<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549
 
                               ----------------
 
                                   FORM 10-K
 
  (Mark One)
 
   [X]Annual Report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934
                  For the fiscal year ended December 31, 1996
 
                                      OR
 
   [_]Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934
 
                        Commission File Number: 0-21159
 
                               ----------------
 
                            ATRIA COMMUNITIES, INC.
            (Exact name of registrant as specified in its charter)
 
              DELAWARE                                 61-1303738
   (State or other jurisdiction of        (I.R.S. Employer Identification No.)
   incorporation or organization)
 
 
       515 WEST MARKET STREET                             40202
           LOUISVILLE, KY                              (Zip Code)
   (Address of principal executive
              offices)
 
                                (502) 596-7540
             (Registrant's telephone number, including area code)
 
                               ----------------
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
                                     None
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
<TABLE>
      <S>                                                <C>
                                                         NAME OF EACH EXCHANGE
                TITLE OF EACH CLASS                       ON WHICH REGISTERED
                --------------------                     ---------------------
      Common Stock, par value $.10 per share                     None
</TABLE>
 
                               ----------------
 
  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 Rule
405 of Regulation S-K ((S) 229.405 of this chapter) 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 amendment of this Form 10-K. [X]
 
  As of March 3, 1997, there were 15,830,000 shares of the Registrant's Common
Stock, $.10 par value, outstanding. The aggregate market value of the shares
of Registrant held by non-affiliates of the Registrant, based on the closing
price of such stock on the National Association of Securities Dealers--
National Market System on March 3, 1997, was approximately $66,128,000. For
purposes of the foregoing calculation only, Vencor, Inc. and all directors and
executive officers of the Registrant have been deemed affiliates.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  A portion of Part III is incorporated by reference from the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 21,
1997.
 
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<PAGE>
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
 <C>         <S>                                                           <C>
 PART I
    Item 1.  Business....................................................    3
    Item 2.  Properties..................................................   13
    Item 3.  Legal Proceedings...........................................   13
    Item 4.  Submission of Matters to a Vote of Security Holders.........   13
 PART II
             Market for Registrant's Common Equity and Related
    Item 5.   Stockholder Matters........................................   14
    Item 6.  Selected Financial Data.....................................   15
    Item 7.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations..................................   16
    Item 8.  Financial Statements and Supplementary Data.................   19
    Item 9.  Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure...................................   19
 PART III
    Item 10. Directors and Executive Officers of the Registrant..........   19
    Item 11. Executive Compensation......................................   19
             Security Ownership of Certain Beneficial Owners and
    Item 12.  Management.................................................   19
    Item 13. Certain Relationships and Related Transactions..............   19
 PART IV
             Exhibits, Financial Statement Schedules and Reports on Form
    Item 14.  8-K........................................................   20
</TABLE>
 
                                       2
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
  Atria Communities, Inc. ("Atria" or the "Company") is a national provider of
assisted and independent living communities for the elderly. The assisted and
independent living industry serves the long-term needs of the elderly who do
not require the more extensive medical services available in skilled nursing
facilities, or who prefer or require only occasional assistance. As of
December 31, 1996, the Company operated 21 communities in 12 states with a
total of 2,942 units, including 650 assisted living units and 2,292
independent living units. The Company owns 18 of these communities, leases one
community and manages two communities. The Company also had 16 assisted living
communities with 1,056 units, under development as of December 31, 1996. For
additional information with respect to the expansion of the Company's
communities during 1997, see "Business--Development Program" and "Business--
Recent Acquisitions."
 
  The Company was incorporated in Delaware on May 1, 1996, as a wholly owned
subsidiary of Vencor, Inc. ("Vencor"). Vencor operates an integrated network
of health care services primarily focusing on the needs of the elderly. Prior
to the Company's initial public offering of its Common Stock in August 1996
(the "IPO"), Vencor contributed to the Company substantially all of its
assisted and independent living communities in exchange for shares of the
Company's Common Stock and the Company assumed certain liabilities related to
such communities.
 
  On September 28, 1995, Vencor consummated a merger (the "Hillhaven Merger")
with The Hillhaven Corporation ("Hillhaven"). Prior to the Hillhaven Merger,
Hillhaven and its subsidiaries operated the communities now operated by the
Company. Also, prior to the Hillhaven Merger, Hillhaven consummated a share
exchange (the "Nationwide Exchange") with Nationwide Care, Inc. ("Nationwide")
on June 30, 1995. Four of the communities now operated by the Company were
operated by Nationwide until the effective date of the Nationwide Exchange,
and from that date until the consummation of the Hillhaven Merger, by
Hillhaven. The Company's predecessors have operated assisted and independent
living communities as part of a health care network for over a decade.
 
  This Report contains a number of forward-looking statements. These
statements are qualified by reference to the cautionary statements set forth
under "Business--Additional Company Information--Cautionary Statements."
 
INDUSTRY BACKGROUND
 
  The assisted and independent living industry is a rapidly emerging component
of the non-acute health care system for the elderly. The assisted and
independent living industry serves the long-term needs of the elderly who do
not require the more extensive medical services available in skilled nursing
facilities, yet who are no longer capable of a totally independent lifestyle
or who prefer or require only occasional assistance. Many such individuals
require assistance with at least one activity of daily living ("ADL"), such as
eating, grooming and bathing, personal hygiene and toileting, dressing,
transportation, walking and medication reminders. The Company believes that
assisted living residents typically desire the comfort and security of having
their own "home" yet require help with two or more ADLs on a regular basis.
The Company's independent living residents require or prefer only occasional
assistance with ADLs or may no longer desire, or be able to maintain, a
totally independent lifestyle.
 
  The Company believes that a number of significant trends will support the
continued growth of the assisted and independent living industry. The Company
believes that growth in this industry is being driven by the continued aging
of the population and the increase in demand for elder-care services; cost-
containment efforts that limit access to acute care hospitals and skilled
nursing facilities for the elderly with less intensive medical needs; changing
societal patterns that make it difficult for families to provide in-home care
for the elderly; and an increasing awareness among the elderly that assisted
and independent living communities afford a cost-effective, secure and
attractive lifestyle.
 
                                       3
<PAGE>
 
BUSINESS STRATEGY
 
  The Company's objective is to expand its position as a national provider of
high-quality assisted and independent living services. The Company is pursuing
the following strategies to meet this objective:
 
  Rapid Development of Additional Assisted Living Communities. The Company
intends to develop or acquire 60 to 85 additional assisted living communities
consisting of approximately 5,400 to 7,650 units of additional capacity by the
year 2000 (including the communities currently being developed). The Company
plans to expand its base of assisted living communities on a national basis
where Vencor has a presence and in other high density population areas or in
areas where demographic and competitive factors are favorable. As of March 1,
1997, the Company had 26 sites under development for new assisted living
communities and had received zoning approvals for 24 of those sites. The
Company also plans to develop additional units for the memory-impaired and
convert at least 750 of its existing independent living units to assisted
living units by the year 2000. The Company has identified 250 of these units
which will be converted in 1997. In addition, the Company has entered into a
definitive agreement to acquire American ElderServe Corporation ("American
ElderServe"), an operator of 12 assisted living facilities (the "American
ElderServe Acquisition"). American ElderServe also has six additional assisted
living communities under construction and scheduled to open in 1997. For more
information regarding the American ElderServe Acquisition, see "Business--
Recent Acquisitions."
 
  Network with Vencor. The Company intends to develop communities in close
proximity to Vencor's facilities, which may facilitate participating with
Vencor in providing services to HMOs and other managed care companies. The
Company believes that networking opportunities exist between assisted living
facilities and long-term care hospitals and skilled nursing facilities. The
Company also expects that the geographic proximity to Vencor's nursing and
hospital facilities will foster transfers between the Company's communities
and Vencor's facilities. The Company believes that the proximity of a Vencor
skilled nursing facility is attractive to potential residents and their
families. As a resident's needs change, the ability to relocate in the same
neighborhood is a significant benefit of the Company's networking strategy.
The Company also focuses development efforts on sites near existing Vencor
facilities. Eighteen of the Company's existing communities and 18 communities
being developed as of March 1, 1997 are located on or generally within ten
miles of a Vencor site. Since Vencor is the controlling stockholder of Atria,
an inherent conflict of interest exists. When conflicts of interest do arise
in its dealings with Vencor, the Company anticipates resolving such conflicts
on a case-by-case basis, which may include the use of committees comprised of
disinterested members of the Board of Directors and the retention of
independent financial and other advisors. Transactions between the Company and
its officers, directors, principal stockholders and their affiliates are on
terms no less favorable to the Company than could be obtained from unrelated
third parties and any such transactions will be approved by a majority of the
disinterested members of the Board of Directors.
 
  Higher Acuity Service Model. The Company continues to pursue, as
appropriate, a higher acuity model of assisted living to enable the Company's
residents to "age in place." By making available such extended services as
home health care and rehabilitation to its residents, the Company believes
that it will be better able to meet the full range of its residents' needs and
facilitate longer lengths of stay. Residents will be able to continue to live
in the Company's communities unless they develop medical conditions requiring
institutional care in a skilled nursing facility or admission to an acute care
hospital. Residents currently receive certain health care services from third
parties, including Vencor. The Company may elect to make available certain
health care services to its residents on a direct basis in the future.
 
  Private Pay Focus. The Company focuses its development and marketing efforts
on private pay, middle- and upper-income residents. The Company believes that
this market represents the largest market opportunity for assisted living
services and that private pay residents are more profitable than residents
covered by government reimbursement programs. Substantially all of the
Company's revenues are derived from private pay sources.
 
  This section contains a number of forward-looking statements. These
statements are qualified by reference to the cautionary statements set forth
under "Business--Additional Company Information--Cautionary Statements."
 
                                       4
<PAGE>
 
SERVICES PROVIDED
 
  The Company's mission is to be the leading provider of senior living
services by delivering consistent, high-quality, innovative services to its
residents and their community. Services provided are designed to respond to
residents' individual needs, while promoting independence and dignity.
Residents live in private studios or apartments with access to basic services,
such as health screenings, blood pressure checks, security, utilities, meal
service, housekeeping and laundry services, dietary, exercise and fitness
classes, social and recreational programs, 24-hour emergency call systems and
local transportation on a van or minibus to physician offices, stores and
community events ("Basic Services").
 
  In addition to Basic Services, assisted living residents are offered
additional services including an increased level of housekeeping, meal
services and assistance with one or more ADLs, such as eating, grooming and
bathing, personal hygiene and toileting, dressing, additional transportation,
walking and medication reminders ("Assisted Living Services"). Health-related
services, which are made available and provided according to the resident's
individual needs and in accordance with state regulatory requirements, may
include assistance with taking medication and injections, as well as health
care monitoring. The Company offers each of its residents a personalized
assisted living service plan that may include any combination of ADLs.
 
  Residents pay a monthly fee for Basic Services and additional Assisted
Living Services are purchased based on hourly rates or in some communities are
purchased as part of an increased service package. Most residents rent units
through a one-year lease. If the resident dies or transfers to another
facility due to the need for a higher level of medical care the lease is no
longer binding on the resident.
 
  The process of customizing services to meet the needs of residents begins
with the resident admission process, where the facility's management staff,
the resident and, if appropriate, the resident's family and physician, discuss
the resident's needs and develop an appropriate service plan. If recommended
by the resident's physician, additional health or medical services may be
provided at the facility by a third-party home health care agency or other
medical provider such as Vencor. In some states, the Company or one of its
subsidiaries is a licensed home health care provider. The service plan is
reviewed, monitored and modified on a regular basis.
 
  In addition to Basic Services and Assisted Living Services, specially
trained staff provide other care and services specifically designed for
memory-impaired residents at certain of the Company's communities. These
programs provide the attention, care programs and services needed to help
memory-impaired residents maintain a higher quality of life. As of March 1,
1997, the Company operated three facilities with units specifically designated
for memory-impaired residents and was developing six additional facilities
with these units.
 
  The Company believes that quality care creates satisfied residents who,
along with their families, are important referral sources for the Company. The
Company has developed quality assurance programs to ensure that service
quality is maintained in its communities. The Company conducts periodic
surveys of residents to monitor satisfaction with accommodations and services.
The Company has established operational standards and performance goals for
its communities addressing such matters as food service, housekeeping,
maintenance and administration.
 
THE COMPANY'S COMMUNITIES
 
  The Company's communities vary in size from 28 to 356 units. Communities are
designed to maximize privacy in a home-like, non-institutional atmosphere. The
Company adapts the exterior of its facilities to regional architectural styles
and tastes but attempts to construct the interior space under established
floor plan models. Assisted living units are typically studio or one bedroom
units ranging in size from 375 to 525 square feet. Independent living units
may range from a studio (375 to 425 square feet) to an occasional three
bedroom unit (700 to 1,000 square feet). The units typically include a private
bathroom, kitchenette, closet, living and sleeping area, as well as a lockable
door, emergency call system, individual temperature control, fire alarm and
sprinkler system, among other amenities.
 
  Approximately 40% of a typical community is devoted to common areas and
amenities, including reading rooms, family or living rooms and other areas
(such as beauty salons, cafes and ice cream parlors) designed to promote
interaction among residents. The Company's communities are usually one, two or
three stories. Interior floor plan models are designed to promote a home-like
environment, efficient delivery of quality resident care and resident
independence.
 
                                       5
<PAGE>
 
  The table below sets forth certain information regarding communities
operated by the Company as of December 31, 1996. For information regarding
recent acquisitions of communities by the Company, see "Business--Recent
Acquisitions." Except as otherwise noted, the Company owns, directly or
indirectly, the following communities:
<TABLE>
<CAPTION>
                                                                                AVERAGE
                                                                               OCCUPANCY
                                                       NUMBER OF UNITS        FOR THE YEAR
                                                  ---------------------------    ENDED
                                      YEAR FIRST  INDEPENDENT ASSISTED        DECEMBER 31,
COMMUNITY                LOCATION(1)  OPERATED(2)   LIVING     LIVING   TOTAL     1996(3)
---------                -----------  ----------  ----------- --------  ----- ------------
<S>                      <C>          <C>         <C>         <C>       <C>   <C>
ARIZONA
  Valley Manor.......... Tucson          1975           45       24        69     87.2%
  Villa Campana......... Tucson          1984          141        -       141     94.7
  Campana Del Rio(4).... Tucson          1988          190       24       214     98.9
  Kachina Point(4)...... Sedona          1986          102        -       102     96.9
CALIFORNIA
  Courtyard at San
   Marcos(4)(5)......... San Marcos      1987          178       34       212     95.9
COLORADO
  The Court at Castle
   Gardens(4)........... Northglenn      1986            -       99(6)     99     97.7
FLORIDA
  Evergreen Woods....... Spring Hill     1979          161       55       216     94.0
  The Heritage.......... Brooksville     1992            -       57(7)     57     87.9
  Windsor Woods(4)...... Hudson          1988          127       53       180     99.6
  Meridian House(4)(8).. Lantana         1986          140       33       173     95.4
IDAHO
  Hillcrest............. Boise           1984          115        -       115     91.5
INDIANA
  The Heritage at
   Wildwood............. Wildwood        1995            -       72        72     92.3
  Colonial Oaks(9)...... Marion          1978           63        -        63     92.5
KANSAS
  The Hearthstone(4).... Topeka          1987          115       40       155     98.8
MASSACHUSETTS
  Foxhill Village(9).... Westwood        1990          329       27       356     99.9
  New Pond Village(10).. Walpole         1990          167       32       199     95.6
MISSOURI
  Villa Ventura......... Kansas City     1985          129       43       172     96.6
NEW HAMPSHIRE
  The Greens............ Hanover         1984           28        -        28     96.6
UTAH
  The Crosslands(4)..... Sandy           1986          120        -       120     96.0
WASHINGTON
  The Narrows Glen...... Tacoma          1987          142        -       142     98.7
  Laurel House.......... Tacoma          1994            -       57        57     94.4
                                                     -----      ---     -----
    Total...............                             2,292      650     2,942     96.1%
                                                     =====      ===     =====
</TABLE>
--------
 (1) All communities are within ten miles of a Vencor skilled nursing
     facility, except for Meridian House, The Hearthstone and Villa Ventura.
 (2) Represents the year in which the Company or a predecessor of the Company
     opened or commenced operations.
 (3) Average occupancy is calculated on a daily basis by dividing the number
     of occupied units by the total number of available units.
 (4) The construction of these communities was financed through the issuance
     of industrial revenue bonds.
 (5) The Company owns a 65% interest in this community.
 (6) Includes 22 units for the memory impaired.
 (7) Includes 44 units for the memory impaired.
 (8) The Company owns a 99% interest in this community.
 (9) The Company manages these communities pursuant to management agreements
     which expire September 30, 1997 (Colonial Oaks) and July 31, 2000
     (Foxhill Village). These communities are owned by unaffiliated entities.
(10) The Company leases this community from a partnership controlled by Vencor
     pursuant to a 99-year lease agreement.
 
                                       6
<PAGE>
 
DEVELOPMENT PROGRAM
 
  As of March 1, 1997, the Company was developing 26 sites for new assisted
living communities and had received zoning approvals for 24 of these sites.
The table below sets forth certain information regarding such properties:
 
<TABLE>
<CAPTION>
                                                       ESTIMATED     NUMBER OF
                                                       COMPLETION     ASSISTED
          LOCATION(1)             DEVELOPMENT PHASE     DATE(2)     LIVING UNITS
          -----------             ------------------ -------------- ------------
<S>                               <C>                <C>            <C>
Huntsville, Alabama(3)..........  Zoned              March 1998           50
Sedona, Arizona.................  Under construction October 1997         60(4)
Tucson, Arizona.................  Zoned              December 1997        40
Redding, California.............  Under construction July 1997            60
Highland Ranch, Colorado........  Under contract     June 1998            90
Northglenn, Colorado............  Zoned              March 1998           48(5)
Lantana, Florida................  Zoned(6)           September 1998       48(5)
Atlanta, Georgia................  Zoned              March 1998           74
Evansville, Indiana.............  Zoned              March 1998           90
Topeka, Kansas..................  Zoned              March 1998           90
Elizabethtown, Kentucky.........  Zoned              March 1998           60
Louisville, Kentucky............  Under construction July 1997            70
Kennebunk, Maine................  Zoned              March 1998           75
Dennis, Massachusetts...........  Land acquired      December 1998        60(4)
Jackson, Tennessee(3)...........  Zoned              March 1998           51
Memphis, Tennessee (Cordova)(7).  Under construction July 1997            84
Memphis, Tennessee
 (Germantown)(8)................  Under construction March 1997           92
Memphis, Tennessee (Primacy)....  Under construction May 1997             48
Carrollton, Texas(9)............  Under contract     June 1998            90
Dallas, Texas (Grapevine).......  Under contract     June 1998            90
Dallas, Texas (Preston
 Hollow)(3).....................  Zoned              March 1998           64(4)
Dallas, Texas (Richardson)......  Under contract     June 1998            90
Houston, Texas..................  Under contract     June 1998            90
Sandy, Utah.....................  Under construction March 1997           63
Virginia Beach, Virginia........  Zoned(6)           March 1998          110(4)
Tacoma, Washington..............  Under construction October 1997         40
                                                                       -----
  Total.........................                                       1,827
                                                                       =====
</TABLE>
--------
(1) All properties are located adjacent to or within ten miles of an existing,
    or to be developed, Vencor skilled nursing facility, except Huntsville,
    Alabama; Atlanta, Georgia; Topeka, Kansas; Jackson, Tennessee; the three
    sites located in Dallas, Texas; and Houston, Texas. All properties are
    owned by the Company, unless denoted as "under contract" or otherwise
    indicated herein.
(2) There can be no assurance that zoning or construction delays will not be
    experienced.
(3) These properties were acquired from The Carra Company, LLC ("Carra") in
    February 1997 (the "Carra Acquisition").
(4) Includes 20 units for the memory impaired.
(5) All units will be for the memory impaired.
(6) A special use permit is also required to begin construction.
(7) The Company has agreed to acquire this community in connection with the
    Carra Acquisition. See footnote 3.
(8) The Company has entered into a definitive agreement with Carra to acquire
    this community pending certain regulatory approvals expected by July 1997.
    Pending such approvals, the Company will operate this community under a
    management agreement.
(9) This property is leased from Metrocrest Hospital Authority pursuant to a
    long-term land lease.
 
                                       7
<PAGE>
 
  The Company is focusing on expanding its base of assisted living communities
where Vencor has a presence and in other high-density population areas or in
areas where demographic and competitive factors are favorable. The Company
currently expects to develop or acquire 60 to 85 communities consisting of
approximately 5,400 to 7,650 units by the year 2000, including the 26
communities set forth in the preceding table. In addition, the Company plans
to convert at least 750 of its existing independent living units to assisted
living units by the year 2000. The Company has identified 250 of these units
which will be converted in 1997. The Company will continue outsourcing
selected development functions to third parties. While it is expected that a
significant amount of its expansion will be as a result of development, the
Company also intends to acquire existing assisted and independent living
facilities. See "Business--Recent Acquisitions."
 
  The Company follows a disciplined development strategy that begins with site
selection. When selecting new development sites, the Company considers the
local and regional economic environment, demographics, competition, the labor
market, the legislative and regulatory environment and other factors. After
targeting a market, the Company engages independent contractors to identify
suitable real estate. After the land is under contract, the Company typically
initiates the zoning, architectural and construction aspects of development.
The Company estimates that zoning and other site approvals may take
approximately six months after a site is put under contract. Once such
approvals are obtained, the Company estimates that construction time will be
between eight to ten months and the cost of each unit will range from $70,000
to $75,000.
 
  The Company's existing communities range in size from 28 to 356 units. The
Company plans in the future to develop communities which typically range in
size between approximately 60 to 110 units with a preference towards
communities containing 90 units. The Company believes that communities within
this range offer marketing and operating advantages, including economies of
scale. However, the number of units in a community will depend, among other
things, on local market conditions, site availability and site size. Although
the Company attempts to construct the interior space under established floor
plan models, the Company intends to customize the exterior appearance of each
community to reflect local architectural styles and tastes.
 
  Prior to the completion of construction, the Company initiates a marketing
campaign, emphasizing contacts with potential referral sources. Once opened,
the Company estimates that it will take approximately twelve months for
communities to achieve targeted occupancy levels, depending on the size of the
facility.
 
  The Company also plans to acquire additional assisted living facilities or
other properties that can be repositioned as assisted living communities. In
evaluating possible acquisitions, the Company considers, among other factors:
(i) location, construction quality, condition and design of the facility; (ii)
current and projected cash flows; (iii) the ability to increase revenues,
occupancy and cash flows by providing a full range of assisted living
services; (iv) costs of repositioning (including renovations, if any); and (v)
the extent to which the acquisition will complement the Company's development
program.
 
  The forward-looking statements in this section, including those related to
the Company's business strategy and development program, are qualified by
reference to the cautionary statements set forth under "Business--Additional
Company Information--Cautionary Statements."
 
RECENT ACQUISITIONS
 
  On March 3, 1997, the Company entered into a definitive agreement to acquire
American ElderServe Corporation, an Atlanta based operator of assisted living
communities in the southeastern portion of the United States, for a
combination of stock and cash plus debt assumption valued at approximately
$30.5 million. American ElderServe currently operates 12 assisted living
communities consisting of 503 units. The communities are located as follows:
ten in the greater Atlanta, Georgia area; one in Auburn, Alabama; and one in
Houston, Texas. American ElderServe also has six additional communities under
construction and scheduled to open in 1997. These communities will contain
approximately 345 additional units. The communities under construction are
located in the greater Atlanta, Georgia area; Charlotte, North Carolina;
Jacksonville, Florida; Augusta,
 
                                       8
<PAGE>
 
Georgia; Houston, Texas; and Chattanooga, Tennessee. Assuming receipt of
certain regulatory approvals, the Company expects to close the acquisition on
or about April 1, 1997. Effective with the closing, Andy L. Schoepf, President
and Chief Executive Officer of American ElderServe, will join the Company as
its Chief Operating Officer and will serve as a director of the Company. In
connection with the acquisition, Mr. Schoepf will receive approximately
675,000 shares of Common Stock, including certain demand registration rights
with respect to the Common Stock.
 
  Simultaneously with the closing of the American ElderServe Acquisition, the
Company will enter into a joint venture development agreement. Under this
agreement, Atria will own 10% and George A. Schoepf, former Executive Vice
President of American ElderServe and the brother of Andy L. Schoepf, will own
90% of a newly formed development company. The new development company will
have the exclusive right to develop assisted living communities for the
Company in an 11 state region in the southeastern United States. Atria has
agreed that the development company will develop at least 15 communities in
this southeast region over the next three years. Atria will have a first
option to purchase any such developed community at the lesser of its fair
market value or the costs to develop and operate such community up to the time
of purchase plus the sum of $666,666. The Company may exercise its option to
purchase a community only after the community's operations become profitable
as defined in the development agreement. In connection with the development of
such communities, Atria has agreed to fund all construction costs of the
development company through the use of its $200 million bank credit facility
(the "Credit Facility"). Such communities will secure the borrowings under the
Credit Facility. Atria will manage these communities from the date they
commence operations and has agreed to fund operating losses of these
communities through the use of its Credit Facility. George A. Schoepf will
serve as President and Chief Executive Officer of the development company.
 
  In addition to the American ElderServe Acquisition, the Company acquired a
102 unit assisted living community and a 48 bed, 27 unit memory-impaired
community on February 14, 1997. Both of these communities are located in
Knoxville, Tennessee.
 
MANAGEMENT OF THE COMMUNITIES
 
  An executive director typically manages the day-to-day operations at each
community, including oversight of the quality of care, marketing, coordination
of services and monitoring financial performance. The executive director is
responsible for all personnel, including management, security, staff and
independent contractors. Executive directors are compensated based on quality
of service, as well as financial results. Quality of service is assessed, in
part, through customer and employee satisfaction surveys.
 
  In most cases, each community also has managers for environmental services,
care services, the business office, dietary services, activities, security,
transportation and sales and marketing. All assisted and independent living
communities employ a licensed practical nurse or utilize home health agencies
to provide such services. Some residents contract with third parties such as
home health agencies to provide additional services.
 
  The Company actively recruits personnel to maintain adequate staffing levels
at its existing communities, as well as new staff for new or acquired
communities prior to opening. The Company maintains training sites in Tacoma,
Washington and Hudson, Florida, for its executive directors and other key
personnel. The Company intends to open an additional training site in Atlanta,
Georgia during 1997. Participants receive intensive training in all facets of
community management in three- to four-day sessions. Moreover, the Company
offers two different levels of training, such that participants who
successfully complete one level return subsequently for the next level of
training.
 
  Executive directors report to area executive directors. The Company has six
area executive directors, each with regional responsibility. Area executive
directors report directly to the Company's Vice President of Operations.
 
                                       9
<PAGE>
 
MARKETING
 
  Each community employs a sales and marketing director. Before opening new
communities, the Company typically uses telemarketing, direct mail and
newspaper ads for developing awareness of such communities. Once communities
are open, the Company's marketing strategy focuses on enhancing the reputation
of the communities and creating an awareness of the Company's services among
potential referral sources, such as hospitals, rehabilitation hospitals, home
health care agencies and other health care providers located near the
Company's communities. The Company believes that satisfied residents and their
families are the most important referral sources for its established
communities. Accordingly, the Company believes that its emphasis on high-
quality services and resident satisfaction will result in a strong referral
base for its existing communities. The Company also seeks to maintain
occupancy levels by retaining residents for longer periods of time by
expanding the services available to residents, thereby allowing residents to
"age in place."
 
COMPETITION
 
  The assisted and independent living industry is highly competitive. The
Company faces competition from numerous local, regional and national providers
of assisted living and long-term care. The Company also competes with
companies providing home-based health care. Some of the Company's competitors
operate on a not-for-profit basis or as charitable organizations. Many of the
Company's competitors are significantly larger and have greater financial
resources than the Company. The Company believes that the assisted and
independent living industry will become even more competitive in the future.
Regulatory barriers to entry into this industry are generally not substantial.
If the development of new assisted and independent living communities
surpasses the demand for such communities in particular markets, such markets
may become saturated. The Company expects to face competition with respect to
its acquisition of additional assisted and independent living communities and
properties. There can be no assurance that competition will not limit the
Company's ability to attract residents and expand its business.
 
  The Company believes that assisted and independent living communities
compete primarily on the basis of quality of service, services offered,
reputation, a facility's location and appearance and prices. The Company
believes its communities are distinguishable from assisted and independent
living facilities that do not cater primarily to private pay residents because
of the quality of services, amenities and physical facilities that the Company
is able to offer. In addition, a number of the Company's communities maintain
both assisted and independent living units. The Company believes that the
ability of these communities to continue to serve residents as their needs
increase may be attractive to potential residents.
 
SOURCES OF REVENUES FOR ASSISTED AND INDEPENDENT LIVING CARE
 
  The Company currently, and for the foreseeable future, expects to rely
primarily on its residents' ability to pay the Company's charges from their
own resources. Inflation or other circumstances that adversely affect the
elderly's ability to pay for services could have an adverse effect on the
Company's business, financial condition and results of operations. Depending
on the nature of an individual's health insurance program or any long-term
care insurance policy, the resident may receive reimbursement for certain
costs under an "alternate care benefit."
 
  Eight of the Company's communities (containing 1,255 units) were financed in
part through the issuance of tax-free industrial revenue bonds (the "Bonds").
At December 31, 1996, there was $62.1 million in outstanding principal on
these Bonds with a weighted average interest rate of approximately 5.2%. Under
the terms of the Bonds, the Company is required to rent approximately 250
assisted and independent living units to individuals who have incomes which
are 80% or less of the average income levels in a designated market. In
certain cases, the Company's ability to increase prices in communities with
such Bond financing (in response to higher operating costs or other
inflationary factors) could be limited if it affects the ability of the
Company to attract and retain residents with qualifying incomes.
 
  Government payments for assisted and independent living have been limited.
Some state or local governments offer subsidies for rent or services for low-
income elderly persons. Others may provide subsidies in
 
                                      10
<PAGE>
 
the form of additional payments for those who receive Supplemental Security
Income. Medicaid provides insurance for certain financially or medically needy
persons, regardless of age, and is funded jointly by federal, state and local
governments. Payments for the services provided by the Company are not
permitted under the Medicaid program absent a waiver. While there are various
federal and state initiatives to provide reimbursement for assisted and
independent living programs, at this time the Company believes that the level
of reimbursement under such federal and state programs would be insufficient
to cover the cost of delivering the level of service provided by the Company.
 
GOVERNMENT REGULATION
 
  The health care industry is subject to extensive regulation and frequent
regulatory change. At this time, no federal laws or regulations specifically
regulate assisted or independent living facilities. While a number of states
have not yet enacted specific assisted living regulations, the Company's
communities are subject to regulation, licensing, certificate of need
requirements and permitting by state and local health and social service
agencies and other regulatory authorities. While such requirements vary from
state to state, they typically relate to staffing, physical design, required
services and resident characteristics. The Company believes that such
regulation will increase in the future. In addition, health care providers are
receiving increased scrutiny under anti-trust laws as integration and
consolidation of health care delivery increases and affects competition. The
Company's communities are also subject to various zoning restrictions, local
building codes and other ordinances, such as fire safety codes. Failure by the
Company to comply with applicable regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. Regulation of the assisted and independent living
industry is evolving. The Company is unable to predict the content of new
regulations and their effect on its business. There can be no assurance that
the Company's operations will not be adversely affected by changes in existing
laws and regulations, adoption of new laws and regulations and new
interpretations of existing laws and regulations.
 
  Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients
to such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommending of, a particular provider of
health care items or services. Vencor provides certain services to residents
of the Company's communities. The Medicare/Medicaid anti-kickback law has been
broadly interpreted to apply to certain contractual relationships between
health care providers and sources of patient referral. Similar state laws,
which vary from state to state, are sometimes vague and seldom have been
interpreted by courts or regulatory agencies. Violation of these laws can
result in loss of licensure, civil and criminal penalties, and exclusion of
health care providers or suppliers from participation in the Medicare and
Medicaid program. There can be no assurance that such laws will be interpreted
in a manner consistent with the practices of the Company.
 
  The Company believes that its communities are in substantial compliance with
applicable regulatory requirements. However, in the ordinary course of
business, one or more of the Company's communities could be cited for
deficiencies. In such cases, the appropriate corrective action would be taken.
To the Company's knowledge, no material regulatory actions are currently
pending with respect to any of the Company's communities.
 
  Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist which also may require modifications to existing and planned
properties to create access to the properties by disabled persons. While the
Company believes that its properties are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated
basis than anticipated, additional costs would be incurred by the Company.
Further legislation may impose additional burdens or restrictions with respect
to access by disabled persons, the costs of compliance with which could be
substantial.
 
 
                                      11
<PAGE>
 
                        ADDITIONAL COMPANY INFORMATION
 
EMPLOYEES
 
  As of December 31, 1996, the Company has approximately 1,150 employees of
which 820 were full-time and 330 were part-time. Eight full-time employees
were employed at the Company's corporate headquarters. None of the Company's
employees are currently represented by a labor union and the Company is not
aware of any union organizing activity among its employees. The Company
believes that its relationship with its employees is satisfactory.
 
CAUTIONARY STATEMENTS
 
  Information provided in this Report contains, and from time to time the
Company may disseminate materials and make statements which may contain,
"forward-looking" statements as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). These cautionary statements are
being made pursuant to the provisions of the Act. The Company cautions
investors that any forward-looking statements made by the Company are not
guarantees of future performance and that actual results may differ materially
from those in the forward-looking statements as a result of various factors,
including, but not limited to, the following:
 
  (i) Newly developed assisted living communities are expected to incur
operating losses during the first twelve months of operations of between
$150,000 and $250,000 for a 90-unit community. Once opened, the Company
estimates that it will take an average of twelve months for its communities to
achieve targeted occupancy levels of at least 85%. The Company may incur
additional losses if it fails to achieve expected occupancy rates at newly
developed communities or if expenses related to the development, acquisition
or operation of new communities exceed expectations.
 
  (ii) To achieve its growth objectives, the Company will need to obtain
substantial additional financing to fund its development, construction and
acquisition activities beyond 1997. Accordingly, the Company's future growth
will depend upon its ability to obtain additional financing on acceptable
terms. There can be no assurance that adequate funding will be available as
needed or on terms acceptable to the Company. Insufficient financial resources
may require the Company to delay or eliminate all or some of its development
projects and acquisition plans, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
  (iii) The Company's ability to expand and develop additional assisted living
communities will depend upon a number of factors, including, but not limited
to, the Company's ability to acquire suitable properties or communities at
reasonable prices; the Company's success in obtaining the necessary zoning,
land use, building, occupancy, licensing and other required governmental
permits and authorizations; and the Company's ability to control construction
and renovation costs and project completion schedules. In addition, the
Company's development plan is subject to numerous factors outside its control,
including competition for acquisitions, shortages of, or the inability to
obtain, labor or materials, changes in applicable laws or regulations or in
the methods of applying such laws and regulations, the failure of general
contractors or subcontractors to perform under their contracts, strikes, and
adverse weather. The Company does not currently have a substantial internal
development staff but instead it has retained third parties, including Vencor,
to locate suitable sites for new assisted living communities and to handle
other aspects of the development process on a contract basis. If the Company
is unable to continue to retain third party sources to assist in the
development process, the Company's ability to execute its development and
growth plans and the Company's business, financial condition and results of
operations could be materially and adversely affected.
 
  (iv) The success of the Company's acquisitions will be determined by
numerous factors, including the Company's ability to identify suitable
acquisition candidates, competition for such acquisitions, the purchase price,
the financial performance of the facilities after acquisition and the ability
of the Company to integrate effectively the operations of acquired facilities.
 
 
                                      12
<PAGE>
 
  (v) The amount of debt and debt-related payments is expected to increase
substantially as the Company pursues its growth strategy. As a result, an
increasing portion of the Company's cash flow will be devoted to debt service
and related payments and the Company will be subject to risks normally
associated with increasing financial leverage. There can be no assurance that
the Company will generate sufficient cash flows from operations to cover
required interest, principal and any operating lease payments. Substantially
all of the Company's indebtedness, including the Credit Facility, bears
interest at floating rates. Therefore, increases in prevailing interest rates
could increase the Company's interest payment obligations and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
  (vi) The Company's success will depend in part, on its ability to manage its
planned rapid growth. The Company presently does not have adequate staff to
manage its planned growth and will rely on Vencor to provide many internal
management functions. The Company will need to expand its operational,
financial, and management information systems and continue to attract,
motivate and retain key employees. If the Company does not manage its growth
effectively, its business, financial condition and results of operations could
be materially and adversely affected.
 
  (vii) The Company currently relies, and in the foreseeable future, expects
to rely, primarily on the ability of residents to pay for the Company's
charges from their own financial resources. In the event that managed care
becomes a significant factor in the assisted living industry, the amount the
Company receives for its services could be adversely affected. In addition,
inflation and other circumstances which adversely affect the ability of the
elderly to pay for the Company's services could have a material adverse effect
on the Company's business, financial condition and results of operations.
 
ITEM 2. PROPERTIES
 
  For information concerning the Company's communities, see "Business--The
Company's Communities" and "Business--Development Program." The Company also
leases approximately 4,000 square feet of office space in Louisville, Kentucky
from Vencor which houses its corporate headquarters. The Company believes that
its corporate headquarters are adequate for the Company's current needs and
will continue to evaluate such needs in the future.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of management of the Company, although the
outcomes of these suits and claims are uncertain, in the aggregate they should
not have a material adverse effect on the Company's business, financial
condition and results of operations.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  Not applicable.
 
                                      13
<PAGE>
 
                     EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Set forth below are the executive officers of the Company, their ages (as of
January 1, 1997), and their positions with the Company. Mr. Mulloy and Mr.
Wesley were elected to their positions in May 1996.
 
<TABLE>
<CAPTION>
             NAME            AGE           POSITION(S) WITH THE COMPANY
             ----            ---           ----------------------------
   <S>                       <C> <C>
   W. Patrick Mulloy, II....  43 Chief Executive Officer, President and Director
   J. Timothy Wesley........  37 Chief Financial Officer, Vice President of
                                  Development and Secretary
</TABLE>
 
  W. PATRICK MULLOY, II has served as the Chief Executive Officer, President
and a director of the Company since May 1996. From 1994 to 1996, Mr. Mulloy
was a member and of counsel to the law firm of Greenebaum Doll & McDonald
PLLC. From 1992 to 1994, Mr. Mulloy served as the Secretary of the Finance and
Administration Cabinet for the Commonwealth of Kentucky. For over ten years
prior to 1992, Mr. Mulloy engaged in the private practice of law in
Louisville, Kentucky. Mr. Mulloy has also been actively involved in commercial
and multi-family real estate acquisitions and developments.
 
  J. TIMOTHY WESLEY has been the Chief Financial Officer, Vice President of
Development and Secretary of the Company since May 1996. From 1994 to May
1996, Mr. Wesley was Director and Manager of Development at Vencor. From 1992
to 1994, Mr. Wesley was Vice President of Strategic Planning for Home Care
Affiliates, Inc., and from 1986 to 1992, he was employed by Humana Inc., most
recently as Director of Acquisitions.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The Company's Common Stock is listed and traded on the NASDAQ National
Market System ("NASDAQ") under the symbol "ATRC." The following table sets
forth the high and low sales prices for the Common Stock, as reported by
NASDAQ, for the periods indicated:
 
<TABLE>
<CAPTION>
                                                                   HIGH   LOW
                                                                  ------ ------
      <S>                                                         <C>    <C>
      Fiscal year ended December 31, 1996:
        Third Quarter (1)........................................ $13.50 $10.00
        Fourth Quarter...........................................  14.50   9.25
</TABLE>
--------
(1) Atria Common Stock commenced trading on August 20, 1996.
 
  On March 3, 1997, the closing price for the Common Stock as reported by
NASDAQ was $11.75 per share. As of such date, the Company had approximately
240 holders of record of the Common Stock.
 
  The Company intends to retain any earnings to finance operations and its
development strategy. In addition, the Company's Credit Facility prohibits
distributions to the Company's stockholders. Accordingly, the payment of any
cash dividends on the Common Stock is unlikely in the foreseeable future.
 
                                      14
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
                            ATRIA COMMUNITIES, INC.
                            SELECTED FINANCIAL DATA
            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STATISTICS)
<TABLE>
<CAPTION>
                                                                        YEAR
                                    YEAR ENDED DECEMBER 31,            ENDED
                              --------------------------------------  MAY 31,
                                1996      1995      1994      1993    1993(A)
                              --------  --------  --------  --------  --------
<S>                           <C>       <C>       <C>       <C>       <C>
OPERATIONS:
Revenues....................  $ 51,846  $ 47,976  $ 39,758  $ 35,870  $ 36,479
                              --------  --------  --------  --------  --------
Salaries, wages and
 benefits...................    19,861    17,455    14,638    14,735    14,620
Supplies....................     5,024     4,860     4,023     4,360     4,199
Rent........................       353       383       333       351       563
Depreciation and
 amortization...............     5,060     5,113     4,541     4,503     5,025
Non-recurring transactions..     1,050       600    (1,675)     (266)        -
Other operating expenses....    10,594     9,465     8,347     8,031     9,229
                              --------  --------  --------  --------  --------
                                41,942    37,876    30,207    31,714    33,636
                              --------  --------  --------  --------  --------
Operating income............     9,904    10,100     9,551     4,156     2,843
Interest expense............     4,287     4,322     3,538     3,499     5,058
Investment income...........    (1,439)     (147)     (330)     (346)     (445)
                              --------  --------  --------  --------  --------
Income (loss) before income
 taxes and extraordinary
 loss.......................     7,056     5,925     6,343     1,003    (1,770)
Provision for income taxes..     2,787     2,341     2,506       396      (699)
                              --------  --------  --------  --------  --------
Income (loss) before
 extraordinary loss.........     4,269     3,584     3,837       607    (1,071)
Extraordinary loss on
 extinguishment of debt, net
 of income tax benefit......         -      (146)        -      (103)        -
                              --------  --------  --------  --------  --------
    Net income (loss).......  $  4,269  $  3,438  $  3,837  $    504  $ (1,071)
                              ========  ========  ========  ========  ========
Earnings per common and
 common equivalent share(b):
 Income before extraordinary
  loss......................  $   0.35  $   0.36
 Extraordinary loss on
  extinguishment of debt....         -     (0.02)
                              --------  --------
    Net income..............  $   0.35  $   0.34
                              ========  ========
Shares used in computing
 earnings per common and
 common equivalent share(b).    12,226    10,095
STATISTICAL DATA:
Average occupancy(c)........      96.1%     94.5%     93.8%     90.8%     87.1%
Number of communities(d):
 Owned and leased...........        19        20        19        19        20
 Managed....................         2         2         2         2         2
                              --------  --------  --------  --------  --------
   Total....................        21        22        21        21        22
                              ========  ========  ========  ========  ========
Number of units(d):
 Owned and leased...........     2,523     2,603     2,531     2,574     2,734
 Managed....................       419       419       419       419       419
                              --------  --------  --------  --------  --------
   Total....................     2,942     3,022     2,950     2,993     3,153
                              ========  ========  ========  ========  ========
BALANCE SHEET DATA:
Cash and cash equivalents...  $ 65,238  $  2,819  $  1,497  $  1,695  $  2,473
Assets......................   209,782   140,917   133,016   137,308   141,151
Long-term debt, including
 amounts due within one
 year.......................   110,032   105,350    91,193    91,744   108,003
Stockholders' equity........    88,946    28,447    31,835    34,959    30,049
</TABLE>
--------
(a) For accounting purposes, the consolidated financial information of Atria
    for 1992 is based upon the previous fiscal reporting period of such
    entities which most closely approximate the respective calendar year.
    Accordingly, operating results for the five months ended May 31, 1993 are
    included in both May 31, 1993 and December 31, 1993 disclosures. Revenues
    and net income for such period approximated $15.6 million and $61,000
    respectively.
(b) Share and per share amounts for periods prior to the IPO are presented on
    a pro forma basis.
(c) Average occupancy is calculated on a daily basis by dividing the number of
    occupied units by the total number of available units.
(d) At end of period.
 
                                      15
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
  The Selected Financial Data in Item 6 and the consolidated financial
statements included in this Form 10-K set forth certain data with respect to
the financial position, results of operations and cash flows of Atria which
should be read in conjunction with the following discussion and analysis.
 
  Atria is a national provider of assisted and independent living communities
for the elderly. At December 31, 1996, Atria operated 21 communities
comprising 2,942 units located in 12 states. At March 1, 1997, Atria had 26
assisted living communities containing 1,827 units under development,
including eight communities under construction.
 
PLANNED EXPANSION AND DEVELOPMENT
 
  Atria intends to expand its business in the future through both construction
of additional communities and acquisition of existing facilities which could
add 60 to 85 assisted and independent living communities consisting of
approximately 5,400 to 7,650 units by the year 2000 (including 26 communities
currently being developed). The estimated cost to construct, equip or
otherwise acquire such communities could approximate $375 to $550 million.
 
  The estimated cost of Atria's planned expansion and development is
significantly in excess of: (i) estimated cash flows from operations; (ii)
proceeds from the IPO; and (iii) borrowings available under the Credit
Facility. Management believes that substantial additional financing will be
required to continue Atria's growth plans beyond 1997. Available sources of
future capital may include, among other things, equity, public or private
debt, and additional bank revolving credits. However, there can be no
assurance that such financing will be available on terms which are acceptable
to Atria, nor can there be any assurance that additional financing will not be
required or sought by Atria in 1997.
 
  Newly opened communities are expected to incur operating losses until
sufficient occupancy levels and operating efficiencies are achieved. Based
upon historical experience, management believes that a typical community will
achieve its targeted occupancy levels twelve months from commencement of
operations. Accordingly, Atria will require substantial amounts of liquidity
to maintain the operations of newly opened communities. In addition, if
sufficient occupancy levels related to newly opened communities are not
achieved within a reasonable period, the results of operations, financial
position and liquidity of Atria could be materially and adversely impacted.
 
  The statements contained under "Planned Expansion and Development" are
forward looking statements and are qualified by reference to the cautionary
statements set forth under "Business--Additional Company Information--
Cautionary Statements."
 
                                      16
<PAGE>
 
RESULTS OF OPERATIONS
 
  A summary of operations follows:
 
<TABLE>
<CAPTION>
                                    PERCENTAGE OF
                                      REVENUES
                                  -------------------
                                  1996   1995   1994
                                  -----  -----  -----
      <S>                         <C>    <C>    <C>
      Revenues..................  100.0% 100.0% 100.0%
                                  -----  -----  -----
      Salaries, wages and
       benefits.................   38.3   36.4   36.8
      Supplies..................    9.7   10.1   10.1
      Rent......................    0.7    0.8    0.9
      Depreciation and
       amortization.............    9.8   10.7   11.4
      Non-recurring
       transactions.............    2.0    1.2   (4.2)
      Other operating expenses..   20.4   19.7   21.0
                                  -----  -----  -----
                                   80.9   78.9   76.0
                                  -----  -----  -----
      Operating income..........   19.1   21.1   24.0
      Interest expense..........    8.3    9.0    8.9
      Investment income.........   (2.8)  (0.2)  (0.9)
                                  -----  -----  -----
        Income before income
         taxes and extraordinary
         loss...................   13.6   12.3   16.0
      Provision for income
       taxes....................    5.4    4.8    6.3
                                  -----  -----  -----
        Income before
         extraordinary loss.....    8.2%   7.5%   9.7%
                                  =====  =====  =====
</TABLE>
 
  Revenues increased 8.1% to $51.8 million in 1996 and 20.7% to $48.0 million
in 1995. This increase in 1996 was primarily attributable to price increases
approximating 5% ($2.2 million), growth in occupancy ($1.0 million) and
expansion of ancillary services ($600,000). The increase in 1995 revenues was
primarily attributable to the purchase of controlling interest in two
communities previously accounted for under the equity method ($4.4 million),
the effect of two newly constructed communities ($2.2 million), price
increases approximating 4% ($1.2 million), growth in occupancy ($600,000) and
expansion of ancillary services ($400,000). Revenues in 1994 include
approximately $600,000 related to the operations of a sold community.
 
  Compensation costs and other operating expenses as a percentage of revenues
increased in 1996 compared to 1995. Increases in such costs resulted primarily
from growth in administrative expenses of approximately $1.3 million
associated with Atria's expansion and development program. Compensation and
other operating expenses as a percentage of revenue declined in 1995 compared
to 1994 primarily as a result of operating efficiencies associated with
increased occupancy and the fixed nature of a significant portion of such
costs.
 
  Operating income declined 1.9% to $9.9 million in 1996 and increased 5.7% to
$10.1 million in 1995. Excluding the effect of non-recurring transactions,
operating income increased 2.4% to $11.0 million in 1996 and increased 35.9%
to $10.7 million in 1995. In both years, operating income increased primarily
due to growth in revenues, operating efficiencies associated with higher
occupancy levels and growth in ancillary services. However, operating income
in 1996 was adversely impacted by administrative costs incurred in connection
with Atria's expansion and development program.
 
  Income before extraordinary loss increased 19.1% to $4.3 million in 1996 and
declined 6.6% to $3.6 million in 1995. Excluding the effect of non-recurring
transactions, income before extraordinary loss increased 24.2% to $4.9 million
in 1996 and 39.3% to $3.9 million in 1995. The improvement in 1996 was
primarily attributable to a decline in interest costs and increased investment
income resulting from the IPO. The improvement in 1995 resulted primarily from
growth in operating income.
 
  For periods prior to the IPO, certain allocations and estimates have been
made by management in the consolidated financial statements to present the
historical financial position and results of operations of Atria as a separate
entity. Upon consummation of the IPO, Atria became contractually obligated to
pay Vencor for certain centralized management and administrative services
underlying such historical allocations and estimates. The operating results of
Atria include corporate costs and expenses of Vencor aggregating $620,000,
$600,000 and $570,000 for the three years ended December 31, 1996, 1995 and
1994, respectively. Management believes that these allocations reasonably
reflect the proportional costs incurred by Vencor on behalf of Atria.
 
                                      17
<PAGE>
 
  In June 1996, Atria recorded a non-recurring pretax charge of $1.1 million
($630,000 net of tax) in connection with the settlement of certain litigation
involving a minority partner at one of its communities. Results of operations
in 1995 include a charge of $600,000 ($360,000 net of tax) related to the
writedown of undeveloped property to its estimated net realizable value.
Pretax income in 1994 includes a gain on the sale of property aggregating
$425,000 ($255,000 net of tax). In addition, settlements of certain litigation
increased pretax earnings by approximately $1.3 million ($750,000 net of tax)
in 1994.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Cash provided by operations totaled $13.2 million, $8.5 million and $7.6
million for the three years ended December 31, 1996, 1995 and 1994,
respectively. The improvement in cash flows from operations resulted primarily
from growth in net income (excluding non-recurring transactions) and, in 1996,
growth in accounts payable and other accrued liabilities.
 
  As a result of the IPO, working capital at December 31, 1996 totaled $45.6
million. Current liabilities exceeded current assets by $776,000 at December
31, 1995, primarily as a result of the timing of cash settlements of advances
from Vencor (which comprised 100% of Atria's pre-IPO equity). Substantially
all cash and cash equivalents in excess of working capital needs will be used
to fund Atria's expansion and development program.
 
  On August 26, 1996, Atria entered into the Credit Facility aggregating $200
million (including a letter of credit option not to exceed $70 million) which
has a maturity of four years and may be extended at the option of the banks
for one additional year. The Credit Facility bears interest, at Atria's
option, at either (i) a base rate based on PNC Bank's prime rate or the daily
federal funds rate or (ii) a LIBOR rate, plus an additional percentage based
on certain leverage ratios. The obligations under the Credit Facility are
secured by substantially all of Atria's property, the capital stock of its
present and future principal subsidiaries and all intercompany indebtedness
owed to Atria by its subsidiaries. Available borrowings under the Credit
Facility at December 31, 1996 approximated $107 million.
 
  Net cash used in investing activities totaled $8.5 million, $2.9 million and
$4.0 million for the three years ended December 31, 1996, 1995 and 1994,
respectively. Atria's investing activities included capital expenditures
related to the development of new facilities and expansion of existing
operations totaling $7.4 million, $4.0 million and $5.7 million for the
respective periods.
 
  Net cash provided by financing activities was $57.8 million (including $52.1
million of proceeds from the IPO) for 1996, while net cash used in financing
activities totaled $4.3 million for 1995 and $3.8 million for 1994. In all
periods, operating cash flows in excess of capital expenditures were used
primarily to repay advances from Vencor.
 
  At March 1, 1997, Atria had 26 sites under development for new assisted
living communities, eight of which were under construction. In addition, on
March 3, 1997, the Company entered into a definitive agreement to acquire
American ElderServe for a combination of stock and cash plus debt assumption
valued at approximately $30.5 million. American ElderServe currently operates
12 assisted living communities containing 503 units and has six facilities
under construction which are expected to open in 1997. Capital expenditures
related to the Company's current development plan, including maintenance and
expansion of existing facilities, could approximate $100 million to $110
million in 1997. Although management believes that cash flows from operations,
proceeds from the IPO and available borrowings under the Credit Facility are
sufficient to meet these liquidity needs, Atria will require substantial
additional financing to continue its growth plans beyond 1997. At December 31,
1996, the additional cost to complete and equip three communities under
construction approximated $7 million.
 
  Atria plans to retain future earnings to finance the growth of its business
rather than to pay cash dividends. Payment of cash dividends in the future
will depend on the financial condition, results of operations and capital
requirements of Atria as well as other factors deemed relevant by the Board of
Directors. The Credit Facility prohibits Atria from paying cash dividends.
 
 
                                      18
<PAGE>
 
  In connection with the IPO, all amounts previously classified as investments
by and advances from Vencor were contributed to Atria as part of its permanent
capitalization. In addition, Vencor also contributed approximately $4.3
million in cash to Atria prior to the consummation of the IPO.
 
  The Credit Facility contains financial covenants and other restrictions that
(i) require Atria to meet certain financial tests, (ii) require that there be
no change of control of Atria, (iii) limit, among other things, the ability of
Atria and certain of its subsidiaries to borrow additional funds, dispose of
certain assets and engage in mergers and other business combinations, (iv)
prohibit distributions to Atria's stockholders and (v) require that Vencor own
at least 30% of Atria's common stock. Vencor has guaranteed for four years
certain borrowings by Atria under the Credit Facility in amounts up to $100
million in the first year following the IPO, declining to $75 million, $50
million and $25 million in each respective year thereafter.
 
EFFECTS OF INFLATION AND CHANGING PRICES
 
  Atria derives substantially all of its revenues from private pay sources
within its assisted and independent living business. The terms of most rental
agreements approximate one year, generally enabling Atria to increase prices
to maintain operating margins. However, management believes that a significant
number of competing assisted and independent living communities will be
developed in markets in which Atria operates, the effect of which may limit
Atria's ability to increase prices to maintain operating margins in the
future. In addition, other market conditions, including the effect of
unfavorable real estate zoning requirements and increased government
regulation, could adversely impact Atria's ability to increase prices or
control growth in operating expenses.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The information required by this Item is included in appendix pages F-1
through F-15 of this Report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  None.
 
                                   PART III
 
ITEMS 10, 11, 12, AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by these Items other than the information set forth
above under Part I, "Executive Officers of the Registrant," is omitted because
the Company is filing a definitive proxy statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this
Report. The required information contained in the Company's proxy statement is
incorporated herein by reference.
 
                                      19
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
  (a) (1) Index to Consolidated Financial Statements:
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Report of Independent Auditors............................................  F-2
Consolidated Financial Statements:
 Consolidated Statement of Income for the years ended December 31, 1996,
  1995 and 1994...........................................................  F-3
 Consolidated Balance Sheet, December 31, 1996 and 1995...................  F-4
 Consolidated Statement of Stockholders' Equity for the years ended
  December 31, 1996, 1995 and 1994........................................  F-5
 Consolidated Statement of Cash Flows for the years ended December 31,
  1996, 1995 and 1994.....................................................  F-6
 Notes to Consolidated Financial Statements...............................  F-7
 Quarterly Consolidated Financial Information (unaudited)................. F-15
</TABLE>
 
  (a) (2) Index to Exhibits:
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 NUMBER DESCRIPTION OF DOCUMENT
 ------ -----------------------
 <C>    <S>                                                                <C>
   3.1  Restated Certificate of Incorporation. Exhibit 3.1 to the
        Company's Registration Statement on Form S-1 (Comm. File 333-
        06907) is hereby incorporated by reference.
   3.2  Amended and Restated By-laws. Exhibit 3.2 to the Company's
        Registration Statement on Form S-1 (Comm. File No. 333-06907) is
        hereby incorporated by reference.
   4.1  Specimen Common Stock Certificate. Exhibit 4 to the Company's
        Registration Statement on Form S-1 (Comm. File No. 333-06907) is
        hereby incorporated by reference.
   4.2  Article IV of the Restated Certificate of Incorporation is
        included in Exhibit 3.1.
   4.3  Credit Agreement dated as of August 15, 1996, among (a) Atria
        Communities, Inc., as Borrower; (b) the lending institutions
        listed in Annex I to the Credit Agreement, as Lenders; (c) PNC
        Bank, National Association, as Administrative Agent; (d) PNC
        Bank, Kentucky, Inc., as Managing Agent; (e) National City Bank
        of Kentucky, as Documentation Agent, and (f) PNC Bank, National
        Association, National City Bank of Kentucky, and the Toronto-
        Dominion Bank, New York Agency, as Syndication Agent. Exhibit 1
        to the Company's Current Report on Form 8-K dated August 26,
        1996 (Comm. File No. 0-21159) is hereby incorporated by
        reference.
  10.1  Form of Registration Rights Agreement. Exhibit 10.1 to the
        Company's Registration Statement on Form S-1 (Comm. File No.
        333-06907) is hereby incorporated by reference.
  10.2  Form of Incorporation Agreement. Exhibit 10.2 to the Company's
        Registration Statement on Form S-1 (Comm. File No. 333-06907) is
        hereby incorporated by reference.
  10.3  Form of Administrative Services Agreement. Exhibit 10.3 to the
        Company's Registration Statement on Form S-1 (Comm. File No.
        333-06907) is hereby incorporated by reference.
  10.4  Form of Tax Sharing Agreement. Exhibit 10.4 to the Company's
        Registration Statement on Form S-1 (Comm. File No. 333-06907) is
        hereby incorporated by reference.
  10.5  Form of 1996 Stock Ownership Incentive Plan. Exhibit 10.5 to the
        Company's Registration Statement on Form S-1 (Comm. File No.
        333-06907) is hereby incorporated by reference.
  10.6  Form of Non-Employee Directors 1996 Stock Incentive Plan.
        Exhibit 10.6 to the Company's Registration Statement on Form S-1
        (Comm. File No. 333-06907) is hereby incorporated by reference.
  10.7  Mortgage and Trust Indenture dated as of November 1, 1990, by
        and between New Pond Village Associates and The First National
        Bank of Boston, as Trustee. Exhibit 10.7 to the Company's
        Registration Statement on Form S-1 (Comm. File No. 333-06907) is
        hereby incorporated by reference.
</TABLE>
 
                                       20
<PAGE>
 
<TABLE>
<CAPTION>
 NUMBER DESCRIPTION OF DOCUMENT
 ------ -----------------------
 <C>    <S>                                                                <C>
 10.8   Indenture of Trust and Agreement dated as of December 1, 1985,
        by and among The Redevelopment Agency of the City of San Marcos,
        San Marcos Retirement Village, The First National Bank of
        Boston, as Trustee, and Security Pacific National Bank. Exhibit
        10.8 to the Company's Registration Statement on Form S-1 (Comm.
        File No. 333-06907) is hereby incorporated by reference.
 10.9   Form of Services Agreements relating to Kachina Point, San
        Marcos, McMillen, Valley Manor, The Greens, Heritage at Wildwood
        and Villa Campana. Exhibit 10.9 to the Company's Registration
        Statement on Form S-1 (Comm. File No. 333-06907) is hereby
        incorporated by reference.
 10.10  Form of Sublease Agreement. Exhibit 10.10 to the Company's
        Registration Statement on Form S-1 (Comm. File No. 333-06907) is
        hereby incorporated by reference.
 10.11  Form of Voting Agreement. Exhibit 10.11 to the Company's
        Registration Statement on Form
        S-1 (Comm. File No. 333-06907) is hereby incorporated by
        reference.
 10.12  Form of Redding Lease. Exhibit 10.12 to the Company's
        Registration Statement on Form S-1 (Comm. File No. 333-06907) is
        hereby incorporated by reference.
 10.13  Form of New Pond Village Associates Lease. Exhibit 10.13 to the
        Company's Registration Statement on Form S-1 (Comm. File No.
        333-06907) is hereby incorporated by reference.
 10.14  Form of Term Promissory Note to Vencor. Exhibit 10.14 to the
        Company's Registration Statement on Form S-1 (Comm. File No.
        333-06907) is hereby incorporated by reference.
 10.15  Foxhill Village Management Agreement. Exhibit 10.15 to the
        Company's Registration Statement on Form S-1 (Comm. File No.
        333-06907) is hereby incorporated by reference.
 10.16  Form of Guaranty Fee Agreement. Exhibit 10.16 to the Company's
        Registration Statement on Form S-1 (Comm. File No. 333-06907) is
        hereby incorporated by reference.
 10.17  Security Agreement dated as of August 15, 1996 among Atria
        Communities, Inc. as a Assignor and the other Assignors named
        therein, and PNC Bank, National Association, as Collateral
        Agent. Exhibit 2 to the Company's Current Report on Form 8-K
        dated August 26, 1996 (Comm. File No. 0-21159) is hereby
        incorporated by reference.
 10.18  Pledge Agreement dated as of August 15, 1996 among Atria
        Communities, Inc. as a Pledgor and the other Pledgors named
        therein, and PNC Bank, National Association, as Collateral
        Agent. Exhibit 3 to the Company's Current Report on Form 8-K
        dated August 26, 1996 (Comm. File No. 0-21159) is hereby
        incorporated by reference.
 10.19  Parent Guaranty dated as of August 15, 1996 among (a) Atria
        Communities, Inc., as Borrower, (b) Vencor, Inc., as Parent
        Guarantor, (c) First Healthcare Corporation, Northwest
        Healthcare, Inc., Medisave Pharmacies, Inc., Hillhaven of
        Central Florida, Inc., and Nationwide Care, Inc., as Supporting
        Guarantors, and (d) PNC Bank, National Association, as
        Administrative Agent. Exhibit 4 to the Company's Current Report
        on Form 8-K dated August 26, 1996 (Comm. File No. 0-21159) is
        hereby incorporated by reference.
 10.20  Subsidiary Guaranty dated as of August 15, 1996 between the
        subsidiaries of Atria Communities, Inc. named therein and PNC
        Bank, National Association, as Administrative Agent. Exhibit 5
        to the Company's Current Report on Form 8-K dated August 26,
        1996 (Comm. File No. 0-21159) is hereby incorporated by
        reference.
 10.21  Future Advance Mortgage, Assignment of Leases and Security
        Agreement dated as of August 15, 1996, executed by Atria
        Communities, Inc., in favor of PNC Bank, National Association,
        as Collateral Agent (Heritage at Wildwood). (Similar forms were
        used for other properties. See Annex III to the Credit Facility
        Agreement.) Exhibit 6 to the Company's Current Report on Form 8-
        K dated August 26, 1996 (Comm. File No. 0-21159) is hereby
        incorporated by reference.
</TABLE>
 
                                       21
<PAGE>
 
<TABLE>
<CAPTION>
 NUMBER DESCRIPTION OF DOCUMENT
 ------ -----------------------
 <C>    <S>                                                               <C>
 10.22  Future Advance Deed of Trust, Fixture Filing, and Assignment of
        Leases and Rents and Security Agreement dated as of August 15,
        1996, executed by Atria Communities, Inc. in favor of
        Transnation Title Insurance Company (Valley Manor). (Similar
        forms were used for other properties. See Annex III to the
        Credit Facility Agreement). Exhibit 7 to the Company's Current
        Report on Form 8-K dated August 26, 1996 (Comm. File No. 0-
        21159) is hereby incorporated by reference.
 11     Statement Regarding Computation of Per Share Earnings.
 21     Subsidiaries of the Registrant.
 23     Consent of Ernst & Young LLP.
 27     Financial Data Schedule (included only in filings under the
        Electronic Data Gathering, Analysis, and Retrieval System).
</TABLE>
 
(b) REPORTS ON FORM 8-K.
 
  During the fourth quarter of 1996, the Company filed a Current Report on
Form 8-K dated October 10, 1996 which disclosed certain cautionary statements
for the purpose of establishing a readily available document for reference
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.
 
(c) EXHIBITS.
 
  The response to this portion of Item 14 is submitted as a separate section
of this Report.
 
(d) FINANCIAL STATEMENT SCHEDULES.
 
  Not applicable
 
                                      22
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
                                          ATRIA COMMUNITIES, INC.
 
                                                  /s/ J. Timothy Wesley
Date: March 27, 1997                      By: _________________________________
                                                    J. Timothy Wesley
                                              Chief Financial Officer, Vice
                                                      President of
                                                Development and Secretary
 
  In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----
 
<S>                                  <C>                           <C>
    /s/   W. Bruce Lunsford          Chairman of the Board           March 27, 1997
____________________________________
         W. Bruce Lunsford
 
   /s/  W. Patrick Mulloy, II        Chief Executive Officer,        March 27, 1997
____________________________________  President and Director
       W. Patrick Mulloy, II
 
    /s/   J. Timothy Wesley          Chief Financial Officer,        March 27, 1997
____________________________________  Vice President of
         J. Timothy Wesley            Development and Secretary
                                      (Chief Financial and
                                      Accounting Officer)
 
  /s/   Sandra Harden Austin         Director                        March 27, 1997
____________________________________
        Sandra Harden Austin
 
   /s/ William C. Ballard Jr.        Director                        March 27, 1997
____________________________________
       William C. Ballard Jr.
 
        /s/ Peter J. Grua            Director                        March 27, 1997
____________________________________
           Peter J. Grua
 
       /s/  Thomas T. Ladt           Director                        March 27, 1997
____________________________________
           Thomas T. Ladt
 
       /s/  R. Gene Smith            Director                        March 27, 1997
____________________________________
           R. Gene Smith
</TABLE>
 
                                      23
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Report of Independent Auditors............................................  F-2
Consolidated Financial Statements:
 Consolidated Statement of Income for the years ended December 31, 1996,
  1995 and 1994...........................................................  F-3
 Consolidated Balance Sheet, December 31, 1996 and 1995...................  F-4
 Consolidated Statement of Stockholders' Equity for the years ended
  December 31, 1996, 1995
  and 1994................................................................  F-5
 Consolidated Statement of Cash Flows for the years ended December 31,
  1996, 1995 and 1994.....................................................  F-6
 Notes to Consolidated Financial Statements...............................  F-7
 Quarterly Consolidated Financial Information (Unaudited)................. F-15
</TABLE>
 
                                      F-1
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
To the Board of Directors and Stockholders
Atria Communities, Inc.
 
  We have audited the accompanying consolidated balance sheet of Atria
Communities, Inc. (formerly the assisted and independent living businesses of
Vencor, Inc.--see Note 1) as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 Atria Communities, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
 
                                                                           LOGO
Louisville, Kentucky
February 1, 1997, except
for Note 11 as to which
the date is March 3, 1997
 
                                      F-2
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
                        CONSOLIDATED STATEMENT OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                       1996     1995     1994
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
Revenues............................................  $51,846  $47,976  $39,758
                                                      -------  -------  -------
Salaries, wages and benefits........................   19,861   17,455   14,638
Supplies............................................    5,024    4,860    4,023
Rent................................................      353      383      333
Depreciation and amortization.......................    5,060    5,113    4,541
Non-recurring transactions..........................    1,050      600   (1,675)
Other operating expenses............................   10,594    9,465    8,347
                                                      -------  -------  -------
                                                       41,942   37,876   30,207
                                                      -------  -------  -------
Operating income....................................    9,904   10,100    9,551
Interest expense....................................    4,287    4,322    3,538
Investment income...................................   (1,439)    (147)    (330)
                                                      -------  -------  -------
Income before income taxes and extraordinary loss...    7,056    5,925    6,343
Provision for income taxes..........................    2,787    2,341    2,506
                                                      -------  -------  -------
Income before extraordinary loss....................    4,269    3,584    3,837
Extraordinary loss on extinguishment of debt, net of
 income
 tax benefit of $93 in 1995.........................        -     (146)       -
                                                      -------  -------  -------
    Net income......................................  $ 4,269  $ 3,438  $ 3,837
                                                      =======  =======  =======
Earnings per common and common equivalent share:
 Income before extraordinary loss...................  $  0.35  $  0.36
 Extraordinary loss on extinguishment of debt, net
  of income
  tax benefit.......................................        -    (0.02)
                                                      -------  -------
    Net income......................................  $  0.35  $  0.34
                                                      =======  =======
Shares used in computing earnings per common
 and common equivalent share........................   12,226   10,095
</TABLE>
 
 
                            See accompanying notes.
 
                                      F-3
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
                           CONSOLIDATED BALANCE SHEET
                           DECEMBER 31, 1996 AND 1995
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                               1996      1995
                          ASSETS                             --------  --------
<S>                                                          <C>       <C>
Current assets:
 Cash and cash equivalents.................................  $ 65,238  $  2,819
 Accounts receivable less allowance for loss of $130--1996
  and $89--1995............................................       574       561
 Other.....................................................       985       366
                                                             --------  --------
                                                               66,797     3,746
Property and equipment, at cost:
 Land......................................................    21,368    20,668
 Buildings.................................................   123,707   122,986
 Equipment.................................................    11,228    10,510
 Construction in progress (estimated cost to complete and
  equip after December 31, 1996--$7,000)...................     5,643        73
                                                             --------  --------
                                                              161,946   154,237
 Accumulated depreciation..................................   (27,426)  (23,027)
                                                             --------  --------
                                                              134,520   131,210
Intangible assets less accumulated amortization of $3,599--
 1996 and $3,294--1995.....................................     3,353     2,173
Other......................................................     5,112     3,788
                                                             --------  --------
                                                             $209,782  $140,917
                                                             ========  ========
<CAPTION>
           LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                          <C>       <C>
Current liabilities:
 Accounts payable..........................................  $  2,536  $  1,875
 Salaries, wages and other compensation....................     1,163     1,019
 Other accrued liabilities.................................     2,686       784
 Long-term debt due within one year........................    14,825       844
                                                             --------  --------
                                                               21,210     4,522
Long-term debt.............................................    95,207   104,506
Deferred credits and other liabilities.....................     4,419     3,442
Contingencies
Stockholders' equity:
 Preferred stock, $1.00 par value, authorized 5,000 shares:
  none issued and outstanding..............................         -         -
 Common stock, $0.10 par value; authorized 50,000 shares;
  issued and
  outstanding 15,830 shares................................     1,583         -
 Capital in excess of par value............................    85,658         -
 Retained earnings.........................................     1,705         -
 Investments by and advances from Vencor, Inc..............         -    28,447
                                                             --------  --------
                                                               88,946    28,447
                                                             --------  --------
                                                             $209,782  $140,917
                                                             ========  ========
</TABLE>
 
 
                            See accompanying notes.
 
                                      F-4
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                             INVESTMENTS
                                           CAPITAL              BY AND
                         COMMON  COMMON   IN EXCESS            ADVANCES
                         STOCK    STOCK      OF     RETAINED     FROM
                         SHARES PAR VALUE PAR VALUE EARNINGS VENCOR, INC.  TOTAL
                         ------ --------- --------- -------- ------------ -------
<S>                      <C>    <C>       <C>       <C>      <C>          <C>
Balances, December 31,
 1993...................      -  $    -    $     -   $    -    $ 34,959   $34,959
 Net income.............                                          3,837     3,837
 Net cash payments to
  Vencor, Inc...........                                         (6,811)   (6,811)
 Non-cash transfers to
  Vencor, Inc...........                                           (150)     (150)
                         ------  ------    -------   ------    --------   -------
Balances, December 31,
 1994...................      -       -          -        -      31,835    31,835
 Net income.............                                          3,438     3,438
 Net cash payments to
  Vencor, Inc...........                                         (6,350)   (6,350)
 Non-cash transfers to
  Vencor, Inc...........                                           (476)     (476)
                         ------  ------    -------   ------    --------   -------
Balances, December 31,
 1995...................      -       -          -        -      28,447    28,447
 Net income January 1,
  through
  August 19, 1996.......                                          2,564     2,564
 Net income after August
  19, 1996..............                              1,705                 1,705
 Net cash advances by
  Vencor, Inc...........                                          2,621     2,621
 Non-cash transfers from
  Vencor, Inc...........                                          1,646     1,646
 Equity contribution
  from Vencor, Inc...... 10,000   1,000     34,278              (35,278)        -
 Net proceeds from
  public offering of
  common stock..........  5,750     575     51,234                         51,809
 Award of restricted
  stock.................     80       8        146                            154
                         ------  ------    -------   ------    --------   -------
Balances, December 31,
 1996................... 15,830  $1,583    $85,658   $1,705    $      -   $88,946
                         ======  ======    =======   ======    ========   =======
</TABLE>
 
 
                            See accompanying notes.
 
                                      F-5
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                      1996     1995     1994
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Cash flows from operating activities:
 Net income........................................ $  4,269  $ 3,438  $ 3,837
 Adjustments to reconcile net income to net cash
  provided
  by operating activities:
  Depreciation and amortization....................    5,060    5,113    4,541
  Provision for doubtful accounts..................       42       79        7
  Deferred income taxes............................      860      (63)     169
  Extraordinary loss on extinguishment of debt.....        -      239        -
  Non-recurring transactions.......................      750      600     (425)
  Other............................................       22     (261)    (745)
  Changes in operating assets and liabilities:
   Accounts receivable.............................     (340)    (240)    (212)
   Other assets....................................      164      234       18
   Accounts payable................................    1,354       53      572
   Other accrued liabilities.......................    1,017     (661)    (179)
                                                    --------  -------  -------
    Net cash provided by operating activities......   13,198    8,531    7,583
                                                    --------  -------  -------
Cash flows from investing activities:
 Purchase of property and equipment................   (7,389)  (4,025)  (5,714)
 Sale of assets....................................        -        -      672
 Collection of notes receivable....................        -        -    1,800
 Net change in partnership investments.............       31      716     (814)
 Other.............................................   (1,185)     437       54
                                                    --------  -------  -------
    Net cash used in investing activities..........   (8,543)  (2,872)  (4,002)
                                                    --------  -------  -------
Cash flows from financing activities:
 Issuance of long-term debt........................   23,205    6,806    6,450
 Repayment of long-term debt.......................  (18,205)  (4,659)  (3,348)
 Payment of deferred financing costs...............   (1,816)       -        -
 Public offering of common stock...................   52,097        -        -
 Equity contribution from Vencor, Inc..............    4,350        -        -
 Net payments to Vencor, Inc.......................   (1,729)  (6,350)  (6,811)
 Other.............................................     (138)    (134)     (70)
                                                    --------  -------  -------
    Net cash provided by (used in) financing
     activities....................................   57,764   (4,337)  (3,779)
                                                    --------  -------  -------
Change in cash and cash equivalents................   62,419    1,322     (198)
Cash and cash equivalents at beginning of period...    2,819    1,497    1,695
                                                    --------  -------  -------
Cash and cash equivalents at end of period......... $ 65,238  $ 2,819  $ 1,497
                                                    ========  =======  =======
Supplemental information:
 Interest payments................................. $  3,528  $ 4,397  $ 3,667
 Income tax payments...............................    2,446    2,310    2,336
 Non-cash transaction:
  Exchange of note receivable for additional
   partnership interest............................        -    4,552        -
</TABLE>
 
                            See accompanying notes.
 
                                      F-6
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1--ACCOUNTING POLICIES
 
 BASIS OF PRESENTATION
 
  Atria Communities, Inc. ("Atria" or the "Company") is a national provider of
assisted and independent living communities for the elderly. At December 31,
1996, Atria operated 21 communities located in 12 states with a total of 2,942
units, including 650 assisted living units and 2,292 independent living units.
 
  In May 1996, the Board of Directors of Vencor, Inc. ("Vencor") authorized
management to establish Atria as a wholly owned subsidiary to operate Vencor's
assisted and independent living business. As part of that transaction,
management consummated an initial public offering (the "IPO") of 5,750,000
shares of Atria's common stock (including 750,000 shares in connection with
the exercise of the underwriters' overallotment option) in the third quarter
of 1996. At December 31, 1996, Vencor owned 10,000,000 shares, or 63.2%, of
Atria's outstanding common stock.
 
  The consolidated financial statements include all subsidiaries. Significant
intercompany transactions have been eliminated.
 
  The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include amounts
based upon the estimates and judgments of management. Actual amounts may
differ from these estimates.
 
 REVENUES
 
  Revenues are recognized when services are rendered and consist of daily
resident fees and fees for other ancillary services. Agreements with residents
are generally for a term of one year. Revenues from management contracts are
recognized in the period earned in accordance with the terms of the management
agreement.
 
  Substantially all revenues are derived from private pay sources. A summary
of revenues follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                         1996    1995    1994
                                                        ------- ------- -------
<S>                                                     <C>     <C>     <C>
Owned and leased facilities............................ $51,568 $47,635 $39,340
Managed facilities.....................................     278     341     418
                                                        ------- ------- -------
                                                        $51,846 $47,976 $39,758
                                                        ======= ======= =======
</TABLE>
 
  The terms of resident agreements at one community require the resident to
forfeit a certain percentage of the face amount of a resident mortgage bond
(purchased by the resident at the inception of the residency agreement) to
Atria upon termination of the residency agreement. These amounts are recorded
as deferred revenue at the inception of the residency agreement and recognized
as income on a straight-line basis over the estimated stay of a resident based
upon the community's historical experience. See Note 4.
 
 CASH AND CASH EQUIVALENTS
 
  Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less. Carrying values of cash and cash equivalents
approximate fair value due to the short-term nature of these instruments.
 
 ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
  A summary of the allowance for doubtful accounts follows (dollars in
thousands):
 
<TABLE>
<CAPTION>
                                                               1996  1995  1994
                                                               ----  ----  ----
<S>                                                            <C>   <C>   <C>
Balance at beginning of period................................ $ 89  $46   $47
  Provision for doubtful accounts.............................   42   79     7
  Accounts written off........................................   (1) (36)   (8)
                                                               ----  ---   ---
Balance at end of period...................................... $130  $89   $46
                                                               ====  ===   ===
</TABLE>
 
                                      F-7
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
 
 PROPERTY AND EQUIPMENT
 
  Property and equipment are recorded at cost and include interest capitalized
on significant construction projects during the construction period as well as
other costs directly related to the development and construction of
communities.
 
  Depreciation expense, computed by the straight-line method, was $4.6 million
in 1996, $4.4 million in 1995 and $3.8 million in 1994. Depreciable lives for
buildings range generally from 20 to 45 years. Estimated useful lives of
equipment vary from 5 to 10 years.
 
  During 1996, Atria adopted Financial Accounting Standards Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." The provisions of this statement did not have a material
impact on the consolidated financial statements.
 
 INTANGIBLE ASSETS
 
  Intangible assets consist primarily of debt issuance costs and are amortized
by the straight-line method based upon the lives of the respective loans.
 
 INCOME TAXES
 
  Prior to the IPO, Atria's operations were included in Vencor's federal and
certain state income tax returns on a consolidated basis. Accordingly,
provision for income taxes recorded in the consolidated financial statements
of Vencor have been apportioned to Atria on a divisional basis. However, for
purposes of the accompanying consolidated financial statements, the provision
for income taxes has been recorded as if Atria were filing separate income tax
returns. Subsequent to the IPO, Atria will file separate federal and state
income tax returns.
 
 MINORITY INTEREST IN CONSOLIDATED ENTITIES
 
  The consolidated financial statements include all assets, liabilities,
revenues and expenses of partnerships controlled by Atria. Minority interests
in the earnings and equity of these entities are not significant.
 
 EARNINGS PER COMMON SHARE
 
  Shares used in the computation of earnings per share include 10,000,000
shares of common stock issued to Vencor for its contribution of assets to
Atria and the assumption by Atria of related liabilities, and 95,000 shares of
restricted stock. In addition, for the year ended December 31, 1996, the
computation also gives effect to the 5,750,000 shares issued in connection
with the IPO and the dilution associated with the issuance of common stock
options. Share and per share amounts for periods prior to the IPO are
presented on a pro forma basis.
 
NOTE 2--NON-RECURRING TRANSACTIONS
 
  In June 1996, Atria recorded a non-recurring pretax charge of $1.1 million
in connection with the settlement of certain litigation involving a minority
partner at one of its communities. Results of operations in 1995 include a
charge of $600,000 related to the writedown of undeveloped property to its
estimated net realizable value. Operating results in 1994 include a gain on
the sale of property aggregating $425,000.
 
  Settlements of certain litigation increased income before income taxes by
approximately $1.3 million in 1994.
 
                                      F-8
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3--INCOME TAXES
 
  A summary of provision for income taxes follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                          1996    1995    1994
                                                         ------  ------  ------
<S>                                                      <C>     <C>     <C>
Current
 Federal................................................ $1,634  $2,021  $1,965
 State..................................................    293     383     372
                                                         ------  ------  ------
                                                          1,927   2,404   2,337
Deferred................................................    860     (63)    169
                                                         ------  ------  ------
                                                         $2,787  $2,341  $2,506
                                                         ======  ======  ======
 
  Reconciliation of federal statutory rate to effective income tax rate
follows:
 
<CAPTION>
                                                          1996    1995    1994
                                                         ------  ------  ------
<S>                                                      <C>     <C>     <C>
Federal statutory rate..................................   35.0%   35.0%   35.0%
State income taxes, net of federal income tax benefit...    3.7     4.0     4.1
Other items, net........................................    0.8     0.5     0.4
                                                         ------  ------  ------
 Effective income tax rate..............................   39.5%   39.5%   39.5%
                                                         ======  ======  ======
</TABLE>
 
  A summary of deferred income taxes by source included in the consolidated
balance sheet at December 31 follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                  1996               1995
                                           ------------------ ------------------
                                           ASSETS LIABILITIES ASSETS LIABILITIES
                                           ------ ----------- ------ -----------
<S>                                        <C>    <C>         <C>    <C>
Depreciation.............................. $    -   $3,761    $    -   $2,954
Partnerships..............................  2,040        -     1,908        -
Compensation..............................    214      198       187        -
Other.....................................    361      223       152        -
                                           ------   ------    ------   ------
                                           $2,615   $4,182    $2,247   $2,954
                                           ======   ======    ======   ======
</TABLE>
 
  Deferred income taxes totaling $193,000 and $79,000 at December 31, 1996 and
1995, respectively, are included in other current assets. Non-current deferred
income taxes, included principally in deferred credits and other liabilities,
totaled $1,760,000 and $786,000 at December 31, 1996 and 1995, respectively.
 
NOTE 4--LONG-TERM DEBT
 
  A summary of long-term debt at December 31 follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                1996     1995
                                                              -------- --------
<S>                                                           <C>      <C>
Industrial revenue bonds, 5.0% to 6.1% (rates generally
 floating, average 5.2%) payable in periodic installments
 through 2010................................................ $ 62,115 $ 66,456
Non-interest bearing residential mortgage bonds, payable in
 periodic installments through 2040..........................   33,917   33,344
Collateralized borrowings under Vencor, Inc. bank revolving
 credit agreement (floating rates averaging 6.9%)............        -    5,550
Note payable to Vencor, Inc., at prime plus 1%, due August
 1997........................................................   14,000        -
                                                              -------- --------
  Total debt, average life of 20 years (rates averaging
   4.1%).....................................................  110,032  105,350
Amounts due within one year..................................   14,825      844
                                                              -------- --------
  Long-term debt............................................. $ 95,207 $104,506
                                                              ======== ========
</TABLE>
 
                                      F-9
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED)
NOTE 4--LONG-TERM DEBT (CONTINUED)
 
  Under the terms of a residency agreement at one community, residents are
required to purchase a residential mortgage bond which entitles them to occupy
a residential unit and to receive services and use the community as described
in the agreement. The face amount of each bond is equal to the market value of
the residential unit to be occupied by the resident. The bonds represent non-
interest bearing loans to the Company and are non-transferable. The first
maturity date of each bond is January 1, 2040; however, the Company is
required to redeem a bond within 180 days of the termination of a residency
agreement, at which time the Company is required to repay the residential
mortgage bond to the resident less a fee of up to 20% of the face amount of
the bond. The consolidated statement of cash flows includes issuances of
resident mortgage bonds aggregating $5.5 million, $4.2 million and $6.5
million in 1996, 1995 and 1994, respectively, and redemptions of such bonds
aggregating $4.7 million, $3.5 million and $2.8 million for each of the
respective years.
 
  Maturities of long-term debt in years 1998 through 2001 are $825,000,
$875,000, $875,000 and $875,000, respectively.
 
  The estimated fair value of Atria's long-term debt was $97.0 million and
$91.8 million at December 31, 1996 and 1995, respectively, compared to
carrying amounts aggregating $110.0 million and $105.4 million. The estimate
of fair value is based upon the quoted market prices for the same or similar
issues of long-term debt, or on rates available to Atria for debt of the same
remaining maturities.
 
  On August 26, 1996, Atria entered into a bank credit facility (the "Credit
Facility") aggregating $200 million (including a letter of credit option not
to exceed $70 million) which has a maturity of four years and may be extended
at the option of the banks for one additional year. The Credit Facility will
bear interest, at Atria's option, at either (i) a base rate based on PNC
Bank's prime rate or the daily federal funds rate or (ii) a LIBOR rate, plus
an additional percentage based on certain leverage ratios. The obligations
under the Credit Facility are secured by substantially all of Atria's
property, the capital stock of its present and future principal subsidiaries
and all intercompany indebtedness owed to Atria by its subsidiaries.
 
  The Credit Facility contains financial covenants and other restrictions that
(i) require Atria to meet certain financial tests, (ii) require that there be
no change of control of Atria, (iii) limit, among other things, the ability of
Atria and certain of its subsidiaries to borrow additional funds, dispose of
certain assets and engage in mergers and other business combinations, (iv)
prohibit distributions to Atria's stockholders and (v) require that Vencor own
at least 30% of Atria's common stock. Vencor has guaranteed for four years
certain borrowings by Atria under the Credit Facility in amounts up to $100
million in the first year following the IPO, declining to $75 million, $50
million and $25 million in each respective year thereafter.
 
NOTE 5--CONTINGENCIES
 
  Management continually evaluates contingencies based upon the best available
evidence. In addition, allowances for loss are provided currently for disputed
items that have continuing significance, such as deductions that continue to
be claimed on tax returns.
 
  Management believes that allowances for loss have been provided to the
extent necessary and that its assessment of contingencies is reasonable.
Management believes that resolution of contingencies will not materially
affect Atria's liquidity, financial position or results of operations.
 
                                     F-10
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6--TRANSACTIONS WITH VENCOR
 
  For periods prior to the IPO, certain allocations and estimates have been
made by management in the consolidated financial statements to present the
historical financial position and results of operations of Atria as a separate
entity. Upon consummation of the IPO, Atria became contractually obligated to
pay Vencor for certain centralized management and administrative services
underlying such historical allocations and estimates. The operating results of
Atria include corporate costs and expenses of Vencor aggregating $620,000,
$600,000 and $570,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Management believes that these allocations reasonably reflect
the proportional costs incurred by Vencor on behalf of Atria.
 
  Administrative Services--Vencor provides to Atria for a period of one year
various administrative services in such areas as finance and accounting, human
resources, risk management, legal support, market planning and information
systems support. Atria may extend the Administrative Services Agreement for up
to one additional year, subject to termination by either party upon 60 days
prior written notice.
 
  Shared Services--Atria and subsidiaries of Vencor share certain costs at
seven communities relating to marketing and certain administrative services.
These agreements may be canceled by either party upon 90 days prior written
notice. Atria will pay a maximum of $150,000 per year for such services.
 
  Guarantees--Vencor guarantees for four years certain borrowings by Atria
under the Credit Facility in amounts up to $100 million in the first year
following the IPO, declining to $75 million, $50 million and $25 million in
each respective year thereafter. Atria will pay to Vencor a fee equal to 1
1/2% of any guaranteed amounts. During 1996, Atria did not incur any costs
related to Vencor's guarantee.
 
  Leases--Atria leases certain properties from Vencor including its
headquarters office space. Rent expense approximated $18,000 in 1996.
 
  Borrowings From Vencor--A subsidiary of Atria is indebted to Vencor in the
amount of $14 million, due August 1997, which bears interest (payable
quarterly) at a rate equal to the floating prime rate of National City Bank,
Kentucky plus 1%. The promissory note may be prepaid without penalty at any
time after six months. Interest costs incurred by Atria in connection with
this note aggregated $482,000 for the year ended December 31, 1996.
 
  Income Taxes--A tax sharing agreement provides for risk-sharing arrangements
in connection with various income tax related issues.
 
  Registration Rights--Atria has granted demand and piggyback registration
rights to Vencor with respect to registration under the Securities Act of 1933
of Atria Common Stock owned by Vencor. Four demand registrations are
permitted. Atria will pay the fees and expenses of two demand registrations
and the piggyback registrations, while Vencor will pay all underwriting
discounts and commissions. The registration rights expire five years from the
completion of the IPO and are subject to certain conditions and limitations,
including the right of underwriters of an offering to limit the number of
shares owned by Vencor included in such registration.
 
  Registration Expenses--Atria paid Vencor $150,000 for Vencor's assistance
provided to Atria in connection with the IPO.
 
                                     F-11
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6--TRANSACTIONS WITH VENCOR (CONTINUED)
 
  Liabilities and Indemnifications--Atria assumed all contractual liabilities
relating to the assets transferred by Vencor to Atria.
 
  In connection with the IPO, all amounts previously classified as investments
by and advances from Vencor were contributed to Atria as part of its permanent
capitalization. In addition, Vencor also contributed approximately $4.3
million in cash to Atria prior to the consummation of the IPO.
 
NOTE 7--CAPITAL STOCK
 
 PLAN DESCRIPTIONS
 
  Atria's Restated Certificate of Incorporation authorizes 50,000,000 shares
of common stock (par value $0.10 per share) and 5,000,000 shares of preferred
stock (par value $1.00 per share). No preferred stock was issued in 1996.
 
  The accompanying consolidated financial statements are presented as if Atria
had been operated as a separate entity. Accordingly, stockholders' equity
prior to the IPO comprises both investments by and non-interest bearing
advances from Vencor. In connection with the IPO, such amounts have been
classified as part of Atria's permanent equity capitalization.
 
  Atria has established certain stock compensation plans under which options
to purchase common stock may be granted to officers, key employees and
directors who are not employees of Atria. Options may be granted at not less
than market price on the date of grant. Options are exercisable in whole or in
part one to four years after grant and ending ten years after grant. The plans
also provide that awards of restricted stock may be distributed to officers,
key employees and certain directors. The initial restricted stock issued in
connection with the IPO will vest one-half annually over a two-year period.
 
  Options granted in 1996 (option price of $10.00 per share) aggregated
639,500, of which 549,500 were outstanding at December 31, 1996. The remaining
contractual life of the options outstanding at December 31, 1996 approximated
10 years. Shares of common stock available for future grants were 700,500 at
December 31, 1996.
 
 STATEMENT NO. 123 DATA
 
  Atria has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement No.
123"), requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
Atria's employee stock options is equal to the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
 
  Pro forma information regarding net income and earnings per share is
required by Statement No. 123, which also requires that the information be
determined as if Atria has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996: risk-free interest rate of 6.5%; no dividend yield;
expected term of 9 years and a volatility factor of the expected market price
of Atria's common stock of .50. The fair value of options granted in 1996
approximated $6.69 per share.
 
                                     F-12
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--CAPITAL STOCK (CONTINUED)
 
 STATEMENT NO. 123 DATA (CONTINUED)
 
  The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because Atria's employee stock options have characteristics significantly
different from those of traded options, and because the changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
 
  For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Pro forma
information follows (in thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                                                          1996
                                                                         ------
<S>                                                                      <C>
Pro forma net income.................................................... $3,929
Pro forma earnings per common share.....................................   0.32
</TABLE>
 
  All stock options outstanding as of December 31, 1996 were granted in
connection with the IPO.
 
NOTE 8--EMPLOYEE BENEFIT PLANS
 
  Atria participates in Vencor's defined contribution retirement plans
covering employees who meet certain minimum eligibility requirements. Benefits
are determined as a percentage of a participant's contributions and are
generally vested based upon length of service. Retirement plan expense was
$84,000 for 1996, $77,000 for 1995 and $66,000 for 1994. Amounts equal to
retirement plan expense are funded annually.
 
  Atria participates in a substantial number of Vencor employee benefit plans.
 
NOTE 9--ACCRUED LIABILITIES
 
  A summary of other accrued liabilities at December 31 follows (dollars in
thousands):
 
<TABLE>
<CAPTION>
                                                                     1996  1995
                                                                    ------ ----
<S>                                                                 <C>    <C>
Taxes other than income............................................ $  779 $625
Interest...........................................................    835   70
Due to Vencor......................................................    257    -
Employee benefits..................................................    243   77
Income taxes.......................................................    190    -
Professional fees..................................................    167    9
Other..............................................................    215    3
                                                                    ------ ----
                                                                    $2,686 $784
                                                                    ====== ====
</TABLE>
 
                                     F-13
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED)
 
NOTE 10--FAIR VALUE DATA
 
  A summary of fair value data at December 31 follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                     1996            1995
                                               ---------------- ---------------
                                               CARRYING  FAIR   CARRYING  FAIR
                                                VALUE    VALUE   VALUE   VALUE
                                               -------- ------- -------- ------
<S>                                            <C>      <C>     <C>      <C>
Cash and cash equivalents..................... $ 65,238 $65,238 $  2,819 $2,819
Long-term debt, including amounts due within
 one year.....................................  110,032  96,989  105,350 91,822
</TABLE>
 
NOTE 11--SUBSEQUENT EVENT
 
  On March 3, 1997, the Company entered into a definitive agreement to acquire
American ElderServe Corporation ("American ElderServe"), an Atlanta based
operator of assisted living communities, for a combination of stock and cash
plus debt assumption valued at approximately $30.5 million. American
ElderServe currently operates 12 assisted living communities consisting of 503
units, also has six additional communities under construction scheduled to
open in 1997.
 
 
                                     F-14
<PAGE>
 
                            ATRIA COMMUNITIES, INC.
           QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                            1996
                                               --------------------------------
                                                FIRST  SECOND   THIRD   FOURTH
                                               ------- ------- -------  -------
<S>                                            <C>     <C>     <C>      <C>
Revenues...................................... $12,611 $12,837 $13,038  $13,360
Net income(a).................................   1,166     568   1,212    1,323
Earnings per common and common equivalent
 share(b).....................................    0.11    0.06    0.10     0.08
Market prices per common share(c):
 High.........................................       -       -   13.50    14.50
 Low..........................................       -       -   10.00     9.25
<CAPTION>
                                                            1995
                                               --------------------------------
                                                FIRST  SECOND   THIRD   FOURTH
                                               ------- ------- -------  -------
<S>                                            <C>     <C>     <C>      <C>
Revenues...................................... $11,367 $11,897 $12,178  $12,534
Net income:
 Income before extraordinary loss(d)..........     728     903     612    1,341
 Extraordinary loss on extinguishment of debt.       -       -    (146)       -
  Net income..................................     728     903     466    1,341
Earnings per common and common equivalent
 share(b):
 Income before extraordinary loss.............    0.07    0.09    0.07     0.13
 Extraordinary loss on extinguishment of debt.       -       -   (0.02)       -
  Net income..................................    0.07    0.09    0.05     0.13
</TABLE>
--------
(a) Second quarter results include a charge of $1.1 million ($630,000 net of
    tax) related to the settlement of certain litigation.
(b) Share and per share amounts for periods prior to the IPO are presented on
    a pro forma basis.
(c) Atria Common Stock commenced trading on August 20, 1996. Atria Common
    Stock is traded on NASDAQ (ticker symbol - ATRC).
(d) Third quarter results include a charge of $600,000 ($360,000 net of tax)
    related to the writedown of undeveloped property to net realizable value.
 
                                     F-15