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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004
 or [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition period from      to
 Commission file number 1-13498 Assisted Living Concepts, Inc. (Exact name of registrant as specified in its charter)
 Nevada
    
    93-1148702(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 1349 Empire Central, Suite 900
Dallas, TX 75247(Address of principal executive offices) (214) 424-4000(Registrants telephone number, including area code) 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.  The registrant had 6,431,925 shares of common stock, $.01 par value,
outstanding at May 7, 2004.




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ASSISTED LIVING CONCEPTS, INC. FORM 10-Q
March 31, 2004 INDEX PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets, December 31, 2003 and March 31, 2004
    
    
    3Consolidated Statements of Income, Three Months Ended March 31, 2003 and 2004
    
    
    4Consolidated Statements of Cash Flows, Three Months Ended March 31, 2003 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    17Certification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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PART I - FINANCIAL INFORMATION 
 Item 1. Financial Statements ASSISTED LIVING CONCEPTS, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (In Thousands, Except Share Amounts)
 December 31,
    
    March 31,2003
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,943
    
    
    $
    94Cash restricted for resident security deposits
    
    
    104
    
    
    
    104Accounts receivable, net of allowance for doubtful accounts of $706
at December 31, 2003 and $649 at March 31, 2004
    
    
    3,415
    
    
    
    2,869Escrow deposits
    
    
    3,269
    
    
    
    3,888Prepaid expenses
    
    
    1,187
    
    
    
    3,732Cash restricted for workers compensation claims
    
    
    4,014
    
    
    
    4,358Other current assets
    
    
    1,395
    
    
    
    1,039Total current assets
    
    
    15,327
    
    
    
    16,084Restricted cash
    
    
    1,012
    
    
    
    1,014Property and equipment, net
    
    
    182,972
    
    
    
    181,867Deferred income taxes
    
    
    606
    
    
    
    885Other assets, net
    
    
    4,297
    
    
    
    4,054Total assets
    
    $
    204,214
    
    
    $
    203,904LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,800
    
    
    $
    1,437Accrued real estate taxes
    
    
    3,720
    
    
    
    4,345Accrued interest expense
    
    
    96
    
    
    
    434Accrued payroll expense
    
    
    7,275
    
    
    
    6,473Other accrued expenses
    
    
    6,982
    
    
    
    7,925Income taxes payable
    
    
    1,267
    
    
    
    1,732Resident security deposits
    
    
    1,262
    
    
    
    1,244Other current liabilities
    
    
    989
    
    
    
    2,683Current portion of unfavorable lease adjustment
    
    
    490
    
    
    
    483Current portion of long-term debt and capital lease obligations
    
    
    3,175
    
    
    
    3,317Total current liabilities
    
    
    27,056
    
    
    
    30,073Other liabilities
    
    
    523
    
    
    
    627Unfavorable lease adjustment, net of current portion
    
    
    2,327
    
    
    
    2,211Long-term debt and capital lease obligations, net of current portion
    
    
    144,279
    
    
    
    139,211Total liabilities
    
    
    174,185
    
    
    
    172,122Commitments and contingenciesShareholders equity:Preferred stock, $.01 par value; 3,250,000 shares authorized;
none issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 20,000,000 shares authorized; issued
and outstanding 6,431,925 shares at December 31, 2003 and
at March 31, 2004 (68,241 shares to be issued upon settlement of pending claims)
    
    
    65
    
    
    
    65Additional paid-in capital
    
    
    34,221
    
    
    
    34,421Accumulated deficit
    
    
    (4,257
    )
    
    
    (2,704
    )Total shareholders equity
    
    
    30,029
    
    
    
    31,782Total liabilities and shareholders equity
    
    $
    204,214
    
    
    $
    203,904
 The accompanying notes are an integral part of these consolidated financial statements. 3




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ASSISTED LIVING CONCEPTS, INC. 
 CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited) Three Months EndedMarch 31,2003
    
    2004Revenue
    
    $
    41,144
    
    
    $
    42,556Operating expenses:Residence operating expenses
    
    
    27,723
    
    
    
    28,737Corporate general and administrative
    
    
    4,342
    
    
    
    4,572Building rentals
    
    
    3,105
    
    
    
    3,162Depreciation and amortization
    
    
    1,676
    
    
    
    1,902Total operating expenses
    
    
    36,846
    
    
    
    38,373Operating income
    
    
    4,298
    
    
    
    4,183Other income (expense):Interest expense
    
    
    (3,429
    )
    
    
    (2,388
    )Interest income
    
    
    36
    
    
    
    34Other expense, net
    
    
    (4
    )
    
    
    (4
    )Total other expense, net
    
    
    (3,397
    )
    
    
    (2,358
    )Income from continuing operations before income taxes
    
    
    901
    
    
    
    1,825Income tax expense
    
    
    364
    
    
    
    272Income from continuing operations
    
    
    537
    
    
    
    1,553Discontinued operations:Income from operations (including gain on sale
of assets)
    
    
    830
    
    
    
    Income tax expense
    
    
    336
    
    
    
    Income from discontinued operations
    
    
    494
    
    
    
    Net income
    
    $
    1,031
    
    
    $
    1,553Basic earnings per share:Income from continuing operations
    
    $
    0.08
    
    
    $
    0.24Income from discontinued operations
    
    
    0.08
    
    
    
    Net income
    
    $
    0.16
    
    
    $
    0.24Diluted earnings per share:Income from continuing operations
    
    $
    0.08
    
    
    $
    0.23Income from discontinued operations
    
    
    0.08
    
    
    
    Net income
    
    $
    0.16
    
    
    $
    0.23
 The accompanying notes are an integral part of these consolidated financial statements. 4




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ASSISTED LIVING CONCEPTS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) Three Months Ended March 31,2003
    
    2004Operating Activities:Net income
    
    $
    1,031
    
    
    $
    1,553Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    1,676
    
    
    
    1,902Stock-based compensation expense
    
    
    
    
    
    
    64Amortization of debt issuance costs
    
    
    27
    
    
    
    145Amortization of fair value adjustment to building rentals
    
    
    (155
    )
    
    
    (123
    )Amortization of fair market adjustment to long-term debt
    
    
    97
    
    
    
    3Amortization of discount on long-term debt
    
    
    135
    
    
    
    Straight line adjustment to building rentals
    
    
    111
    
    
    
    16Interest paid-in-kind
    
    
    330
    
    
    
    Provision for doubtful accounts
    
    
    252
    
    
    
    9Gain on sale of assets
    
    
    (899
    )
    
    
    Deferred income taxes
    
    
    
    
    
    
    (142
    )Changes in assets and liabilities:Accounts receivable
    
    
    (850
    )
    
    
    537Deposit escrows
    
    
    345
    
    
    
    (619
    )Prepaid expenses and other current assets
    
    
    (655
    )
    
    
    (2,189
    )Other assets
    
    
    (311
    )
    
    
    98Accounts payable
    
    
    1,006
    
    
    
    (363
    )Accrued expenses
    
    
    (2,174
    )
    
    
    1,104Other liabilities
    
    
    (42
    )
    
    
    2,229Net cash provided by (used in) operating activities
    
    
    (76
    )
    
    
    4,224Investing Activities:Decrease (increase) in restricted cash
    
    
    313
    
    
    
    (346
    )Purchases of property and equipment
    
    
    (427
    )
    
    
    (797
    )Sales of properties
    
    
    2,569
    
    
    
    Net cash provided by (used in) investing activities
    
    
    2,455
    
    
    
    (1,143
    )Financing Activities:Proceeds from long-term debt
    
    
    
    
    
    
    8,000Payments on long-term debt and capital lease obligations
    
    
    (2,808
    )
    
    
    (12,930
    )Net cash used in financing activities
    
    
    (2,808
    )
    
    
    (4,930
    )Net decrease in cash and cash equivalents
    
    
    (429
    )
    
    
    (1,849
    )Cash and cash equivalents, beginning of period
    
    
    7,165
    
    
    
    1,943Cash and cash equivalents, end of period
    
    $
    6,736
    
    
    $
    94Supplemental disclosure of cash flow information:Cash payments for interest
    
    $
    3,847
    
    
    $
    1,903Cash payments for income taxes
    
    $
    25
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. 5




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ASSISTED LIVING CONCEPTS, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 1. The Company Assisted Living Concepts, Inc., (the Company) operates owned and leased
free-standing assisted living residences which provide housing to older persons
who need help with the activities of daily living such as bathing and dressing.
The Company provides personal care and support services and makes available
routine health care services, as permitted by applicable law, designed to meet
the needs of its residents. 2. Basis of Presentation The condensed consolidated financial statements included herein have been
prepared by the Company without audit and in the opinion of management include
all adjustments (all of which are normal and recurring) necessary for a fair
presentation of the results of operations for each of the three months ended
March 31, 2003 and 2004, pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying condensed consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to the
prior period financial statements to conform to the current period
presentation. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations; however the Company believes
that the disclosures in the accompanying financial statements are adequate to
make the information presented not misleading. The accompanying condensed consolidated financial statements should be read in
conjunction with the Companys annual report on Form 10-K for the fiscal year
ended December 31, 2003 filed with the Securities and Exchange Commission. The
results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results for a full year. The results of operations for the three months ended March 31, 2003 and 2004
reflect the continuing operations of 177 residences. Results of operations for
two residences sold in March 2003 are included in discontinued operations in
the accompanying financial statements. (See Note 5). 6




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3. Long-Term Debt As of December 31, 2003 and March 31, 2004, long-term debt consists of the
following (in thousands): December 31, 2003
    
    March 31, 2004Carrying
    
    Principal
    
    Carrying
    
    PrincipalAmount
    
    Amount
    
    Amount
    
    AmountTrust Deed Notes, payable to the State of Oregon
Housing and Community Services Department
(OHCS) (Oregon Notes) due 2028
    
    $
    9,508
    
    
    $
    9,412
    
    
    $
    9,447
    
    
    $
    9,353Variable Rate Multifamily Revenue Bonds, payable
to the Washington State Housing Finance Commission
Department (Washington Bonds) due 2028
    
    
    6,897
    
    
    
    6,970
    
    
    
    6,898
    
    
    
    6,970Variable Rate Demand Housing Revenue Bonds, Series
1997, payable to the Idaho Housing and Finance
Association (Idaho Bonds) due 2017
    
    
    5,996
    
    
    
    6,060
    
    
    
    5,998
    
    
    
    6,060Variable Rate Demand Housing Revenue Bonds, Series
A-1 and A-2 payable to the State of Ohio Housing
Finance Agency (Ohio bonds) due 2018
    
    
    9,989
    
    
    
    10,105
    
    
    
    9,991
    
    
    
    10,105Housing and Urban Development (HUD) Insured
Mortgages due 2036
    
    
    7,280
    
    
    
    7,358
    
    
    
    7,268
    
    
    
    7,345Mortgage loans due 2008
    
    
    27,384
    
    
    
    27,343
    
    
    
    27,238
    
    
    
    27,198Red Capital (Fannie Mae) due 2013
    
    
    38,400
    
    
    
    38,400
    
    
    
    38,293
    
    
    
    38,293G.E. Capital Term Loan due 2008
    
    
    35,000
    
    
    
    35,000
    
    
    
    34,895
    
    
    
    34,895G.E. Capital Credit Facility due 2008
    
    
    7,000
    
    
    
    7,000
    
    
    
    2,500
    
    
    
    2,500Total debt
    
    
    147,454
    
    
    $
    147,648
    
    
    
    142,528
    
    
    $
    142,719Less current portion
    
    
    3,175
    
    
    
    
    
    
    
    3,317Long-term debt
    
    $
    144,279
    
    
    
    
    
    
    $
    139,211
 The Oregon Notes are secured by buildings, land, furniture and fixtures of six
Oregon residences. The notes are payable in monthly installments including
interest at effective rates ranging from 7.4% to 9.0%. The Washington Bonds are secured by a $7.1 million letter of credit and
buildings, land, furniture and fixtures of five Washington residences and had
an interest rate of 1.1% at March 31, 2004. The letter of credit expires in
July 2005 and has an annual commitment fee of 2.0%. The Idaho Bonds are secured by a $6.2 million letter of credit and buildings,
land, furniture and fixtures of four Idaho residences and had an interest rate
of 1.1% at March 31, 2004. The letter of credit expires in July 2005 and has an
annual commitment fee of 2.0%. The Ohio Bonds are secured by a $10.3 million letter of credit and buildings,
land, furniture and fixtures of six Ohio residences and had an interest rate of
1.1% at March 31, 2004. The letter of credit expires in July 2005 and has an
annual commitment fee of 2.0%. The HUD insured mortgages include three separate loan agreements entered into
in 2001. The mortgages are each secured by a separate facility in Texas. These
loans mature between July 1, 2036 and August 1, 2036 and collectively require
monthly principal and interest payments of $47,493. The loans bear interest at
fixed rates ranging from 7.4% and 7.6%. At March 31, 2004, mortgage loans include three fixed rate loans secured by
seven Texas residences, three Oregon residences and three New Jersey
residences. These loans collectively require monthly principal and interest
payments of $230,000, with balloon payments of $11.8 million, $5.3 million and
$7.2 million due at maturity in May, August and September 2008, respectively.
These loans bear interest at fixed rates ranging from 7.6% to 8.7%. As of the Effective Date, the Successor Company revalued its long-term debt in
conjunction with the implementation of fresh-start reporting. At December 31,
2001, an adjustment of $3.1 million was recorded to reduce long-term debt to
its fair market value. Amortization of this adjustment is computed using the
straight-line method over the life of the corresponding debt. 7




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In December 2003, the Company refinanced Senior and Junior Secured Notes and a
secured loan provided by GE Capital (collectively Refinanced Debt), which had
a total principal amount of approximately $90.5 million at the refinancing
date. The Senior Notes were due to mature in January 2009 and accrued interest
at 10%. The Junior Notes were due to mature in January 2012, bearing interest
payable in additional Junior Notes at 8% per annum through 2004 and bearing
interest at 12% payable in cash beginning in 2005. The GE Capital loan had a
maturity of January 2005, and accrued interest at LIBOR plus 4.5% with a
minimum interest rate of 8%. Under the terms of the Junior and Senior
Indentures, the notes were legally defeased effective December 29, 2003. The Refinanced Debt was retired using proceeds from a new $38.4 million loan
from Red Mortgage Capital (FNMA Loan), as lender for Fannie Mae, a new $35
million term loan and a $15 million revolving loan, both from GE Capital (GE
Term Loan and GE Credit Facility, respectively). The FNMA Loan has a fixed interest rate of 6.24%, matures in 10 years, has a
25-year principal amortization and is secured by 24 residences, which serve as
collateral. Both the GE Term Loan and the GE Credit Facility mature in 5 years,
accrue interest at LIBOR plus 4.0%, which is calculated based on a 360 day year
and charged for the actual number of days elapsed, with an interest rate floor
of 5.75%, and are secured by a collective pool of 30 residences, which serve as
collateral. The GE Term Loan and the GE Credit Facility had an interest rate of
5.75% at March 31, 2004. The GE Term Loan requires monthly interest payments
and principal reductions based on a 25-year principal amortization schedule,
with a balloon payment at maturity. The GE Credit Facility has an initial
revolving borrowing period of 2 years, which may be extended annually
thereafter for three years upon mutual consent by GE Capital and the Company.
During the initial revolving borrowing period, the GE Credit Facility requires
monthly interest payments, no principal reductions, and accrues interest on the
unused loan availability at a rate of 0.75% per year, which is paid quarterly.
If the initial revolving borrowing period is not extended, then the GE Credit
Facility converts from a revolving loan to a term loan with the same terms as
the GE Term Loan. The GE Term Loan and the GE Credit Facility contain
financial covenants that require a certain level of financial performance for
the residences which serve as collateral for the loan and require the Company
to remain current on its other debt service obligations. Failure to comply
with these covenants could restrict loan amounts available to the Company under
the loan agreement and could constitute an event of default, which would allow
GE Capital to declare any amounts outstanding under the loan documents to be
due and payable. The loans from Red Mortgage Capital and GE Capital were
entered into by subsidiaries of the Company and are non-recourse to the
Company, subject to a limited guaranty by the Company. As of March 31, 2004, the following annual principal payments are required (in
thousands): April 1, 2004 through December 31, 2004
    
    $
    2,7002005
    
    
    3,4982006
    
    
    3,7672007
    
    
    4,0092008
    
    
    28,092Thereafter
    
    
    100,653Total
    
    $
    142,719
 The Company has a series of Reimbursement Agreements with U.S. Bank for Letters
of Credit that support certain of our Revenue Bonds Payable. The total amount
of these Letters of Credit was approximately $23.6 million as of March 31,
2004. The Companys agreements with U.S. Bank contain certain financial
covenants. Failure to comply with these covenants could constitute an event of
default, which would allow U.S. Bank to declare any amounts outstanding under
the loan documents to be due and payable. The agreements also require the
Company to deposit $500,000 in cash collateral with U.S. Bank in the event
certain regulatory actions are commenced with respect to the properties
securing the Companys obligations to U.S. Bank. U.S. Bank is required to
release such deposits upon satisfactory resolution of the regulatory action. Approximately $23.1 million of the Companys indebtedness was secured by
letters of credit held by U.S. Bank as of March 31, 2004, which in some cases
have termination dates prior to the maturity of the underlying debt. As such
letters of credit expire, in July 2005, the Company will need to extend the
current letters of credit, obtain replacement letters of credit, post cash
collateral or refinance the underlying debt. There can be no assurance that the
Company will be able to extend the current letters of credit or procure
replacement letters of credit from the same or other lending institutions on
terms that are acceptable to the Company or at all. In the event that the
Company is unable to obtain a replacement letter of credit or provide alternate
collateral prior to the expiration of any of these letters of credit, the
Company would be in default on the underlying debt. Such a default would allow
U.S. Bank to declare any amounts outstanding under the loan documents to be
immediately due and payable. 8




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In addition to the debt agreements with OHCS related to the six owned
residences in Oregon, the Company has entered into Lease Approval Agreements
with OHCS and the lessor of the Oregon Leases, which obligates the Company to
comply with the terms and conditions of the underlying trust deed relating to
the leased buildings. Under the terms of the OHCS debt agreements, the Company
is required to maintain a capital replacement escrow account to cover expected
capital expenditure requirements for the Oregon Leases and the six OHCS loans.
As a further condition of the OHCS debt agreements, the Company is required to
comply with the terms of certain regulatory agreements which provide, among
other things, that in order to preserve the federal income tax exempt status of
the bonds, the Company is required to lease at least 20% of the units of the
projects to low or moderate income persons as defined in Section 142(d) of the
Internal Revenue Code. There are additional requirements as to the age and
physical condition of the residents with which the Company must also comply.
Non-compliance with these restrictions may result in an event of default and
cause acceleration of the scheduled repayment. 4. Income Taxes The Company anticipates taxable income for financial reporting purposes for the
year ending December 31, 2004, and accordingly, has provided for federal and
state income taxes on income for the three months ended March 31, 2004. The
Company has recorded such income tax expense at the rate of 14.9% for the three
months ended March 31, 2004. The provision for income taxes differs from the applicable U.S. statutory
federal rate as a result of the following items: Statutory federal income tax rate
    
    
    34.0
    %State income taxes, net of federal benefit
    
    
    8.1
    %Non-deductible expenses
    
    
    0.6
    %Reduction of valuation allowance
    
    
    (35.3
    )%Utilization of Predecessor Company NOLs
recorded as additional paid in capital
    
    
    7.5
    %Effective tax rate
    
    
    14.9
    %
 At December 31, 2003, the Company had approximately $12.7 million of net
operating loss (NOL) carry-forwards, which will expire between 2009 and 2022.
The NOL carry-forwards are subject to certain provisions of the Internal
Revenue Code which restricts the utilization of the losses. In addition, any
net unrealized built-in losses resulting from the excess of tax basis over the
carrying value of the Companys assets (primarily property and equipment) as of
the Effective Date, which are recognized within five years, are also subject to
these provisions. Section 382 of the Internal Revenue Code imposes limitations
on the utilization of the NOL carry-forwards and built-in losses after certain
changes of ownership of a loss company. The Company is deemed to be a loss
company for these purposes. Under these provisions, the Companys ability to
utilize these NOL carry-forwards and built-in losses in the future will
generally be subject to an annual limitation of approximately $1.6 million (the
Annual Limitation). There can be no assurance that the Company will be able
to utilize NOL carry-forwards or built-in losses and therefore, the Company
established a 100 percent valuation allowance to offset the remaining deferred
tax asset. Pursuant to SOP 90-7, the income tax benefit, if any, of the realization of NOL
carry-forwards and other deductible temporary differences existing as of the
Effective Date is recorded as an adjustment to additional paid-in capital. For the year ended December 31, 2003, the Annual Limitation was utilized on all
available pre-change NOL carry-forwards, except for approximately $36,000. At
December 31, 2003, the Company had recorded a $42.8 million valuation allowance
against a net deferred tax asset of $43.4 million. For the full fiscal year
ending December 31, 2004, the Company anticipates utilizing the 2004 Annual
Limitation as well as the unused 2003 Annual Limitation. 5. Discontinued Operations During March 2003, the Company sold one residence in Ohio and one residence in
Indiana. The total sales price for these residences was $2.6 million, and the
Company recognized a gain from these sales of $899,000. In accordance with
SFAS No. 144, the results of operations and the gain and losses from sales have
been included in Income from discontinued operations in the accompanying
financial statements for the three months ended March 31, 2003. 6. Stock-based Compensation Effective January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and
recognizes compensation expense according to the prospective transition method
under SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure. Under this method the Company expenses the fair value 9




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of all new stock options granted after January 1, 2003. Previously, the Company
accounted for stock-based compensation plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25) and related interpretations. No stock-based employee
compensation expense for stock options was reflected in Net Income previous to
April 1, 2003, as all stock options granted under those plans had an exercise
price equal to the fair market value of the underlying common stock on the date
of grant. The following table illustrates the effect on net income and earnings
per share had the Company applied the fair value accounting method to all of
the Companys stock option grants. Three Months EndedMarch 31,2003
    
    2004Net income, as reported
    
    $
    1,031
    
    
    $
    1,553Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects
    
    
    
    
    
    
    43Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards granted, net of related tax effects
    
    
    (20
    )
    
    
    (57
    )Pro forma net income
    
    $
    1,011
    
    
    $
    1,539Net income per share:Basic  as reported
    
    $
    0.16
    
    
    $
    0.24Basic  pro forma
    
    $
    0.16
    
    
    $
    0.24Diluted  as reported
    
    $
    0.16
    
    
    $
    0.23Diluted  pro forma
    
    $
    0.16
    
    
    $
    0.23
 7. Income Per Share The weighted average common shares used for basic net income per common share
were 6,500,166 for the three months ended March 31, 2003 and 2004. The effect
of dilutive stock options using the treasury stock method added 8,976 shares
for the three months ended March 31, 2003 and 335,133 shares for the three
months ended March 31, 2004. For the three months ended March
31, 2003 and 2004, 106,583 and zero stock options, respectively, were
excluded from the computation of diluted earnings per share as their
inclusion would be anti-dilutive. 8. Liquidity The Company had working capital deficits of $11,729,000 and $13,989,000 at
December 31, 2003 and March 31, 2004, respectively. The Company has certain contingencies and reserves, including litigation
reserves, recorded as current liabilities at March 31, 2004 that management
believes it will not be required to liquidate within the next twelve months.
However, in the event that all current liabilities become due within twelve
months, the Company may be required to obtain debt financing and/or sell
securities on unfavorable terms. There can be no assurance that such action may
not be necessary to ensure appropriate liquidity for the operations of the
Company. 
 Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations This report on Form 10-Q (or otherwise made by the Company or on the Companys
behalf from time to time in other reports, filings with the Securities and
Exchange Commission, news releases, conferences, World Wide Web posting or
otherwise), may be deemed to constitute forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements include statements about the Companys
estimates, expectations, beliefs, intentions or strategies for the future, and
the assumptions underlying these forward-looking statements. The Company uses
the words will, believes, anticipates, estimates, intends, expects,
should, could, and words of similar import, to identify these
forward-looking statements. These forward-looking statements may be affected by
risks and uncertainties, including without limitation (i) our ability to
control costs and improve operating margins, (ii) our ability to increase
occupancy, (iii) our ability to increase our revenue at a pace which exceeds
expense inflation, (iv) our ability to operate our residences in compliance
with evolving regulatory requirements, (v) the degree to which our future
operating results and financial condition may be affected by a reduction in
Medicaid reimbursement rates, (vi) our ability to extend or renegotiate our
current debt agreements, and (vii) the risk factors discussed in our Form 10-K
for the period ending December 31, 2003. In light of such risks and
uncertainties, our actual results could differ materially from such
forward-looking statements. Caution should be taken not to place undue reliance
on the Companys forward-looking statements which 10




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represent the Companys views only as of the date this report is filed. Except
as may be required by law, we do not undertake any obligation to publicly
release any revisions to any forward-looking statements contained herein to
reflect events and circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events. References in this section to ALC, the Company, us or we refer to
Assisted Living Concepts, Inc. and its wholly owned subsidiaries. General We operate owned and leased free-standing assisted living residences. These
residences are primarily located in small, middle-market, rural and suburban
communities with a population typically ranging from 10,000 to 40,000. As of
March 31, 2004, we had residences in 14 states. We provide personal care and support services, and make available routine
nursing services (as permitted by applicable law) designed to meet the personal
and health care needs of our residents. We believe that this combination of
residential, personal care, support and health care services provides a
cost-efficient alternative to, and affords an independent lifestyle for,
individuals who do not require the broader array of medical services that
nursing facilities are required by law to provide. As of March 31, 2004, we operated 177 assisted living residences (6,838 units),
of which we owned 122 residences (4,734 units) and leased 55 residences (2,104
units). We derive our revenues primarily from resident fees for room, board and care.
Resident fees typically are paid monthly by residents, their families, state
Medicaid agencies or other third parties. Resident fees include revenue derived
from a multi-tiered rate structure, which varies based on the level of care
provided. Resident fees are recognized as revenues when services are provided.
Our expenses include:  
    
    residence operating expenses, such as staff payroll, food, property
taxes, utilities, insurance and other direct residence operating
expenses;
    
    general and administrative expenses consisting of regional management
and corporate support functions such as legal, accounting and other
administrative expenses;
    
    building rentals;
    
    depreciation and amortization; and
    
    interest expense related to debt. We anticipate that the majority of our revenues will continue to come from
private pay sources. However, we believe that by having located some of our
residences in states with favorable regulatory and reimbursement climates, we
should have a stable source of residents eligible for Medicaid reimbursement to
the extent that private pay residents are not available and, in addition,
provide our private pay residents with alternative sources of income when their
private funds are depleted and they become Medicaid eligible. Although we manage the mix of private paying residents and Medicaid paying
residents residing in our facilities, any significant increase in our Medicaid
population could have an adverse effect on our financial position, results of
operations and cash flows, particularly if states operating these programs
continue to limit, or more aggressively seek limits on, reimbursement rates. Sales of Residences During March 2003, the Company sold one residence in Ohio and one residence in
Indiana. The total sales price for these residences was $2.6 million, and the
Company recognized a gain from these sales of $899,000. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate these 11




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estimates, including those related to bad debts, income taxes, professional and
general liability reserves, the carrying value of long-lived assets, financing
operations, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. See Critical Accounting
Policies and Estimates under Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operationsin the Companys annual report
on Form 10-K for the fiscal year ended December 31, 2003. Results of Operations The following tables set forth, for the periods presented, operating expenses
as a percentage of revenue, the number of total residences and units operated,
average occupancy and rental rates and the sources of our revenue. The portion
of revenues received from state Medicaid agencies are labeled as Medicaid
state paid portion while the portion of our revenues that a Medicaid-eligible
resident must pay out of his or her own resources is labeled Medicaid resident
paid portion. Three Months EndedMarch 31,2003
    
    2004Revenue
    
    
    100.0
    
    
    
    100.0Operating expenses:Residence operating expenses
    
    
    67.4
    
    
    
    67.5Corporate general and administrative
    
    
    10.6
    
    
    
    10.8Building rentals
    
    
    7.5
    
    
    
    7.4Depreciation and amortization
    
    
    4.0
    
    
    
    4.5Total operating expenses
    
    
    89.5
    
    
    
    90.2Operating income
    
    
    10.5
    
    
    
    9.8Other income (expense):Interest expense
    
    
    (8.4
    )
    
    
    (5.6
    )Interest income
    
    
    0.1
    
    
    
    0.1Other income, net
    
    
    (0.0
    )
    
    
    (0.0
    )Total other expense, net
    
    
    (8.3
    )
    
    
    (5.5
    )Income from continuing operations before income taxes
    
    
    2.2
    
    
    
    4.3Income tax expense
    
    
    0.9
    
    
    
    0.7Income from continuing operations
    
    
    1.3
    
    
    
    3.6Discontinued operations:Income from operations (including gain on sale
of assets)
    
    
    2.0
    
    
    
    Income tax expense
    
    
    0.8
    
    
    
    Income from discontinued operations
    
    
    1.2
    
    
    
    Net income
    
    
    2.5
    
    
    
    3.6
 12




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##### Table of Contents



Three Months EndedMarch 31,2003
    
    2004Other Data Relating to Continuing Operations:Residences operated (end of period)
    
    
    177
    
    
    
    177Units operated (end of period)
    
    
    6,844
    
    
    
    6,838Average occupancy rate (based on occupied units)
    
    
    88.3
    %
    
    
    88.9
    %Average monthly rental rate
    
    $
    2,235
    
    
    $
    2,306Sources of revenue:Medicaid state paid portion
    
    
    12.9
    %
    
    
    14.2
    %Medicaid resident paid portion
    
    
    8.4
    %
    
    
    9.4
    %Private resident paid portion
    
    
    78.7
    %
    
    
    76.4
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Three months ended March 31, 2004 compared to three months ended March 31, 2003: The Company recorded net income of $1.6 million on revenues of $42.6 million
for the three months ended March 31, 2004 (the March 2004 Quarter) compared
to net income of $1.0 million on revenues of $41.1 million for the three months
ended March 31, 2003 (the March 2003 Quarter). Revenues increased $1.4 million for the March 2004 Quarter compared to the
March 2003 Quarter primarily due to an increase in average occupancy percentage
of approximately 0.6% and an increase in average rental rate received from
residents of approximately $71 per month. In March 2004 the Company instituted
a private resident rent increase in all its residences. Residence operating expenses increased $1.0 million for the March 2004 Quarter
compared to the March 2003 Quarter and increased slightly as a percentage of
revenue from 67.4% to 67.5%. Of the increase, $1.2 million is attributable to
an increase in payroll expenses, which increased slightly as a percentage of
revenue. The increase in payroll is primarily due to an increase in benefits
and workers compensation expense, and increased salaries and wages, including
expenses related to employee incentives. The increases in payroll and other
less significant increases were offset primarily by a decrease of $204,000 in
administrative expenses and a decrease of $247,000 in bad debt expense. Corporate, general and administrative expenses increased $230,000 for the March
2004 Quarter compared to the March 2003 Quarter and increased slightly as a
percentage of revenue. This increase is primarily related to increases in
payroll of $428,000 and legal expenses of $140,000 that were partially offset
by a decrease in building rent expense of $232,000 and other less significant
decreases. The decrease in building rent expense is primarily due to the
absence in the March 2004 Quarter of expenses incurred in the March 2003
Quarter related to operating two corporate headquarters and other costs
associated with the preparation to close the corporate office in Portland,
Oregon. Building rentals increased $57,000, or 1.8%, for the March 2004 Quarter
compared to the March 2003 Quarter and decreased as a percentage of revenue
from 7.5% to 7.4%. Depreciation and amortization expense increased by $226,000 for the March 2004
Quarter compared to the March 2003 Quarter due to fixed asset purchases in 2003
and 2004. Interest expense decreased $1.0 million for the March 2004 Quarter compared to
the March 2003 Quarter due to the overall reduction of indebtedness and lower
interest rates. Liquidity and Capital Resources At March 31, 2004, we had a working capital deficit of $14.0 million and
unrestricted cash and cash equivalents of $94,000. Cash decreased from
December 31, 2003 to March 31, 2004 primarily due to $4.5 million of payments
towards the GE Credit Facility, thereby increasing our availability under the
GE Credit Facility at March 31, 2004 to $12.5 million. Net cash provided by operating activities was $4.2 million during the three
months ended March 31, 2004. The primary sources were net income of $1.6
million plus $1.9 million for depreciation and amortization. 13




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##### Table of Contents



Net cash used in investing activities was $1.1 million during the three months
ended March 31, 2004 and primarily related to the purchases of property and
equipment. Net cash used in financing activities was $4.9 million during the three months
ended March 31, 2004, all of which related to borrowings of and payments on
long-term debt. Of this $4.9 million, $4.5 million related to net payments
towards the GE Credit Facility, under which we have $12.5 million available at
March 31, 2004. In December 2003, the Company refinanced the Senior and Junior Secured Notes
and a secured loan provided by GE Capital (collectively Refinanced Debt),
which had a total principal amount of approximately $90.5 million at the
refinancing date. The Senior Notes were due to mature in January 2009 and
accrued interest at 10%. The Junior Notes were due to mature in January 2012,
bearing interest payable in additional Junior Notes at 8% per annum through
2004 and bearing interest at 12% payable in cash beginning in 2005. The GE
Capital loan had a maturity of January 2005, and accrued interest at LIBOR plus
4.5% with a minimum interest rate of 8%. Under the terms of the Junior and
Senior Indentures, the Indentures and notes were legally defeased effective
December 29, 2003 and the notes were redeemed in their entirety. The Refinanced Debt was retired using proceeds from a new $38.4 million loan
from Red Mortgage Capital (FNMA Loan), as lender for Fannie Mae, a new $35
million term loan and a $15 million revolving loan, both from GE Capital (GE
Term Loan and GE Credit Facility, respectively). The FNMA Loan has a fixed interest rate of 6.24%, matures in 10 years, has a
25-year principal amortization and is secured by 24 residences, which serve as
collateral. Both the GE Term Loan and the GE Credit Facility mature in 5 years,
accrue interest at LIBOR plus 4.0%, which is calculated based on a 360 day year
and charged for the actual number of days elapsed, with an interest rate floor
of 5.75%, and are secured by a collective pool of 30 residences, which serve as
collateral. The GE Term Loan and the GE Credit Facility had an interest rate of
5.75% at March 31, 2004. The GE Term Loan requires monthly interest payments
and principal reductions based on a 25-year principal amortization schedule,
with a balloon payment at maturity. The GE Credit Facility has an initial
revolving borrowing period of 2 years, which may be extended annually
thereafter for three years upon mutual consent by GE Capital and the Company.
During the initial revolving borrowing period, the GE Credit Facility requires
monthly interest payments and no principal reductions. If the initial
revolving borrowing period is not extended, then the GE Credit Facility
converts from a revolving loan to a term loan with the same terms as the GE
Term Loan. The GE Term Loan and the GE Credit Facility contain financial covenants that
require a certain level of financial performance for the residences which serve
as collateral for the loan and require the Company to remain current on its
other debt service obligations. Failure to comply with these covenants could
restrict loan amounts available to the Company under the loan agreement and
could constitute an event of default, which would allow GE Capital to declare
any amounts outstanding under the loan documents to be due and payable. Any
such default could have a material adverse effect on the Company. The loans
from Red Mortgage Capital and GE Capital were entered into by subsidiaries of
the Company and are non-recourse to the Company, subject to a limited guaranty
by the Company. The Company has a series of Reimbursement Agreements with U.S. Bank for Letters
of Credit that support certain of our Revenue Bonds Payable. The total amount
of these Letters of Credit was approximately $23.6 million as of March 31,
2004. Our agreements with U.S. Bank contain certain financial covenants.
Failure to comply with these covenants could constitute an event of default,
which would allow U.S. Bank to declare any amounts outstanding under the loan
documents to be due and payable. Any such default could have a material
adverse effect on the Company. The agreements also require us to deposit
$500,000 in cash collateral with U.S. Bank in the event certain regulatory
actions are commenced with respect to the properties securing our obligations
to U.S. Bank. U.S. Bank is required to release such deposits upon satisfactory
resolution of the regulatory action. Approximately $23.1 million of our indebtedness was secured by letters of
credit held by U.S. Bank as of March 31, 2004, which in some cases have
termination dates prior to the maturity of the underlying debt. As such letters
of credit expire, in July 2005, we will need to extend the current letters of
credit, obtain replacement letters of credit, post cash collateral or refinance
the underlying debt. There can be no assurance that we will be able to extend
the current letters of credit or procure replacement letters of credit from the
same or other lending institutions on terms that are acceptable to us or at
all. In the event that we are unable to obtain a replacement letter of credit
or provide alternate collateral prior to the expiration of any of these letters
of credit, we would be in default on the underlying debt. Certain of our leases, loan agreements, and debt instruments contain covenants
and cross-default provisions such that a default on one of those agreements
could cause us to be in default on one or more other agreements, which would
have a material adverse effect on the Company. 14




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##### Table of Contents



The Company leases 37 of its facilities, representing 1,426 units, from LTC
Properties, Inc. (LTC). In accordance with the Companys plan of
reorganization, effective January 1, 2002, the Company entered into a Master
Lease Agreement with LTC under which 16 leases were consolidated. This Master
Lease Agreement provides for aggregate rent reductions of $875,000 per year and
restructured the provision related to minimum rent increases for the 16
properties for the remaining initial term. The Master Lease Agreement and other
LTC lease agreements also provide LTC with the option to exercise certain
remedies, including the termination of the Master Lease Agreement and the other
LTC leases, upon the occurrence of an Event of Default. A change of control of
the Company is deemed to be an Event of Default if certain conditions are not
met. A change of control is deemed to occur if, among other things, (i) any
person, directly or indirectly, is or becomes the beneficial owner of thirty
percent (30%) or more of the combined voting power of the Companys outstanding
voting securities, (ii) the stockholders approve under certain conditions a
merger or consolidation of the Company with another corporation or entity, or
(iii) the stockholders approve a plan of liquidation or sale of all or
substantially all of the assets of the Company. However, if upon a change of
control, the surviving entity has a net worth of $75 million or more, the
change of control would not constitute an Event of Default. In addition, there
are cross default provisions in the LTC leases. At the same time that the
Company entered into the Master Lease Agreement, it also amended 16 other
leases with LTC under which the renewal rights of certain of those leases are
tied. The lease agreements between the Company and LTC expire according to the
following schedule: Number of LTC Properties
    
    Year of Lease Expiration6
    
    
    200718
    
    
    20087
    
    
    20091
    
    
    20105
    
    
    2015Total
    
    37
 Sixteen of the 37 LTC leases expiring between 2007 and 2010 have been further
consolidated into two groups of eight leases each for purposes of applying
certain provisions of the underlying leases (collectively, the Pooled Leases).
Specifically the Pooled Leases provide for the right to collectively extend the
individual leases of each pool for two periods of five years each, provided no
uncured events of default exist and the right to extend is exercised upon the
earliest deadline of renewal for the individual lease in the pool. Under the
terms of the Pooled Leases, the Company must elect to exercise its option to
extend in 2007, or all of the leases will expire on their scheduled expiration
date. Below is summarized financial information for the 37 LTC properties: Three months ended(in thousands)
    
    March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    March 31,(unaudited)
    
    2003
    
    2003
    
    2003
    
    2003
    
    2004Revenue
    
    $
    8,448
    
    
    $
    8,776
    
    
    $
    8,855
    
    
    $
    8,886
    
    
    $
    9,020Residence operating expenses
    
    
    5,469
    
    
    
    5,442
    
    
    
    5,552
    
    
    
    5,620
    
    
    
    5,719Building rentals
    
    
    2,149
    
    
    
    2,149
    
    
    
    2,236
    
    
    
    2,157
    
    
    
    2,187Depreciation & amortization
    
    
    15
    
    
    
    17
    
    
    
    20
    
    
    
    34
    
    
    
    50Total operating expenses
    
    
    7,633
    
    
    
    7,608
    
    
    
    7,808
    
    
    
    7,811
    
    
    
    7,956Operating income(1)
    
    $
    815
    
    
    $
    1,168
    
    
    $
    1,047
    
    
    $
    1,075
    
    
    $
    1,064
  (1)
    
    Excludes certain corporate and other general and administrative
expenses that are not allocated at the property level, and is therefore not
consistent with the presentation of operating income on the Consolidated
Statements of Income. The occurrence of an Event of Default under the LTC leases, including a change
of control of the Company that resulted in the termination of the LTC leases,
would significantly impair the Companys cash flow from operations and could
have a material adverse effect on the Company. 15




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##### Table of Contents



Andre Dimitriadis, a member of the Companys Board of Directors, is the
President, Chief Executive Officer and Chairman of the Board of LTC Properties,
Inc. (LTC). Mr. Dimitriadis, acting solely as a director of the Company and
not in his capacity as an officer or director of LTC, has orally raised certain
issues regarding compliance with certain of the LTC Leases, which include at
this time, the following: 1) whether there are inconsistencies in the number of
units that constitute the leased property in the Athens, Texas, Greenville,
Texas and Tiffen, Ohio leases, 2) whether the LTC leases require insurance
based on the limits stated in the lease on a per facility basis, and 3) whether
the 4 LTC leases with Carriage House require Carriage House to deliver on an
annual basis audited consolidated financial statements of Carriage House. Mr.
Dimitriadis similarly raised the issue as to whether the Company is required to
obtain licenses for the 2 facilities located in Elkhart, Indiana and Madison,
Indiana as assisted living facilities. Management believes that the Company has meritorious defenses available to it
and/or could exercise its cure rights under the leases to resolve these matters
in the event that LTC were to deliver a notice of default. LTC has not
delivered any notice of default to the Company. However, the Company is
continuing to review and assess these matters internally and no assurance can
be given as to whether the eventual resolution of these issues will be
favorable to the Company. The Company is in the process of obtaining licenses
for the 2 Indiana properties as assisted living facilities which is expected to
be completed by December 31, 2004. The Company provides LTC on an annual basis
with annual consolidated audited financial statements of the Company, but not
Carriage House, which was acquired in 1997. Mr. Dimitriadis has sent a letter
to the Company, a copy of which was filed as Exhibit 99 to our Form 10-K for
the period ending December 31, 2003, further discussing these matters and the
circumstances that led him to raise these issues. Failure to favorably resolve these issues in a manner that avoids an occurrence
of an Event of Default under one or more of the LTC leases would have a
material adverse effect on the Company. This would include, but not be limited
to, creating Events of Default on loan covenants regarding a significant
portion of outstanding indebtedness which, if not cured, would make such
indebtedness become immediately payable. Our ability to make payments on and to refinance any of our indebtedness, to
satisfy our lease obligations and to fund planned capital expenditures will
depend on our ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. In addition, our
ability to draw additional amounts under our credit facility with GE Capital
will depend on us maintaining certain levels of financial performance at the
residences that serve as collateral for the credit facility. Based upon our current level of operations, we believe that our current cash on
hand, along with our available credit and expected cash flow from operations,
are sufficient to meet our liquidity needs for at least the next twelve months. There can be no assurance, however, that our business will generate sufficient
cash flow from operations to enable us to pay our indebtedness, to satisfy our
lease obligations and to fund our other liquidity needs. As a result, we may
need to refinance all or a portion of our indebtedness, on or before maturity.
There can be no assurance that we will be able to refinance any of our
indebtedness, on commercially reasonable terms or at all. 
 Item 3.Quantitative and Qualitative Disclosure About Market Risk Market risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates and
equity prices. Changes in these factors could cause fluctuations in our results
of operations and cash flows. For fixed rate debt, changes in interest rates generally affect the fair market
value of the debt instrument, but not our results of operations or cash flows.
We do not have an obligation to prepay any of our fixed rate debt prior to
maturity, and therefore, interest rate risk and changes in the fair market
value of our fixed rate debt will not have an impact on our results of
operations or cash flows until we decide, or are required, to refinance such
debt. For variable rate debt, changes in interest rates generally do not impact the
fair market value of the debt instrument, but do affect our future earnings and
cash flows. We had variable rate debt of $60.5 million outstanding at March 31,
2004 with a weighted average interest rate of 4.0%, of which $37.4 million has
an interest rate floor of 5.75%. Assuming that our balance of variable rate
debt, excluding $37.4 million which has an interest rate floor of 5.75%,
remains constant at $23.1 million, each one-percent increase in interest rates
would result in an annual increase in interest expense, and a corresponding
decrease in net cash flows, of $231,350. Conversely, each one-percent decrease
in interest rates would result in an annual decrease in interest expense, and a
corresponding increase in net cash flows, of $231,350. For our $37.4 million of
variable rate debt which has a interest rate floor of 5.75%, each one-percent
increase in interest rates in excess of 5.75% would result in an annual
increase in interest expense, and a corresponding decrease in net cash flows,
of $374,000. Conversely, each one-percent decrease at interest rates of 6.75%
or greater would result in an annual decrease in interest expense, and a
corresponding increase in net cash flows, of $374,000. 16




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##### Table of Contents



We are also exposed to market risks from fluctuations in interest rates and the
effects of those fluctuations on market values of our cash equivalents and
short-term investments. These investments generally consist of overnight
investments that are not significantly exposed to interest rate risk, except to
the extent that changes in interest rates will ultimately affect the amount of
interest income earned and cash flow from these investments. We do not have any derivative financial instruments in place to manage interest
costs, but that does not mean we will not use them as a means to manage
interest rate risk in the future. 
 Item 4.Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and our
Chief Financial Officer, has evaluated our disclosure controls and procedures
(as defined in Securities Exchange Act of 1934 (the Exchange Act) Rules
13a-15(e) and 15d-15(e) as of the end of the period covered by this report
pursuant to Rule 13a-15(b) under the Exchange Act). Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of the period covered by this report, our disclosure controls and
procedures are effective to ensure that information required to be disclosed in
reports that we file or submit under the Exchange Act is (1) recorded,
processed, summarized and reported in a timely manner, and (2) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Changes in Internal Controls There has been no change in our internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) that occurred during our last
fiscal quarter that has materially affected or is reasonably likely to
materially affect, our internal control over financial reporting. 
 PART II  OTHER INFORMATION 
 Item 1.Legal Proceedings We are involved from time to time in ordinary, routine or regulatory legal
proceedings incidental to our business. As of May 10, 2004, we believe that
such legal proceedings should not have a material adverse effect on our
business. 
 Item 4.Submission of Matters to a Vote of Security Holders None 
 Item 6.Exhibits and Reports on Form 8-K  (a)
    
    The following documents are filed as part of this report: ExhibitNumber31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
 17




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ExhibitNumberAct of 200232.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
  (b)
    
    Reports on Form 8-KWe filed a report on Form 8-K on March 17, 2004 pursuant to Item 12 of Form
8-K announcing the Companys financial results for the quarter and year
ended December 31, 2003. 
 SIGNATURES Pursuant to the requirements of Sections 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. ASSISTED LIVING CONCEPTS, INC.RegistrantBy:
    
    /s/ Edward A. BarnesName: Edward A. BarnesTitle: Senior Vice President, Chief Financial Officer,Chief Accounting Officer, Secretary and Treasurer
 May 11, 2004 
 EXHIBIT INDEX ExhibitNumber31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 18