving the Company's cash flow. To implement these strategic initiatives and to address its short and long-term liquidity and capital needs, we completed an equity-linked investment in the Company of $203 million during the second and third quarters of 2000 (the "Equity Transaction").

In the second half of 2000, however, two issues emerged that have had a materially adverse impact on the Company's liquidity. First, costs associated with operating the residences, labor and liability insurance costs in particular, increased in the second half of 2000. Second, due both to a generally unfavorable financing market for assisted living residences and the declining credit fundamentals at both the residence and corporate level, the Company was unable to complete its anticipated financing transactions in 2001. These financing transactions were originally projected to yield cash proceeds that would have been used to fund a portion of the overall cash requirements. Virtually all of the net cash proceeds of the Equity Transaction were used to fund operating cash flow deficits and to complete construction of its remaining unopened residences.

By February 2001, the Company's overall cash position had declined to a level that was insufficient to operate the Company. As the Company began 2001 operations produced approximately $7.0 million per month of cash flow before monthly secured debt service and lease payments, and monthly secured debt service and lease payments totaled approximately $12.0 million. In addition, there were significant debt maturities in 2001 and 2002.

In February 2001, the Company retained financial advisors and special reorganization counsel to assist in evaluating alternatives to restore the financial viability of the business. To conserve cash and protect the financial integrity of operations, beginning in March 2001, the Company elected not to make $10.4 million of selected scheduled debt service and lease payments, of which $6.6 million remained unpaid as of December 31, 2001. As a result, the Company continues to be in default under many of its major loan and lease facilities. In March 2001, the Company obtained a $7.5 million bridge loan to fund current operations from certain principal stock and debenture holders.

In March of 2001, the Company began to implement a restructuring plan ("Restructuring Plan"). The principal components of the restructuring plan are the disposition of selected assets and the restructuring of the Company's capital structure, including its "senior capital" constituencies comprised principally by its secured indebtedness and leases (operating, capital and synthetic), its "junior capital" constituencies comprised principally by its convertible pay-in-kind (PIK) debentures, its other convertible subordinated debentures, its equity capitalization, and its remaining joint venture relationships. Discussions with various senior capital structure constituencies commenced in the spring of 2001 and are ongoing. While several binding restructuring arrangements have been executed, negotiations with respect to the majority of its secured debt and lease arrangements have not been concluded. Negotiations with junior capital structure constituencies have not commenced. Given that significant restructuring discussions and negotiations are still to be concluded, the Company expects that they may be making modifications to the Restructuring Plan to address issues that arise during the course of these negotiations.



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The Company has incurred historical net losses and for the year ended December 31, 2001, the Company had a net loss of $300.0 million. In addition, during the year ended 2001 the Company had an operating cash flow of $9.7 million, and at year end the Company had a working capital deficit of $1.1 billion. Furthermore, at December 31, 2001 the Company was in violation of certain debt covenants. These conditions raise substantial doubt about the Company's ability to continue as a going concern. 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.

3. Principles of Consolidation

The consolidated financial statements include the accounts of 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 the Company has a minority ownership position are accounted for on the equity method.

Included in the consolidated financial statements are the accounts of certain wholly owned subsidiaries that have been formed as "special purpose entities" (SPEs) in accordance with the requirements of certain of the Company's lenders. Mortgage lenders imposing SPE requirements typically require that, in connection with providing mortgage financing with respect to a pool of residences, the residences actually be owned by one or more SPEs, which become the borrower or borrowers under the mortgage financing arrangement. Although lender requirements with respect to such SPEs vary, a SPE may be required to maintain separate corporation records and books of account, not commingle its assets with those of the parent company, have a separate board of directors from the parent company (including at least one individual board member who is independent of the parent company), maintain arm's length relationships with the parent company, not guarantee or become obligated for the debts of any other entity, including the parent company, or hold its credit as being available to satisfy the obligations of others and not pledge its assets for the benefit of any other entity, including the parent company. Given the separate corporate existence of certain of these SPEs and the fact that the assets of each SPE are subject to the prior claims of the individual creditors of the SPE, neither the creditors nor stockholders of the Company (or of any other of its subsidiaries) have any right to the assets of these SPEs except indirectly by virtue of its (or the subsidiary's) equity interest in such SPEs. SPEs included in the consolidated financial statements include ALS Venture I, Inc. (which owns 18 residences and holds a mortgage on one residence), ALS Venture II, Inc. (which owns 36 residences), AHC Borrower I, Inc. (which owns ten residences), AHC Tenant, Inc. (which leases 26 residences), and other SPE subsidiaries which own 70 residences in the aggregate.

4. Use of Estimates

The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

5. Recent Accounting Pronouncements

In June 2001 the FASB issued Statement 141, Business Combinations , and Statement 142, Goodwill and Other Intangible Assets . Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with provisions of Statement 142. Statement 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with FAS Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Live Assets to Be Disposed Of .

The Company is required to adopt the provisions of Statement 141 immediately, and expects to adopt Statement 142 effective January 1, 2002. Furthermore, any goodwill and intangible assets determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in a business combination completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142.



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Statement 141 will require, upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination and make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

In connection with the transition goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill (and equity-method goodwill) is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle to the Company's statement of earnings.

As of December 31, 2001, the Company had unamortized goodwill in the amount of $118.0 million, which includes $93.8 million of net intangible building and leasehold interests which was reclassified from property and equipment in preparation for Statement 141, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense relating to goodwill was $6.2 million and $5.2 million for the years ended December 31, 2001 and December 31, 2000, respectively. Based on preliminary estimates, the Company expects to record an impairment loss adjustment of approximately $17.4 million during the first quarter of 2002 in accordance with Statements 141 and 142.

In June 2001, the Financial Accounting Standards Board issued Statement 143, Accounting for Asset Retirement Obligations , which addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset.

Statement 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement.

The Company is required and plans to adopt the provisions of Statement 143 effective January 1, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. Because of the effort necessary to comply with the adoption of Statement 143, it is not practicable for management to estimate the impact of adopting this statement at the date of this report.



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In October 2001, the Financial Accounting Standards Board issued Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets , which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 supersedes FASB Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , while maintaining many of the fundamental provisions of that Statement. Statement 144 also supersedes the accounting and reporting provisions of APB Opinion 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions , for the disposal of a segment of a business. The Company is required and plans to adopt the provisions of Statement 144 effective January 1, 2002. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of Statement 144 will have on the Company's financial statements.

6. Cash Equivalents

The Company considers all highly liquid investments with original maturities of less than ninety days to be cash equivalents for purposes of the consolidated financial statements.

7. Fair Value of Financial Instruments and Concentration of Credit Risk

The Company determines fair value of financial assets based on quoted market values. The fair value of debt is estimated based on quoted market values, where available, or on current rates offered to us for debt of the same maturities.

The Company's financial instruments exposed to concentrations of credit risk consist primarily of cash and short-term investments. The Company places its funds into high credit quality financial institutions and, at times, such funds may be in excess of the Federal Deposit Insurance Corporation limits.

8. Long-Lived Assets

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. (See Note 4).

Goodwill represents the costs of acquired net assets in excess of their fair market values. Amortization of goodwill is computed using the straight-line method over the expected periods to be benefited, generally 13 to 40 years. The Company's management periodically evaluates goodwill at the individual residence level for impairment based upon expectations of undiscounted cash flows in relation to the net capital investment in the entity. Based on the analysis performed as of December 31, 2001, the Company believes no impairment exists. Accumulated amortization of goodwill was $13.1 million and $7.1 million as of December 31, 2001 and 2000, respectively.

9. Assets Held For Sale

Property and equipment held for sale are carried at the lower of cost or estimated fair value less costs to sell.

10. Deferred Financing Costs

Financing costs related to the issuance of debt are capitalized and included in other assets and are amortized to interest expense using the effective-interest method over the term of the related debt.



-10-

11. Revenue

Revenue, which is recorded when services are rendered, consists primarily of resident service fees that are reported at net realizable amounts. Other revenue consists of the following components (in thousands):

	2001	2000	1999
Management fees	$5,909	$11,309	$22,956
Franchise fees	243	1,878	2,290
Development fees	--	428	1,165
Total other revenue	$6,152	$13,615	$26,411

Management fees are recognized based on the terms of the management agreements in place for managed residences owned by third parties and those operated under unconsolidated joint venture arrangements. Fees are generally recognized based on a percentage of stabilized revenues. Fees are recognized during the start up period to offset costs to hire and train staff, licensing and other activities, as well as after managed residences are open and operating.

Franchise fees are recognized based on the applicable franchise agreements that charge fees for the right to use Company brand names and operating systems. Fees are recognized based on a fixed fee when franchised residences open and a percentage of revenue once in operation.

Development fees are recognized based on the applicable agreements whereby the Company receives fees for construction of Company prototype buildings for the benefit of third parties. These fees are recorded during the construction period based on achievement of certain milestones as defined in the development agreement.

12. Income Taxes

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.

13. Net Loss Per Common Share

The Company presents both basic and diluted earnings per share, where applicable. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common stock equivalents were exercised and then shared in the earnings of the Company. Common stock equivalents were anti-dilutive in 2001, 2000 and 1999, accordingly, basic and diluted loss per share amounts were the same.

14. Reclassifications

Certain reclassifications have been made to the 2000 and 1999 financial statements to conform with the 2001 presentation.

2. Acquisitions and Joint Venture Activity

The Company completed the following acquisitions during 2000:

• Fourteen assisted living residences located in several states were purchased in May 2000 for $20.9 million net of acquired cash, and in the purchase the Company assumed $48.9 million in debt and recorded goodwill of $6.2 million.

The Company completed the following joint venture settlements during 2001:

• In October 2001 the Company closed on the buyout of joint venture partner interests in 15 residences with an aggregate capacity of 643 residents in connection with a modification and settlement agreement with one investor group. The Company issued a $700,000 note in consideration for the acquired interests and amended the terms of its joint venture arrangement with respect to the ten residences still operated in a joint venture with this investor group.
• In December 2001 the Company terminated its joint venture with Pioneer Development Company by exchanging ownership interests in 12 joint venture (556 resident capacity) entities jointly owned with this group, resulting in the Company and Pioneer each acquiring sole ownership in six of these residences. The Company received $1.6 million in cash and a $500,000 note for a net payment related to its joint venture interests.
• In December 2001 the Company terminated its joint venture with Manor Care, Inc. relating to 13 residences in connection with consummating a global settlement of various pending litigations and arbitration proceedings between the Company and Manor Care and its affiliates. In addition, the Company was released of its joint debt guarantee associated with a $57.7 million revolving line of credit. The Company issued $12.0 million in notes in exchange for the release of its debt guarantee, the termination of the joint venture interests, and the settlement of all pending litigation and arbitration proceedings with Manor Care.

-11-

3. Notes Receivable

As of December 31, 2001, the notes receivable balance consists of a short-term note bearing interest at 9.0%, payable by Pioneer Development Company in 2002 as part of the joint venture termination settlement entered into during December 2001.

As of December 31, 2000, the notes receivable balance represented balances due from 13 joint venture entities. The Company funded working capital on behalf of the joint ventures and received payment upon the sale of the property or cash flow generated from the joint venture. These notes were forgiven as a part of the global settlement of litigation and termination of joint venture arrangements with Manor Care. See Note 2.

4. Assets Held for Sale and Other Current Assets

1. Assets Held for Sale

The Company's Board of Directors adopted a plan in 2000 and 2001 to dispose or terminate leases on 102 residences with an aggregate capacity of 4,444 residents and 33 parcels of land. As of December 31, 2001, 59 residences representing 2,774 resident capacity have either been sold or transferred to a new lessee. In addition, the Company sold ten land parcels. As of December 31, 2001, approximately $150.5 million is reserved for losses relating to future asset sales or lease terminations.

In accordance with the SFAS No.121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121") the Company has recorded an impairment loss on its properties to be held for sale whenever their carrying value cannot be fully recovered through the estimated cashflows including net sale proceeds. The amount of the impairment loss to be recognized is the difference between the residence's carrying value and the residence's estimated fair value. The Company's policy is to consider a residence to be held for sale or disposition when the Company has committed to a plan to sell such residence and active marketing activity has commenced or it is expected to commence in the near term. The Company expects to sell these residences and land parcels in the next six to twelve months.

Residences included in the disposition plan were identified based on an assessment of a variety of factors including geographic location, residence size, and operating performance. Potential buyers provided us with formal indications of interest on many of these assets during the second quarter of 2001, the majority of which reflected purchase prices that are less then carrying value of the applicable residence. The Company recorded a net loss of $189.3 million during 2001 to reflect the assets held for sale at the lower of carrying value or estimated fair value less costs to sell and to write off the carrying value of assets related to terminated residence leases. The value of the assets held for sale, net of reserves, is reflected in current assets and the outstanding debt related to the assets held for sale is reflected in current liabilities on our balance sheet.

There are a number of factors that may affect the timing of a sale and the sale price that will ultimately be achieved for these residences, including, among other things, the following: potential increased competition from any other assisted living residences in the area, the relative attractiveness of assisted living residences for investment purposes, interest rates, the actual operations of the residence, the ability to retain existing residents and attract new residents at the residence and a buyout of joint venture interests. As a result, there is no assurance as to what price will ultimately be obtained upon a sale of these residences or the timing of such a sale.



-12-


The following table represents condensed operating information related to the 102 operating residences which have been sold, are held for sale, or had leases terminated as of December 31, 2001, as reported in the Consolidated Statements of Operations of the Company. In some cases, based on the timing of the asset disposal or lease termination, results may not be comparable (in thousands).

		2001			2000
Revenue	$	66,008		$	72,941
Residence operations expense		55,342			62,898
Lease expense		4,539			9,718
Interest expense		12,292			11,587
Depreciation expense		6,832			6,421
Loss before taxes	$	(12,997	)	$	(17,683	)

2. Other Current Assets

Other current assets are comprised of the following at December 31 (in thousands):

		2001		2000
Restricted cash	$	12,920	$	27,598
Supply inventory		10,157		12,115
Prepaid expenses		5,479		4,713
Other current assets		2,790		12,406
Total other current assets	$	31,346	$	56,832

5.         Property and Equipment

         A summary of property and equipment at December 31 follows (in thousands):

		2001			2000
Land and improvements	$	65,660		$	82,218
Buildings and leasehold improvements		659,955			632,690
Furniture, fixtures, and equipment		88,271			94,109
Construction in progress		--			41,850
Total property and equipment		813,886			850,867
Less accumulated depreciation		(86,470	)		(64,428	)
Property and equipment, net	$	727,416		$	786,439

At December 31, 2001 and 2000, property and equipment includes $205.7 million and $63.4 million, respectively, of buildings and improvements held under capital and financing leases. The related accumulated amortization totaled $10.0 million and $2.2 million at December 31, 2001 and 2000, respectively.

Interest is capitalized in connection with the construction of residences and is amortized over the estimated useful lives of the residences. Interest capitalized in 2001, 2000 and 1999 was approximately $1.9 million, $3.9 million and $10.3 million, respectively.

In preparation for FASB 142, the Company reclassified to goodwill approximately $93.8 million and $105.4 million of net intangible building and leasehold interests as of December 31, 2001 and 2000, respectively.

6. Unconsolidated Affiliates and Managed Residences

The Company manages certain residences operated by joint ventures, primarily in the start-up or lease-up phases of operations, in which it either has no ownership or a minority ownership position, typically less than 10%. Historically, the Company has subsequently elected to purchase or acquire the remaining ownership interest in a majority of these residences, at which point the residences are included in consolidated operating results. As of December 31, 2001, the Company owned minority interests in entities owning or leasing (and also managed) 42 residences and managed six other residences. As of December 31, 2000, the Company owned minority equity interests in entities owning or leasing (and also managed) 71 residences and managed four other residences. Included in other assets of the Company's balance sheet are net advances from affiliates of $1.6 million as of December 31, 2001.

-13-

The results of operations of these unconsolidated and managed residences for 2001, 2000 and 1999 are as follows (in thousands):

		2001			2000			1999
Residence service fees	$	77,874		$	86,147		$	58,409
Residence operation expenses		58,514			76,577			65,374
Residence profit (loss)		19,360			9,570			(6,965	)
Management fee expense		4,869			11,309			23,919
Financing expense		30,758			43,692			31,965
Loss before tax	$	(16,267	)	$	(45,431	)	$	(62,848	)

Financing expense on these residences includes $21.3 million and $28.2 million of lease and mortgage expense in 2001 and 2000, respectively, which represents lease income to the Company from these residences. The Company retains ownership in the underlying assets and then leases the assets to the unconsolidated and managed affiliates.

7. Restricted Cash and Investments

Restricted cash and investments consist of debt service reserves with interest rates ranging from 4.8% to 6.8% and maturities ranging from one to twelve months.

8. Other Assets

         Other assets are comprised of the following at December 31 (in thousands):

		2001		2000
Deferred financing costs, net	$	35,081	$	35,286
Lease security deposits		7,266		10,630
Deposits and other		9,663		6,146
Total other assets	$	52,010	$	52,062

-14-

9. Long-term Debt, Capital Leases, Redeemable Preferred Stock, and Financing Obligations

Long-term debt, capital leases, and financing obligations consist of the following at December 31 (in thousands):

		2001		2000
5.25% convertible subordinated debentures due December 15, 2002, callable by the Company on or after December 31, 2000	$	112,043	$	112,043
7.00% convertible subordinated debentures due June 1, 2004, callable by the Company on or after June 15, 2000		40,355		40,355
6.75% convertible subordinated debentures due June 30, 2006, callable by the Company on or after July 15, 2000		34,850		34,850
9.75% Series A convertible debentures due May 31, 2007, callable by the Company on or after May 31, 2003		42,500		42,500
9.75% Series B convertible debentures due May 31, 2007, callable by the Company on or after May 31, 2003		137,221		121,019
9.75% Series C convertible debentures due May 31, 2007, callable by the Company on or after May 31, 2003		49,795		45,147
Total convertible debt	$	416,764	$	395,914
Mortgages payable, due from 2004 through 2037; weighted average interest rate of 7.10%	$	27,535	$	538,677
Capital and financing lease obligation payable through 2016; weighted average interest rate of 11.32%		37,140		10,682
Serial and term revenue bonds maturing serially from 2000 through 2013; interest rates ranging from 4.00% to 9.50%		3,645		6,290
Notes payable through 2007; weighted average interest rate of 8.83%		14,432		--
Capital leases, financing obligations and mortgage payable in default and subject to acceleration		700,941		161,106
Total long-term obligations		1,200,457		1,112,668
Less current installments		1,117,705		313,718
Total long-term obligations, less current installments	$	82,752	$	798,950

As of December 31, 2001 and 2000, the Company was in violation of its fixed charge covenant with several of its credit facilities. In addition, in order to conserve its liquidity, the Company did not make certain 2001 debt service and lease payments. As the Company's principal credit, lease and other financing facilities are cross-defaulted to a material default occurring under other credit, lease or financing facilities, a payment default by the Company under one such facility results in the Company being in default under other such facilities. As a result of these defaults, two previously unconsolidated synthetic lease SPEs were consolidated during the second quarter of 2001. Obligations in the amount of $700.9 million are currently classified as current liabilities because the applicable lenders have the right to accelerate their loans due to the existence of a default.

The mortgages payable are secured through security agreements and guarantees by the Company. In addition, certain security agreements require the Company to maintain collateral and debt reserve funds. These funds are recorded as restricted cash and long-term investments.

At December 31, 2000, the Company has outstanding $3.4 million of mortgage notes payable that were assumed in conjunction with non-cash acquisition activities in 1999.

-15-

In December 1999 the Company entered into a bridge loan arrangement with an affiliated group (the "Bridge Lender") in connection with the Company's repurchase of 19 Alterra residences then leased from a healthcare REIT (the "REIT Residences"). Pursuant to this arrangement, the Company borrowed $14.0 million (the "Tranche A Loan") for working capital purposes and $30.0 million ("Tranche B Loan") as bridge financing for its initial purchase of seven REIT Residences in December 1999. The Tranche A Loan had a term of up to 12 months and bore interest at an initial annual rate of 8% for the first three months, 9% for the next three months and increasing thereafter by 0.5% per month. The Tranche A Loan was secured by mortgages on certain land and a stock pledge of a subsidiary corporation (the "Holding Subsidiary") formed to serve as the holding company for the subsidiary formed to acquire the REIT Residences. The Tranche B Loan had a term of up to six months, bore interest at an annual rate of 10% for the first three months and at a rate escalating by 0.5% per month thereafter. The Tranche B Loan was secured by mortgages on the seven REIT Residences acquired with the proceeds from the Tranche B Loan.

In February 2000 the Company acquired the remaining 12 REIT Residences. In connection therewith, the Company obtained $60.0 million of mortgage financing from one of its bank lenders and utilized $30.0 million of the proceeds to purchase the 12 REIT Residences and $30.0 million to repay the Tranche B Loan. The Tranche A Loan was repaid in conjunction with the 2000 Equity-Linked Transaction described below.

On May 31, 2000, the Company completed a financing transaction in which it issued $173.0 million of convertible debentures and convertible preferred shares to several investors, including affiliates of the Company. The securities issued were initially convertible at $4.00 per share, bear a 9.75% semi-annual payment-in-kind ("PIK") coupon or dividend and have a seven year maturity. The Company may call the securities at any time after three years if the trading price of the Company's Common Stock averages at least $8.00 for the preceding 30 trading days. This initial closing contemplated that the Company had the option to issue up to an additional $29.9 million of these debentures within 180 days following the May 31, 2000 closing. The Company recorded a gain on the early extinguishment of debt of $8.5 million related to its retirement of $41.4 million of convertible debt in the initial closing. On August 10, 2000, the Company exercised its option to issue the additional $29.9 million of securities, thereby increasing the overall financing transaction to a total of $203.0 million (the May 31, 2000 and August 10, 2000 closings are referred to together as the "2000 Equity-Linked Transaction"). The securities issued in this transaction include the following:

Series A Stock. 1,250,000 shares of the Series A Stock were sold for the stated value, $4.00 per share, representing aggregate proceeds of $5 million. The holders of the Series A Stock are entitled to cumulative PIK dividends at the rate of 9.75% of the stated value, payable semiannually on January 1 and July 1 of each year commencing on January 1, 2001. If at any time the Company's Common Stock is not listed or admitted to trading on a national exchange, the dividend rate increases to 12.25%. The Series A Stock ranks senior to the Company's Common Stock with respect to dividend rights and rights on liquidation, winding up or dissolution. Specifically, no dividend or distribution may be made to the holders of the Common Stock, and no Common Stock may be repurchased or redeemed by the Company, unless all accrued and unpaid dividends on shares of Series A Stock have been paid. The Series A Stock is entitled to receive, in the event of liquidation of the Company, an amount in cash equal to the stated value of the Series A Stock for each share outstanding, plus an amount in cash equal to the accrued but unpaid dividends thereon to the date of liquidation, before any payment may be made to the holders of the Common Stock. The Series A Stock is redeemable at the Company's option commencing on May 31, 2003, if the Company's Common Stock trades at an average price of at least $8.00 per share for the preceding 30 trading day period. The then outstanding shares of Series A Stock must be redeemed by the Company at stated value, plus all accrued but unpaid dividends, upon the earlier of (i) May 31, 2007 or (ii) the date of redemption by the Company of the Series A and B convertible pay-in-kind debentures. The holders of the convertible preferred shares may convert at any time into shares of Common Stock of the Company. The effective conversion price is $2.68 per share as of December 31, 2001. The holders of the Series A Stock are entitled to vote on all matters voted on by the holders of Common Stock, other than the election of directors. However, the holders of the Series A Stock are also entitled to elect, as a class, four of nine members of the Company's Board of Directors. As of December 31, 2001, the $5.5 million principal balance includes $591,000 of accrued but undeclared PIK dividends relating to the dividend payment dates of July 1, 2001 and January 1, 2002.

Series A Debentures. The $42.5 million original aggregate principal amount of 9.75% Series A convertible pay-in-kind debentures due May 31, 2007 bear PIK interest at 9.75% per annum payable semi-annually in the form of additional Series B debentures on January 1 and July 1 of each year, commencing on January 1, 2001. The Series A convertible debentures are redeemable at the Company's option commencing on May 31, 2003, if the Company's Common Stock trades at an average price of at least $8.00 per share for the preceding 30 trading day period. The holders of the Series A convertible debentures may convert at any time into shares of Common Stock of the Company, at the initial conversion price of $4.00 per share (effective conversion price of $2.68 per share at December 31, 2001, due to the operation of applicable anti-dilution provisions).

-16-

Series B Debentures. The $112.6 million original aggregate principal amount of 9.75% Series B convertible pay-in-kind debentures due May 31, 2007 bear PIK interest at 9.75% per annum payable semi-annually in the form of additional Series B debentures on January 1 and July 1 of each year, commencing January 1, 2001. The Series B convertible debentures are redeemable at the Company's option commencing on May 31, 2003, if the Company's Common Stock trades at an average price of at least $8.00 per share for the preceding 30 trading day period. The holders of the Series B convertible debentures may convert at any time, at an initial conversion price of $400.00 per share (effective conversion price of $268 per share at December 31, 2001, due to the operation of applicable anti-dilution provisions), into non-voting Series B preferred shares, each share of which has rights (other than voting rights) substantially similar to 100 shares of Common Stock of the Company.

Series C Debentures. The $42.8 million original aggregate principal amount of 9.75% Series C convertible pay-in-kind debentures due May 31, 2007 bear PIK interest at 9.75% per annum payable semi-annually in the form of additional Series C debentures on January 1 and July 1 of each year, commencing on January 1, 2001. The Series C convertible debentures are redeemable at the Company's option commencing on May 31, 2003, if the Company's Common Stock trades at an average price of at least $8.00 per share for the preceding 30 trading day period. The holders of the Series C convertible debentures may convert at any time into shares of the Common Stock of the Company, at the initial conversion price of $4.00 per share (effective conversion price of $2.68 per share at December 31, 2001, due to the operation of applicable anti-dilution provisions).

Principal payments on long-term debt, capital leases, and financing obligations for the next five years and thereafter are as follows (in thousands):

2002	$1,117,705
2003	617
2004	32,568
2005	379
2006	14,317
Thereafter	34,871
Total long-term debt, capital leases, and financing obligations	$1,200,457

Included in the 2002 principal payment obligation is $58.4 million of 2001 indebtedness that has matured and is past due as of December 31, 2001.

10.         Short-term Notes Payable

In March 2001, the Company obtained a $7.5 million Bridge Loan that has a six-month term and is secured by first mortgages on several residences and bears interest at an escalating interest rate, commencing at 10% per annum. At the Company's election, the Bridge Loan was extended by an additional six months whereupon the Bridge Loan became convertible into convertible subordinated debentures of the Company having rights and terms substantially similar to the Series B 9.75% pay-in-kind convertible debentures, but having a conversion price equal to $75 per share of Series B preferred stock (a Common Stock equivalent price of $0.75 per share). The bridge lenders also are entitled to participate in any transaction involving the issuance by the Company of equity or equity-linked securities during the term of the Bridge Loan. As of December 31, 2001, the outstanding Bridge Loan had a balance of $6 million.

In addition, as of December 31, 2001, short-term notes payable consist of a $4.9 million line of credit bearing interest at 5.75%.

As of December 31, 2000, short-term notes payable consist of a $9.9 million line of credit bearing interest at the then current prime rate.

-17-

11.         Accrued Expenses

         Accrued expenses are comprised of the following at December 31 (in thousands):

		2001		2000
Accrued salaries and wages	$	10,190	$	10,808
Accrued interest		21,744		6,604
General liability deductible reserve		9,526		800
Accrued property taxes		7,859		6,593
Accrued vacation		5,813		5,599
Accrued charges related to exiting development activity		--		1,147
Other		7,204		11,227
Total accrued expenses	$	62,336	$	42,778

During 2001 the Company implemented a self-insurance program related to liability coverage. The reserve as of December 31, 2001, is based on actuarial estimates of the magnitude of the expected losses.

During the fourth quarter of 2000, management implemented operating initiatives focused on overall rate and occupancy improvement and overhead reductions. As a consequence of this decision, the Company recorded one time nonrecurring, pretax charges of $4.2 million. This included $1.1 million of severance of various general and administrative positions, $1.1 million to discontinue our pharmacy joint venture, and $2.0 million to terminate a management agreement. As of December 31, 2001, the Company has paid $4.2 million and the reserve has been eliminated.

12.          Stockholders' Equity

On December 10, 1998, the Company entered into a Rights Agreement with American Stock Transfer & Trust Company, as Rights Agent, pursuant to which it declared and paid a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, $.01 par value per share (the "Preferred Shares"), of the Company at a price of $130.00 per one one-hundredth of a Preferred Share.

13.          Stock Option Plan

In 1995 the Company adopted a stock option plan (the "1995 Plan") pursuant to which the Company's Board of Directors may grant stock options to officers and key employees. The 1995 Plan authorizes grants of options to purchase up to 2,500,000 shares of authorized but unissued Common Stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. Generally, stock options have 10-year terms, vest 25% per year, and become fully exercisable after four years from the date of grant.

At December 31, 2001, 850,977 shares were available for grant under the 1995 Plan. The per share weighted-average exercise price of stock options granted during 2001 and 2000 were $1.31 and $3.83 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumption: expected dividend yield 0.0%, risk-free interest rate of 5.0%, expected volatility of 50% for 2001 and 2000 grants and an expected life of seven years.

In conjunction with the 1997 merger of the Company and Sterling House Corporation, Sterling stock options that were outstanding were exchanged for options to purchase the Company's Common Stock, adjusted for the exchange ratio operative in the merger. Under the terms of the Sterling House Corporation 1995 Incentive Stock Option Plan, all options became vested and immediately exercisable as a result of the Sterling merger.

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For financial reporting purposes, the Company applies the intrinsic value method of APB Opinion No. 25 in accounting for stock options and, accordingly, compensation cost has been recognized only for stock options granted below fair market value. Had the Company determined compensation cost based on the fair value method prescribed by SFAS No. 123 for stock options granted in 2001, 2000 and 1999, its net loss and net loss per share would have been increased to the pro forma amounts indicated below, (in thousands, except per share data):

	Net Loss						Net Loss Per Share
	2001		2000		1999		2001		2000		1999
As reported	$(299,927	)	$(117,806	)	$(27,806	)	$(13.52)		$(5.33)		$(1.26)
Pro forma	$(300,250	)	$(117,953	)	$(27,857	)	$(13.53	)	$(5.34	)	$(1.26)

         Stock option activity during the periods indicated is as follows:

	Number of Shares			Wtd.Avg Exercise Price
Balance at December 31, 1999	1,596,038		$	14.20
Granted	121,656			5.69
Exercised	(9,778	)		0.09
Forfeited	(742,729	)		14.06
Balance at December 31, 2000	965,187		$	12.65
Granted	1,000,000			1.31
Exercised	--			0.00
Forfeited	267,170			14.06
Balance at December 31, 2001	1,698,017			$ 5.75

Stock options outstanding at December 31, 2001 are as follows:

 
 
Range of
exercise
prices

 
 
Number
Outstanding
12/31/01

 
Average
Remaining
Contractual
Life

 
 
Wtd.-Avg.
Exercise
Price

 
 
Number
Exercisable
at 12/31/01

 
 
Wtd.-Avg.
Exercise
Price

$

0.09 - 1.40

1,001,229

7.0

$1.31

1,229

$

0.09

$

1.40 - 8.69

367,041

5.2

5.88

318,465

5.91

$

8.70 - 17.94

55,807

5.4

15.66

 

55,807

15.66

$

17.95 - 20.81

247,644

7.0

18.81

192,043

18.81

$

20.82 - 29.56

26,296

6.3

29.34

 

21,528

29.29

Total:

1,698,017

6.2

$5.75

589,072

$

11.88

14.         Income Taxes

The components of the provision for income taxes for the years ended December 31 are as follows (in thousands):

		2001		2000		1999
Income tax expense (benefit):
Current:
Federal	$	--	$	--	$	(410	)
State		120		573		65
Total current		120		573		(345	)
Deferred:
Federal		--		12,797		(12,831	)
State		--		1,302		(1,493	)
Total deferred		--		14,099		(14,324	)
Total	$	120	$	14,672	$	(14,669	)

-19-

         Deferred tax assets and liabilities consist of the following at December 31 (in thousands):

		2001			2000
Deferred tax assets:
Net operating loss carryforwards	$	116,712		$	51,227
Development write-off		7,990			6,503
Deferred gain sale/leaseback		2,337			2,550
Building reserve		58,649			8,830
Accrued expenses		8,348			3,669
Investment in consolidated affiliates		1,017			1,076
Other		1,096			729
Total deferred tax assets		196,149			74,584
Less valuation allowance		( 161,447	)		(53,042	)
Deferred tax assets, net of valuation allowance	$	34,702		$	21,542
Deferred tax liabilities:
Acquisition basis		1,715			1,715
Depreciation		32,987			19,827
Deferred tax liabilities	$	34,702		$	21,542

The valuation allowance for deferred tax assets as of December 31, 2001 and 2000 was $161.4 million and $53.0, respectively. During 2000, a valuation allowance was established because the Company was uncertain that such deferred tax assets in excess of the applicable reversing deferred tax liabilities would be realized in future years. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
The effective tax rate on income before income taxes varies from the statutory Federal income tax rate as follows:

	2001	2000	1999
Statutory rate	35.0%	35.0%	35.0%
State taxes, net	4.0%	4.0%	2.3
Valuation allowance	(36.1)	(47.5)	--
PIK interest	(2.8)	(3.9)	--
Other	(0.1)	(0.7)	0.7
	0.0%	(13.1)%	38.0%

The Company has approximately $299.3 million of tax net operating loss carryforwards at December 31, 2001. Any unused net operating loss carryforwards will expire commencing in the year 2007 through 2021. The utilization of net operating loss carryforwards may be further limited as to future use due to the change in control provisions in the Internal Revenue Code. In addition, the Company has alternative minimum tax credit carryforwards of approximately $136,000 which are available to reduce future federal regular income taxes, if any, over an indefinite period.

15.         Disclosures About Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value:

Cash and cash equivalents:

The carrying amount approximates fair value because of the short maturity of those instruments.

Restricted cash and long-term investments:

The carrying amount approximates fair value because of the short maturity of the underlying investments. Restricted cash and long-term investments are classified as such because they are restricted as collateral for lease arrangements and debt service reserves.

-20-

Short-term notes payable, mortgage notes payable, convertible debentures payable

:The carrying amount of short-term notes payable approximates fair value because of the short maturity of those instruments.

The carrying amount of mortgage notes payable approximates fair value because the stated interest rates approximate fair value.

The fair value of the Company's convertible debentures is estimated based on quoted market prices. At December 31, 2001, the Company's convertible debentures had a book value of $187.3 million. At December 31, 2001, there is not a meaningful market for these bonds and based on quoted market prices, the fair value of these convertible securities was estimated to be 10% to 15% of the par value.

16.         Commitments and Contingencies

The Company has entered into sale/leaseback agreements with certain REITs as a source of financing the development, construction, and to a lesser extent, acquisitions of assisted living residences. Under such agreements, the Company typically sells to the REIT one or more residences at a negotiated value and simultaneous with such sale, the Company enters into a lease agreement for such residences. The initial terms of the leases vary from ten to 15 years and include aggregate renewal options ranging from 15 to 30 years. The Company is responsible for all operating costs, including repairs, property taxes, and insurance. The annual minimum lease payments are based upon a percentage of the negotiated sales value of each residence. The residences sold in sale/leaseback transactions typically are sold for an amount equal to or less than their fair market value. The leases are accounted for as operating leases with any applicable gain or loss realized in the initial sales transaction being deferred and amortized into income in proportion to rental expense over the initial term of the lease.

Effective July 1, 2001, the Company concluded the restructuring of one of its leased portfolios which includes 42 residences with an aggregate capacity of 1,640. The restructuring includes the amendment of certain lease covenants and terms and the conversion of 42 individual leases into a single master lease, which is accounted for as an operating lease. The master lease is for an initial term of sixteen years and includes one fifteen year renewal option.

Subsequent to the formation of the master lease effective July 1, 2001, the Company added an additional seven residences to the master lease. Due to the inclusion of a purchase option in each of the subsequent lease agreements, these leases have been accounted for as financing leases.

The Company is required by certain REITs to obtain a letter of credit as collateral for leased residences. Outstanding letters of credit at December 31, 2001 and 2000 were $3.8 million.

In addition to leased residences, the Company leases certain office space and equipment under noncancelable operating leases that expire at various times through 2017. Rental expense on all such operating leases, including residences, for the years ended December 31, 2001, 2000, and 1999 was $69.5 million, $82.4 million and $69.4 million, respectively.

Future minimum lease payments for the next five years and thereafter under noncancelable leases at December 31, 2001, are as follows (in thousands):

	Capital		Operating
2002	$ 4,045		$63,558
2003	4,095		65,107
2004	14,602		66,622
2005	2,836		68,188
2006	2,836		69,881
Thereafter	54,821		251,450
Total minimum lease payment	83,235	$	$584,806
Less amount representing interest	46,095
Future minimum capital and financing lease payments	37,140
Less current portion	--
Long-term capital lease obligations	$37,140

-21-

As of December 31, 2001 and 2000, the Company was in violation of its fixed charge covenants with several of its credit facilities. In addition, in order to conserve its liquidity, the Company did not make certain 2001 debt service and lease payments. As the Company's principal credit, lease and other financing facilities are cross-defaulted to a material default occurring under other credit, lease or financing facilities, a payment default by the Company under one such facility results in the Company being in default under other such facilities. Obligations in the amount of $700.9 million are currently classified as current liabilities because the applicable lenders have the right to accelerate their loans due to the existence of a pending default.

The Company has an option under most of its joint venture arrangements to purchase the equity interests of its joint venture partners based upon agreed upon terms and conditions (call option). If the Company elects not to exercise this option, the joint venture partner can require the Company to buy out the joint venture partner's equity interest at the current fair market value (put option). Based on a number of assumptions, including assumptions as to the time at which such options will be exercised and the fair market value of such residences at the date such options are exercised, the Company estimates that it may require approximately $10.0 million to $15.0 million to satisfy these purchase obligations during 2002.

From time to time, the Company is involved in various legal proceedings relating to claims arising in the ordinary course of its business. Neither the Company nor its subsidiaries is a party to any legal proceeding, the outcome of which, individually or in the aggregate, is expected to have a material adverse affect on the Company's financial condition or results of operations, with the possible exception of the following matters.

The Company elected not to fund certain debt service and lease payment obligations due during 2001 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, 2001, the Company had $6.6 million of delinquent outstanding scheduled debt service to lenders or lessors who hold mortgages on, or from whom the Company leases, 82 residences in the aggregate (3,316 resident capacity). The Company has received a written notice of acceleration from lenders with respect to indebtedness aggregating $210.2 million. In addition, indebtedness of approximately $58.4 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. The Company is also in default under various financial and other covenants contained in certain credit and lease arrangements. The Company has 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 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. One lender has commenced litigation in state court in Milwaukee, Wisconsin, seeking the appointment of a receiver for the 20 residences that serve as collateral for the $51.7 million of remaining mortgage financing provided by this lender. As a result of a negotiated forbearance agreement, the receivership action has been stayed temporarily by this lender as restructuring discussions are underway. The Company is also in litigation with a former lessor with respect to their damage claim associated with the early termination of their 11 residence lease portfolio.

The Company's convertible 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, the Company defaulted in making coupon payments on its 5.25%, 6.75% and 7.00% convertible subordinated debentures aggregating approximately $5.5 million and $5.8 million in July 2001 and January 2002, respectively.

The Company is seeking to address all of its pending defaults of its senior and junior capital structure obligations through the Restructuring Plan. However, the Restructuring Plan is largely dependent upon the Company's ability to negotiate consensual modifications and waivers with its various capital structure constituents. Absent an agreed upon resolution with these third parties, the Company's lenders, lessors, and debenture holders may begin exercising remedies under their applicable financing agreements that could substantially hinder or disrupt the Company's efforts to restructure and result in a liquidation of the Company.

The Company is also a defendant in a criminal negligence action involving one of the Company's residences. It is possible that if convicted of a crime, the Company's ability to obtain and renew certain of its licenses and to participate in certain government payor programs could be materially and adversely affected.

-22-

17. Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

		Years Ended December 31,
		2001			2000			1999
Numerator:
Numerator for basic earnings per share-net loss	$	(299,927	)	$	(117,806	)	$	(27,806)
Numerator for diluted earnings per share-net loss	$	(299,927	)	$	(117,806	)	$	(27,806)
Denominator:
Denominator for basic earnings per share-weighted average shares		22,192			22,108			22,088
Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions		22,192			22,108			22,088
Basic loss per common share	$	(13.52	)	$	(5.33	)	$	(1.26	)
Diluted loss per common share	$	(13.52	)	$	(5.33	)	$	(1.26	)

18. Subsequent Events

Effective March 6, 2002, the Company entered into a settlement agreement with the lenders with respect to defaulted indebtedness aggregating approximately $50.5 million (plus $4.5 million of accrued and unpaid interest and late fees and approximately $4.0 million due under an interest rate cap agreement that was terminated March 2001). under a credit facility secured by mortgages on 14 residences. The settlement is structured to immediately shift the economics of ownership and control over the disposition of the mortgaged residences to the lenders. In exchange, the Company receives 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 the Company's guaranty with respect to this indebtedness upon satisfaction of certain conditions. Management has estimated the prospective deficiency claim related to this credit facility at between $23 to $34 million. Until March 31, 2003, or such earlier time as the lenders sell a residence or replace the Company as manager, the Company is obligated to manage the residences for a management fee equal to six percent of facility revenue through June 30, 2002 and seven percent thereafter. Any net operating income from the residences is paid to the lenders as debt service.

Effective March 20, 2002, the Company closed on a refinancing of three properties (resident capacity of 137) included in the settlement mentioned above. These assets were financed in a sale/leaseback transaction and will be accounted for as a financing. The aggregate sales price was $11.8 million.

As of March 29, 2002, six additional residences (258 resident capacity) were either sold or leases were terminated. The sale or lease termination of these assets resulted in the retirement of approximately $16.6 million of debt and lease obligations.

-23-
Supplementary Financial Information

Quarterly Financial Summary
(Unaudited)
(In thousands, except per share data)

		12/31			9/30			6/30			3/31
2001
Operating revenues	$	127,492		$	126,100		$	126,927		$	128,303
Operating income (loss)		2,143			(8,480	)		(158,025	)		(6,998	)
Net loss		(27,271	)		(42,804	)		(192,230	)		(37,622	)
Basic (loss) per share	$	(1.23	)	$	(1.94	)	$	(8.69	)	$	(1.70	)
Diluted (loss) per share	$	(1.23	)	$	(1.94	)	$	(8.69	)	$	(1.70	)
2000
Operating revenues	$	125,317		$	122,583		$	112,039		$	106,556
Operating (loss) income		(17,284	)		2,026			(9,415	)		10,207
Net loss		(82,760	)		(16,696	)		(13,032	)		(5,318	)
Basic loss per share	$	(3.74	)	$	(0.76	)	$	(0.59	)	$	(0.24	)
Diluted loss per share	$	(3.74	)	$	(0.76	)	$	(0.59	)	$	(0.24	)

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the cash and non-cash compensation awarded or paid by the Company for services rendered during each of the years in the three year period ended December 31, 2001 to its Chief Executive Officer and to its other most highly compensated executive officers other than the Chief Executive Officer who are required to be included therein ("Named Executives").

Name and Principal Position	Year	Salary($)	Bonus($)	Other Annual Compensation	Long-Term Compensation Awards (1) Securities Underlying Options(#)
Patrick F. Kennedy Chief Executive Officer and President (2)	2001 2000 1999	--- --- ---	--- --- ---	--- --- ---

---
---
---

Steven L. Vick
Former President and
Chief Operating Officer (3)

2001
2000
1999

$362,579
$269,415
$273,367

150,000
225,000
---

$79,854
---
---

500,000
---
44,757

Chet H. Bradeen
Senior VP of Operations (4)

2001
2000
1999

$109,230
---
---

$55,000
---
---

---
---
---

---
---
---

Anthony R. Geonnotti, Jr.
Senior Vice President

2001
2000
1999

$178,695
$169,300
$112,173

24,153
20,183
12,107

---
---
---

--
10,000
--

Andrea L. Peck
Senior VP of Employee Services

2001
2000
1999

$251,307
$50,639
---

$17,500
$7,500
---

--

--
--

---
---
---

Mark W. Ohlendorf
Chief Financial Officer and
Senior Vice President

2001
2000
1999

$346,291
$278,919
$221,743

$160,000
$225,000
---

$181,776
---
---

500,000
---
---

1. Represents options granted under the Company's Amended and Restated 1995 Incentive Compensation Plan (the "1995 Plan"). Generally, subject to accelerated vesting upon a change in control, one-fourth of the options become exercisable on each of the first through fourth anniversaries of the grant date, except with respect to (i) options granted to these individuals in 1998 which became exercisable 50% on the second anniversary of the grant date, 75% on the third anniversary of the grant date and 100% on the fourth anniversary of the grant date, (ii) options granted to Messrs. Vick and Ohlendorf prior to November 1, 2000, the date of their new employment agreements, all of which expired to the extent not exercised prior to January 15, 2001, and (iii) options granted to Mr. Vick, all of which, to the extent not exercised by November 30, 2000 and February 15, 2002, respectively, have expired.
2. Mr. Kennedy was elected to the position of Chief Executive Officer on November 2, 2001 and the position of President on January 18, 2002. Mr. Kennedy's services are provided to the Company pursuant to a Consulting Services Agreement between the Company and Holiday Retirement Consulting, LLC. See "Executive Compensation - Consulting and Employment Agreements."
3. Mr. Vick resigned as an executive officer and director of the Company as of February 15, 2002. The terms of Mr. Vick's separation arrangement with the Company are described under the caption "Executive Compensation -- Consulting and Employment Agreements."
4. Mr. Bradeen joined the Company in June 2001.

-24-

Option Grants in Last Fiscal Year

The following table sets forth information concerning options issued to the Named Executives during 2001.

Name	Number of Securities Underlying Options Granted	Percent of Total Options Granted in 2001 to Employees	Exercise Price PerShare	Expiration Date	Grant Date Present Value (3)
Patrick F. Kennedy	---	---	---	---	---
Steven L. Vick (1)	500,000	50%	$1.31	1/5/11	440,000
Chet H. Bradeen	---	---	---	---	---
Anthony R. Geonnotti, Jr.	---	---	---	---	---
Mark W. Ohlendorf (2)	500,000	50%	$1.31	1/5/11	440,000
Andrea L. Peck	---	---	---	---	---

1. Represents options granted to Mr. Vick on January 5, 2001 pursuant to his employment agreement. The options provided for three-year vesting, subject to special accelerated vesting in the event Mr. Vick's employment was terminated under certain circumstances and full vesting in the event of a "change of control" of the Company. Pursuant to Mr. Vick's separation agreement, all outstanding options granted to Mr. Vick were extinguished as of February 15, 2002.
2. Represents options granted to Mr. Ohlendorf on January 5, 2001 pursuant to his employment agreement. The options provide for three-year vesting, subject to special accelerated vesting in the event Mr. Ohlendorf's employment is terminated under certain circumstances and full vesting in the event of a "change of control" of the Company.
3. The Black-Scholes option pricing model was chosen to estimate the grant date present value of the options set forth in this table. The Company's use of this model should not be construed as an endorsement of its accuracy at valuing options. Accordingly, there is no assurance that the value realized by an executive, if any, will be at or near the value estimated by the Black-Scholes model. Future compensation resulting from option grants is based solely on the performance of the Company's stock price. The following weight-averaged assumptions were made for purposes of calculating the original Grant Date Present Value for options granted by the Company: an option term of ten years, average volatility of 50%, divided yield of 0.0%, a risk-free interest rate of 5.00%, and a projected exercise period of seven years.

-25-

2001 Aggregated Option Exercises and Year-end Option Values

The following table sets forth information concerning the value of options exercised by the Named Executives during 2001 and the value at December 31, 2001 of unexercised options held by each such officer.

Name	Number of Shares Acquired On Exercise	Value Realized	Number of Securities Underlying Unexercised Options At 12/31/01 Exercisable/Unexercisable	Value of Unexercised In-the-Money (1)
Patrick F. Kennedy	---	---	---	---
Steven L. Vick	---	---	--/500,000	0/0
Mark W. Ohlendorf	---	---	--/500,000	0/0
Anthony R. Geonnotti, Jr.	---	---	15,692/11,250	0/0
Andrea L. Peck	---	---	---	---
Chet H. Bradeen	---	---	---	---

(1)         Calculated on the basis of the fair market value of the underlying securities on December 31, 2001 ($0.11 per share) minus the exercise price.

Compensation Committee Interlocks and Insider Participation

The Company's Compensation Committee is comprised of Timothy J. Buchanan, Robert Haveman and William G. Petty, Jr. There are no compensation committee interlocks.

Consulting and Employment Agreements

         Consulting Services Agreement with Holiday Retirement Consulting . In November 2001, the Company entered into a Consulting Services Agreement with Holiday Retirement Consulting Services, LLC ("Holiday Consulting"), an affiliate of Holiday Retirement Corp. Pursuant to the Consulting Services Agreement, Holiday Consulting is providing management and consulting services to the Company, including the services of Patrick F. Kennedy, the Company's Chief Executive Officer and President, as well as consulting and advisory services provided by other Holiday Consulting personnel. The Holiday Consulting Services Agreement has a six-month initial term, subject to renewal for an additional six months upon the Company's request, and may be terminated by either party upon 30 days' notice to the other. Pursuant to this agreement, Holiday Consulting is entitled to receive a fee of $60,000 per month together with reimbursement of out-of-pocket expenses incurred by Holiday Consulting personnel in connection with this agreement. In addition, Holiday Consulting is entitled to earn a $1.5 million cash flow success fee if, during the term of this agreement, the Company is able to achieve cash flow breakeven for three consecutive calendar months (reflecting payment of all scheduled debt service, but excluding debt service on the Company's outstanding Subordinated Debentures and excluding restructuring charges). Pursuant to the Consulting Services Agreement, Holiday Consulting has agreed to refrain, during the twelve month period following the termination of this agreement, from disclosing or utilizing confidential information of Alterra and from soliciting for employment persons employed by Alterra in a managerial position. During 2001, $120,000 of consulting fees were paid to Holiday Consulting pursuant to this agreement.

-26-

         Employment Agreement with Chet Bradeen . In June 2001, the Company entered into an employment agreement with Chet Bradeen with a term that expires upon the earlier of the third anniversary of the agreement or termination of employment. Pursuant to the agreement, Mr. Bradeen serves as Senior Vice President of Operations of the Company. Pursuant to the agreement, Mr. Bradeen is to receive an annual base salary of not less than $250,000, to be reviewed annually by the Board of Directors, Chief Executive Officer, President or Chief Financial Officer. Mr. Bradeen is also entitled to an incentive bonus of up to 50% of his base salary, to be determined by the Board of Directors, the Chief Executive Officer, President or Chief Operating Officer and, subject to approval by the President and Chief Operating Officer, may be granted a retention bonus, to be paid starting in December 2001. If Mr. Bradeen's employment is terminated by the Company other than for cause or by Mr. Bradeen for "good reason" (as defined in the agreement), Mr. Bradeen is entitled to (i) continue to receive payment of salary and benefits under this agreement for the remainder of the agreement term, but not to exceed twelve months and (ii) receive, within 30 days of such termination provided Mr. Bradeen shall then execute a general release for the benefit of the Company, 75% of an amount (the "Base Sum") equal to the sum of his then current annual salary, any approved but unpaid applicable bonus, the premiums for all medical and other insurance coverages and his annual automobile allowance. An additional 25% of the Base Sum will be payable at the end of the twelve months following his termination. Finally, the employment agreement provides that Mr. Bradeen will not disclose certain proprietary information belonging to the Company or, in certain circumstances, otherwise compete with the Company for a period of twelve months following his termination of employment.

         Employment Agreement with Steven L. Vick. As of November 1, 2000, the Company entered into an employment agreement with Mr. Vick with a term that expires on December 31, 2003. Pursuant to the employment agreement, Mr. Vick served the Company as Chief Operating Officer until his resignation on February 15, 2002. The employment agreement provided that Mr. Vick shall receive a base salary in an amount determined by the Board; provided, however, that in no event may such base salary be less than $350,000 in 2001. Pursuant to the agreement, Mr. Vick received an incentive bonus for 2000 in the amount of $125,000 and was entitled to an incentive bonus in future years based on an incentive compensation program approved by the Compensation Committee of the Board of Directors. Pursuant to a separation agreement between Mr. Vick and the Company setting forth the terms of the separation from Alterra, Mr. Vick was awarded an incentive bonus for 2001 in the amount of $150,000. Pursuant to Mr. Vick's employment agreement, Mr. Vick received a non-qualified option grant for 500,000 shares on January 5, 2001, which options were exercisable at $1.31 per share and which options vested over a three-year period, subject to special accelerated vesting in the event Mr. Vick's employment was terminated under certain circumstances and full vesting in the event of a "change of control" of the Company, as defined in the employment agreement. Pursuant to Mr. Vick's separation agreement, all outstanding options granted to Mr. Vick were extinguished as of February 15, 2002. In addition, pursuant to Mr. Vick's employment agreement, the Company awarded Mr. Vick 33,378 shares of Common Stock on January 5, 2001, which shares were "restricted stock" under the Company's 1995 Plan and, as such, were subject to being forfeited to the Company if the executive's employment with the Company terminated under certain circumstances prior to the lapsing of such restrictions, which occurred over a three-year term (subject to certain acceleration provisions). Upon his resignation from the Company, 22,252 of Mr. Vick's restricted shares were forfeited in accordance with the terms of the restricted stock grant. During the term of his employment by the Company pursuant to this agreement, the Company agreed to nominate Mr. Vick to serve as a director of the Company. Finally, Mr. Vick's separation agreement provides that Mr. Vick will not disclose or use certain proprietary information belonging to the Company or solicit customers or certain management employees of the Company for a period of twelve months following his termination of employment.

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         Employment Agreement with Mark W. Ohlendorf. As of November 1, 2000, the Company entered into an employment agreement with Mr. Ohlendorf with a term that expires on December 31, 2003. Pursuant to the employment agreement, Mr. Ohlendorf serves the Company as Chief Financial Officer. The agreement is automatically renewed for additional consecutive one-year terms unless timely notice of non-renewal is given by either the Company or Mr. Ohlendorf. The employment agreement provides that Mr. Ohlendorf shall receive a base salary in an amount determined by the Board; provided, however, that in no event may such base salary be less than $325,000 in 2001, $340,000 in 2002 and $350,000 in 2003. Pursuant to the agreement, Mr. Ohlendorf received incentive bonuses for 2001 and 2000 in the amount of $160,000 and $125,000, respectively, and is entitled to an incentive bonus in future years based on an incentive compensation program approved by the Compensation Committee of the Board of Directors. Pursuant to this employment agreement, Mr. Ohlendorf received a non-qualified option grant for 500,000 shares on January 5, 2001, which options are exercisable at $1.31 per share and which options vests over a three-year period, subject to special accelerated vesting in the event Mr. Ohlendorf's employment is terminated under certain circumstances and full vesting in the event of a "change of control" of the Company, as defined in the employment agreement. In addition, pursuant to the employment agreement, the Company awarded Mr. Ohlendorf 75,980 shares of Common Stock on January 5, 2001, which shares are "restricted stock" under the Company's 1995 Plan and, as such, are subject to being forfeited to the Company if the executive's employment with the Company terminates under certain circumstances prior to the lapsing of such restrictions, which will occur over a three-year term (subject to certain acceleration provisions). Mr. Ohlendorf is entitled to a payment equal to 36 months of his then current base salary plus annualized bonus pay during the contract term in the event of a "change of control" of the Company if his employment is thereafter terminated by the Company without "cause" or by him for "good reason." Absent a change of control, if Mr. Ohlendorf's employment is terminated by the Company "without cause" or by him for "good reason," then he is eligible to continue to receive his base salary (together with any applicable bonus) and employee benefits for a period of 18 months. Finally, the employment agreement provides that Mr. Ohlendorf will not disclose certain proprietary information belonging to the Company or otherwise compete with the Company for a period of twelve months following his termination of employment except for termination by the Company without cause or by Mr. Ohlendorf for "good reason."

Employment Agreement with Andrea L. Peck . In June 2001, the Company entered into a post-employment compensation agreement with Andrea Peck. Pursuant to the agreement, Ms. Peck serves the Company as Senior Vice President of Employee Services. The agreement remains in effect until the modification of the agreement or until the expiration of the term of post-employment payments contemplated by the agreement. The agreement provides that Ms. Peck shall receive an annual base salary of not less than $210,000, to be reviewed periodically by the Company's Board of Directors, Chief Operating Officer or Chief Financial Officer. If Ms. Peck's employment is terminated due to a reduction in work force and the Company does not offer her another position of comparable employment, the Company agrees to continue to pay Ms. Peck's base salary for a 52 week period following termination. Pursuant to the agreement, Ms. Peck has agreed not to disclose certain proprietary information belonging to the Company or otherwise compete with the Company for a period of 52 weeks following her termination of employment.

1995 Incentive Compensation Plan

The 1995 Plan provides key employees (who may also be directors) of the Company and its subsidiaries performance incentives and also provides a means of encouraging stock ownership in the Company by such persons. Under the 1995 Plan, key employees of the Company or its affiliates are eligible to receive stock options to purchase shares of, and grants of shares of "restricted stock" of, the Company's Common Stock. The 1995 Plan currently allows a maximum number of shares to be subject to options and restricted stock awards of 2,500,000. Options and restricted stock awards are granted under the 1995 Plan on the basis of the optionee's contribution to the Company, and no option may exceed a term of ten years. Options granted under the 1995 Plan may be either incentive stock options or options that do not qualify as incentive stock options. The Company's Compensation Committee is authorized to designate the recipients of options and restricted stock grants, the dates of grants, the number of shares subject to options or grants, the option price, the terms of payment on exercise of the options, the vesting and restriction provisions and the time during which the options may be exercised. The price of incentive stock options granted under the 1995 Plan cannot be less than the fair market value of the shares at the time the options are granted.

In addition, in connection with the Sterling merger, the Company assumed options to acquire shares of the Common Stock of Sterling (the "Assumed Options"), and (as of April 10, 2001) the Assumed Options represented options to acquire an aggregate of 48,994 shares of Common Stock.

Including the Assumed Options and non-plan options, as of March 29, 2002, options to purchase an aggregate of 1,198,017 shares of Common Stock were granted and outstanding at a weighted average exercise price of $7.61 per share, of which options to purchase 864,684 shares were exercisable at such date.

Compensation of the Board of Directors

Directors of the Company who are not parties to services agreements with the Company and are not employees of the Company are entitled to an annual retainer of $20,000, payable in January of each year, together with attendance fees of $1,000 and $500 per meeting for Board, Audit Committee and Compensation Committee meetings attended in person or telephonically, respectively. Prior to 2001, directors of the Company who were not parties to services agreements with the Company and were not employees of the Company were entitled to an annual retainer of $12,000, payable in quarterly installments. In lieu of their annual retainer for the 36 month period commencing June 1, 1996, each of Messrs. Burleson, Haveman, and Tubergen were granted a non-qualified stock option pursuant to the 1995 Plan to purchase up to 12,420 shares of the Common Stock at an exercise price of $8.69 per share, such options vesting one-third on June 1, 1997, one-third on June 1, 1998 and one-third on June 1, 1999, and expiring on May 8, 2006. In October 1998, each of Messrs. Burleson, Haveman, Petty and Tubergen, each of whom were non-employee directors, were granted a non-qualified stock option pursuant to the 1995 Plan to purchase 8,000 shares of the Common Stock at an exercise price of $19.81 per share, which options vest 25% per year on each of the first, second, third and fourth anniversaries of the date of grant, subject to accelerated vesting in the event of a change in control. Directors are also entitled to reimbursement of reasonable out-of-pocket expenses incurred by them in attending meetings of the Board of Directors.

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized.

ALTERRA HEALTHCARE CORPORATIONBy: /s/ Mark W. Ohlendorf
Mark W. Ohlendorf
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary

Dated: April 24, 2002