##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20459




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Form 10-Q



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|   |  |                                                                                           
|-- |  | ------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
	OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the quarterly period ended
	September 30, 2001                                        
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 12
	OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period from
	          to
	          .                                 

Commission file number 1-83938

Assisted Living Concepts, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                   
|--------------------------------------------------------------- |  | ----------------------------------
|Nevada                                                          |  | 93-1148702                        
|(State or other jurisdiction of
	incorporation or organization) |  | (IRS Employer
	Identification No.)

11835 NE Glenn Widing Drive, Building
E

Portland, Oregon 97220


(Address of principle executive
offices)


(503) 252-6233

(Registrants telephone number, including
area code)


Indicate by check mark whether Registrant
(1) has filed all reports 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
Registrants was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days.     Yes 
þ
          No 
 o

The Registrant had 17,120,745 shares of common
stock, $.01 par value, outstanding at November 7, 2001.



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##### 



Explanatory Note: Chapter 11
Reorganization

On October 1, 2001 Assisted Living Concepts,
Inc. (the Company) and its wholly owned subsidiary
Carriage House Assisted Living, Inc. (Carriage
House) filed a voluntary petition under Chapter 11 of
the U.S. Bankruptcy Code in the United States Bankruptcy Court
for the District of Delaware in Wilmington (the
Court). The Company reached an agreement (the
Plan Support Agreement) for a financial
reorganization with the holders (the Debenture
Holders) of $75,857,000 million aggregate principal
amount (out of a total of $161,250,000 million aggregate
principal amount outstanding, or approximately 47%) of its two
series of convertible subordinated debentures (collectively, the
Debentures) that will be implemented through a
prenegotiated plan of reorganization (the Prenegotiated
Plan).

Pursuant to the Plan Support Agreement, upon the
effective date of the Prenegotiated Plan, (1) the
Debentures and certain other unsecured debt of the Company will
be exchanged for (a) $40.25 million aggregate principal
amount of seven-year secured notes (the New Senior Secured
Notes), bearing interest at 10% per annum, payable
semi-annually in arrears, (b) $15.25 million aggregate
principal amount of ten-year secured notes (the New Junior
Secured Notes and collectively with the New Senior Secured
Notes, the New Notes), bearing interest payable in
additional New Junior Secured Notes for three years at 8% per
annum and thereafter payable in cash at 12% per annum payable
semi-annually in arrears, and (c) 96% of the common stock
of the reorganized Company, and (2) existing holders of the
Companys common stock will exchange their stock for 4% of
the common stock of the reorganized Company.

The New Senior Secured Notes will be secured by
(1) all presently unencumbered real property owned by the
Company and its subsidiaries, and (2) any additional real
property owned by the Company and its subsidiaries that may
become unencumbered on or before the effective date of the
Prenegotiated Plan. The New Junior Secured Note will be secured
by a junior lien on the same collateral securing the New Senior
Secured Notes. If the aforementioned collateral has a fair
market value of less than $75.0 million as determined using
an agreed upon formula, then a junior security interest in the
collateral securing the obligations of certain wholly-owned
subsidiaries of the Company (the Non-Debtor Heller
Borrowers) under an existing financing with Heller
Healthcare Finance, Inc. (Heller), which was amended
in connection with the Companys voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code, will also be
provided to meet this market value requirement. As part of the
filing, and pursuant to the Plan Support Agreement, the Company
expects its vendors and trade creditors to be paid in the
ordinary course and to be unaffected by the bankruptcy filing.
The Plan Support Agreement also requires the Debenture Holders
to fully support the Prenegotiated Plan and binds the
transferees of any Debenture Holders which executed the Plan
Support Agreement to fully comply with the terms of the Plan
Support Agreement.

The implementation of the Prenegotiated Plan is
dependent upon a number of conditions typical in restructures of
this type including, among other things, final documentation
satisfactory to the Debenture Holders, Court approval of the
Prenegotiated Plan and related solicitation materials and the
Companys acquisition of debtor-in-possession financing and
takeout financing upon the Companys exit from bankruptcy.
The Company obtained debtor-in-possession financing from Heller,
which was approved by the Court by Interim Order on
October 3, 2001 and Final Order on October 19, 2001.
Among other things, the Final Order also approved the
Companys guaranty of the financing of the acquisition by
Texas ALC Partners, L.P. (Texas ALC) of sixteen
properties currently leased by Texas ALC from the current lessor
thereunder, T and F Properties, L.P. (the Meditrust
Properties and the acquisition by Texas ALC, the
Meditrust Acquisition). The purchase of the
Meditrust Properties was completed on October 24, 2001. See
Item 1 Notes 7 and 9 to the Consolidated Financial
Statements.

On October 26, 2001, the Company and
Carriage House filed a First Amended Plan of Reorganization and
a First Amended Disclosure Statement, which amended the previous
filings to account for developments in the bankruptcy cases from
and after October 1, 2001 and to provide additional
disclosure about certain treatment of claims against and
interests in the debtors. The disclosure statement, which
establishes the timetable and procedures regarding the
Companys solicitation of votes for the Prenegotiated Plan,
was approved by the Court on October 30, 2001. Except as
otherwise ordered by the Court, a party who deems it necessary
to file a proof of claim must do so by November 15, 2001. A
confirmation hearing has been

1



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##### 



Explanatory Note: Chapter 11
Reorganization (Continued)


scheduled on December 5, 2001 and the
Company and Carriage House expect the Prenegotiated Plan to be
effective in early 2002. However, there can be no assurance the
Prenegotiated Plan will become effective in early 2002, or at
all. See Item 2 Management Discussion and
Analysis  Risk Factors.

The accompanying financial statements have been
prepared under accounting principles generally accepted in the
United States of America. Upon exit from bankruptcy, the Company
will adopt fresh start accounting as defined in American
Institute of Certified Public Accountants Statement of
Position 90-7 (SOP 90-7). Fresh start
accounting will be required because holders of existing voting
shares immediately before the filing of Chapter 11 and
Court approval are expected to receive less than 50% of the
voting shares of the emerging entity and its reorganization
value is expected to be less than its post-petition liabilities
and allowed claims. The adoption of fresh start accounting will
result in substantial changes to the Companys future
financial statements.

2



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ASSISTED LIVING CONCEPTS, INC.

(Debtor-in-Possession)


FORM 10-Q

September 30, 2001


INDEX

|                               |  |                                                                                                 |    |      |    | 
|------------------------------ |  | ----------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                               |  |                                                                                                 |    | Page
|                               |  |                                                                                                 |    |     
|PART I  FINANCIAL INFORMATION
|Item  1.                       |  | Financial Statements                                                                            |    |      | 4  | 
|                               |  | Consolidated Balance Sheets, December 31,
	2000 and September 30, 2001                          |    |      | 4  | 
|                               |  | Consolidated Statements of Operations, Three and
	Nine Months Ended September 30, 2000 and 2001 |    |      | 5  | 
|                               |  | Consolidated Statements of Cash Flows, Nine
	Months Ended September 30, 2000 and 2001           |    |      | 6  | 
|                               |  | Notes to Consolidated Financial Statements                                                      |    |      | 7  | 
|Item  2.                       |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations          |    |      | 14 | 
|                               |  | Risk Factors                                                                                    |    |      | 23 | 
|Item  3.                       |  | Quantitative and Qualitative Disclosures About
	Market Risk and Risk Sensitive Instruments      |    |      | 30 | 
|PART II  OTHER INFORMATION   
|Item  1.                       |  | Legal Proceedings                                                                               |    |      | 31 | 
|Item  6.                       |  | Exhibits and Reports on Form 8-K                                                                |    |      | 32 | 
|Signatures                     |  |                                                                                                 | 33 |     
|Exhibit Index                  |  |                                                                                                 | 34 |     

3



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##### 



PART I  FINANCIAL
INFORMATION

Item 1.     Financial Statements

ASSISTED LIVING CONCEPTS, INC.

(Debtor-in-Possession)




CONSOLIDATED BALANCE SHEETS


(In thousands, except share amounts)


|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |         |         | 
|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ------------- | ------- |  | ------- | ------- | ------- | 
|                                                                     |                                                                                                                          | December 31,                               |         | September 30,
|                                                                     |                                                                                                                          | 2000                                       |         | 2001         
|                                                                     |                                                                                                                          |                                            |         |              
|                                                                     |                                                                                                                          |                                            |         | (Unaudited)  
|ASSETS                                                              
|Current assets:                                                      |                                                                                                                          |                                            |         |               |         |  |         |        
|                                                                     | Cash, cash equivalents and cash held for tenant
	security deposits                                                       |                                            | $       | 9,889         |         |  | $       | 5,588   |        
|                                                                     | Accounts receivable, net of allowance for
	doubtful accounts of $1,399 and $217, respectively                            |                                            |         | 2,448         |         |  |         | 2,370   |        
|                                                                     | Prepaid insurance                                                                                                        |                                            |         | 1,765         |         |  |         | 527     |        
|                                                                     | Prepaid expenses                                                                                                         |                                            |         | 1,042         |         |  |         | 610     |        
|                                                                     | Other current assets                                                                                                     |                                            |         | 2,729         |         |  |         | 4,295   |        
|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |        
|                                                                     |                                                                                                                          | Total current assets                       |         |               | 17,873  |  |         |         | 13,390  | 
|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |        
|Restricted cash                                                      |                                                                                                                          |                                            | 6,466   |               |         |  | 8,030   |        
|Property and equipment, net                                          |                                                                                                                          |                                            | 298,744 |               |         |  | 292,752 |        
|Goodwill, net                                                        |                                                                                                                          |                                            | 4,785   |               |         |  | 4,565   |        
|Other assets, net                                                    |                                                                                                                          |                                            | 8,590   |               |         |  | 10,179  |        
|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |        
|                                                                     |                                                                                                                          | Total assets                               |         | $             | 336,458 |  |         | $       | 328,916 | 
|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |        
|LIABILITIES AND SHAREHOLDERS
	EQUITY                               
|Current liabilities:                                                 |                                                                                                                          |                                            |         |               |         |  |         |        
|                                                                     | Accounts payable                                                                                                         |                                            | $       | 2,708         |         |  | $       | 1,519   |        
|                                                                     | Accrued real estate taxes                                                                                                |                                            |         | 4,835         |         |  |         | 4,843   |        
|                                                                     | Accrued interest expense                                                                                                 |                                            |         | 1,937         |         |  |         | 453     |        
|                                                                     | Accrued payroll expense                                                                                                  |                                            |         | 4,017         |         |  |         | 3,104   |        
|                                                                     | Other accrued expenses                                                                                                   |                                            |         | 4,855         |         |  |         | 4,063   |        
|                                                                     | Bridge loan payable                                                                                                      |                                            |         | 4,000         |         |  |         |        |        
|                                                                     | Litigation settlement payable                                                                                            |                                            |         | 7,765         |         |  |         |        |        
|                                                                     | Tenant security deposits                                                                                                 |                                            |         | 2,484         |         |  |         | 2,470   |        
|                                                                     | Other current liabilities                                                                                                |                                            |         | 565           |         |  |         | 519     |        
|                                                                     | Current portion of long-term debt and capital
	lease obligation                                                          |                                            |         | 1,690         |         |  |         | 16,815  |        
|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |        
|                                                                     |                                                                                                                          | Total current liabilities                  |         |               | 34,856  |  |         |         | 33,786  | 
|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |        
|Other liabilities                                                    |                                                                                                                          |                                            | 6,059   |               |         |  | 5,596   |        
|Liabilities subject to compromise                                    |                                                                                                                          |                                            |        |               |         |  | 165,320 |        
|Long-term debt and capital lease obligation, net
	of current portion |                                                                                                                          |                                            | 70,407  |               |         |  | 76,470  |        
|Convertible subordinated debentures                                  |                                                                                                                          |                                            | 161,250 |               |         |  |        |        
|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |        
|                                                                     |                                                                                                                          | Total liabilities                          |         |               | 272,572 |  |         |         | 281,172 | 
|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |        
|Commitments and contingencies                                        |                                                                                                                          |                                            |         |               |         |  |         |        
|Shareholders equity:                                                |                                                                                                                          |                                            |         |               |         |  |         |        
|                                                                     | Preferred Stock, $.01 par value; 1,000,000 shares
	authorized; none issued or outstanding                                |                                            |         |              |         |  |         |        |        
|                                                                     | Common Stock, $.01 par value; 80,000,000 shares
	authorized; issued and outstanding 17,120,745 shares in 2000 and
	2001. |                                            |         | 171           |         |  |         | 171     |        
|                                                                     | Additional paid-in capital                                                                                               |                                            |         | 144,212       |         |  |         | 144,212 |        
|                                                                     | Accumulated deficit                                                                                                      |                                            |         | (80,497       | )       |  |         | (96,639 | )      
|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |        
|                                                                     |                                                                                                                          | Total shareholders equity                 |         |               | 63,886  |  |         |         | 47,744  | 
|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |        
|                                                                     |                                                                                                                          | Total liabilities and shareholders equity |         | $             | 336,458 |  |         | $       | 328,916 | 
|                                                                     |                                                                                                                          |                                            |         |               |         |  |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

4



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ASSISTED LIVING CONCEPTS, INC.

(Debtor-in-Possession)




CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except per share
amounts)


(Unaudited)


|                                                              |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |         |         |  
|------------------------------------------------------------- | ------------------------------------------ | ------------------------ | ------- | ----------------- | ------ | ---- | ------ | ------ | ------ | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                              |                                            |                          |         |                  
|                                                              |                                            | Three Months Ended       |         | Nine Months Ended
|                                                              |                                            | September 30,            |         | September 30,    
|                                                              |                                            |                          |         |                  
|                                                              |                                            | 2000                     |         | 2001              |        | 2000 |        | 2001  
|                                                              |                                            |                          |         |                   |        |      |        |       
|Revenue                                                       |                                            | $                        | 35,308  |                   |        | $    | 38,009 |        |        | $ | 102,586 |         |         | $ | 112,257 |        
|Operating expenses:                                           |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        
|                                                              | Residence operating expenses               |                          |         | 24,049            |        |      |        | 26,140 |        |   |         | 69,036  |         |   |         | 76,589  |        
|                                                              | Corporate general and administrative       |                          |         | 3,219             |        |      |        | 4,546  |        |   |         | 12,333  |         |   |         | 13,254  |        
|                                                              | Building rentals                           |                          |         | 3,702             |        |      |        | 4,111  |        |   |         | 11,032  |         |   |         | 12,432  |        
|                                                              | Building rentals to related party          |                          |         | 318               |        |      |        |       |        |   |         | 952     |         |   |         |        |        
|                                                              | Depreciation and amortization              |                          |         | 2,598             |        |      |        | 2,546  |        |   |         | 7,349   |         |   |         | 7,670   |        
|                                                              | Litigation settlement                      |                          |         | 10,020            |        |      |        |       |        |   |         | 10,020  |         |   |         |        |        
|                                                              |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        
|                                                              |                                            | Total operating expenses |         |                   | 43,906 |      |        |        | 37,343 |   |         |         | 110,722 |   |         |         | 109,945 |  
|                                                              |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        
|Operating income (loss)                                       |                                            |                          | (8,598  | )                 |        |      | 666    |        |        |   | (8,136  | )       |         |   | 2,312   |        
|                                                              |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        
|Other income (expense):                                       |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        
|                                                              | Interest expense                           |                          |         | (4,128            | )      |      |        | (5,303 | )      |   |         | (12,246 | )       |   |         | (14,610 | )      
|                                                              | Interest income                            |                          |         | 187               |        |      |        | 95     |        |   |         | 576     |         |   |         | 382     |        
|                                                              | Gain (loss) on sale and disposal of assets |                          |         |                  |        |      |        |       |        |   |         | 13      |         |   |         | (88     | )      
|                                                              | Loss on sale of marketable securities      |                          |         |                  |        |      |        |       |        |   |         | (368    | )       |   |         |        |        
|                                                              | Other income (expense), net                |                          |         | 94                |        |      |        | 14     |        |   |         | 104     |         |   |         | 33      |        
|                                                              |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        
|                                                              |                                            | Total other expense      |         |                   | (3,847 | )    |        |        | (5,194 | ) |         |         | (11,921 | ) |         |         | (14,283 | )
|                                                              |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        
|Net loss before reorganization costs                          |                                            |                          | (12,445 | )                 |        |      | (4,528 | )      |        |   | (20,057 | )       |         |   | (11,971 | )      
|                                                              |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        
|                                                              | Reorganization costs                       |                          |         |                  |        |      |        | 2,805  |        |   |         |        |         |   |         | 4,171   |        
|                                                              |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        
|Net loss                                                      |                                            | $                        | (12,445 | )                 |        | $    | (7,333 | )      |        | $ | (20,057 | )       |         | $ | (16,142 | )      
|                                                              |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        
|Basic and diluted net loss per common share                   |                                            | $                        | (0.73   | )                 |        | $    | (0.43  | )      |        | $ | (1.17   | )       |         | $ | (0.94   | )      
|                                                              |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        
|Basic and diluted weighted average common shares
	outstanding |                                            |                          | 17,121  |                   |        |      | 17,121 |        |        |   | 17,121  |         |         |   | 17,121  |        
|                                                              |                                            |                          |         |                   |        |      |        |        |        |   |         |         |         |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

5



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##### 



ASSISTED LIVING CONCEPTS, INC.

(Debtor-in-Possession)




CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


(Unaudited)


|                                                                                          |                                                                                                                                  |                                                      |         |        |        |   |         |        |         |  
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------- | -
|                                                                                          |                                                                                                                                  |                                                     
|                                                                                          |                                                                                                                                  | Nine Months Ended                                   
|                                                                                          |                                                                                                                                  | September 30,                                       
|                                                                                          |                                                                                                                                  |                                                     
|                                                                                          |                                                                                                                                  | 2000                                                 |         | 2001  
|                                                                                          |                                                                                                                                  |                                                      |         |       
|Operating Activities:                                                                     |                                                                                                                                  |                                                      |         |        |        |   |         |       
|Net loss                                                                                  |                                                                                                                                  | $                                                    | (20,057 | )      |        | $ | (16,142 | )     
|Adjustment to reconcile net loss to net cash
	(used in) provided by operating activities: |                                                                                                                                  |                                                      |         |        |        |   |         |       
|                                                                                          | Depreciation and amortization                                                                                                    |                                                      |         | 7,349  |        |   |         | 7,670  |        
|                                                                                          | Amortization of deferred financing fees                                                                                          |                                                      |         | 1,222  |        |   |         | 2,712  |        
|                                                                                          | Provision for doubtful accounts                                                                                                  |                                                      |         | 408    |        |   |         | (113   | )      
|                                                                                          | Loss on sale of marketable securities                                                                                            |                                                      |         | 368    |        |   |         |       |        
|                                                                                          | Loss (gain) on sale of assets                                                                                                    |                                                      |         | (13    | )      |   |         | 88     |        
|                                                                                          | Compensation expense earned on issuance of
	consultant options                                                                   |                                                      |         | 8      |        |   |         |       |        
|Changes in assets and liabilities:                                                        |                                                                                                                                  |                                                      |         |        |        |   |         |       
|                                                                                          | Accounts receivable                                                                                                              |                                                      |         | (86    | )      |   |         | 191    |        
|                                                                                          | Prepaid expenses                                                                                                                 |                                                      |         | 539    |        |   |         | 1,670  |        
|                                                                                          | Other current assets                                                                                                             |                                                      |         | (1,051 | )      |   |         | (1,618 | )      
|                                                                                          | Other assets                                                                                                                     |                                                      |         | 3      |        |   |         | (595   | )      
|                                                                                          | Accounts payable                                                                                                                 |                                                      |         | 47     |        |   |         | (1,189 | )      
|                                                                                          | Accrued expenses                                                                                                                 |                                                      |         | 2,203  |        |   |         | 1,359  |        
|                                                                                          | Other current liabilities                                                                                                        |                                                      |         | 9,341  |        |   |         | (8,295 | )      
|                                                                                          | Non-current liabilities                                                                                                          |                                                      |         | 916    |        |   |         | (463   | )      
|                                                                                          |                                                                                                                                  |                                                      |         |        |        |   |         |       
|                                                                                          |                                                                                                                                  | Net cash (used in) provided by operating
	activities |         |        | 1,197  |   |         |        | (14,725 | )
|                                                                                          |                                                                                                                                  |                                                      |         |        |        |   |         |       
|Investing Activities:                                                                     |                                                                                                                                  |                                                      |         |        |        |   |         |       
|Sale of investment securities                                                             |                                                                                                                                  |                                                      | 1,632   |        |        |   |        |       
|Restricted cash                                                                           |                                                                                                                                  |                                                      | 1,014   |        |        |   | (1,564  | )     
|Purchases of property and equipment                                                       |                                                                                                                                  |                                                      | (2,104  | )      |        |   | (1,494  | )     
|                                                                                          |                                                                                                                                  |                                                      |         |        |        |   |         |       
|                                                                                          |                                                                                                                                  | Net cash (used in) provided by investing
	activities |         |        | 542    |   |         |        | (3,058  | )
|                                                                                          |                                                                                                                                  |                                                      |         |        |        |   |         |       
|Financing Activities:                                                                     |                                                                                                                                  |                                                      |         |        |        |   |         |       
|Proceeds from long-term debt                                                              |                                                                                                                                  |                                                      |        |        |        |   | 25,466  |       
|Payments on long-term debt and capital lease
	obligation                                  |                                                                                                                                  |                                                      | (1,112  | )      |        |   | (4,278  | )     
|Payments on bridge loan payable                                                           |                                                                                                                                  |                                                      |        |        |        |   | (4,000  | )     
|Debt issuance costs                                                                       |                                                                                                                                  |                                                      |        |        |        |   | (3,706  | )     
|                                                                                          |                                                                                                                                  |                                                      |         |        |        |   |         |       
|                                                                                          |                                                                                                                                  | Net cash (used in) provided by financing
	activities |         |        | (1,112 | ) |         |        | 13,482  |  
|                                                                                          |                                                                                                                                  |                                                      |         |        |        |   |         |       
|Net decrease in cash, cash equivalents and cash
	held for tenant security deposits        |                                                                                                                                  |                                                      | 627     |        |        |   | (4,301  | )     
|Cash, cash equivalents and cash held for tenant
	security deposits, beginning of period   |                                                                                                                                  |                                                      | 7,606   |        |        |   | 9,889   |       
|                                                                                          |                                                                                                                                  |                                                      |         |        |        |   |         |       
|Cash, cash equivalents and cash held for tenant
	security deposits, end of period         |                                                                                                                                  | $                                                    | 8,233   |        |        | $ | 5,588   |       
|                                                                                          |                                                                                                                                  |                                                      |         |        |        |   |         |       
|Supplemental disclosure of cash flow
	information:                                        |                                                                                                                                  |                                                      |         |        |        |   |         |       
|                                                                                          | Cash payments for interest                                                                                                       |                                                      | $       | 8,870  |        |   | $       | 9,641  |        
|                                                                                          | Decrease in construction payable and property and
	equipment                                                                     |                                                      | $       | (794   | )      |   | $       |       |        
|                                                                                          | Reclassification of other current and other
	liabilities to current and non-current long-term debt and
	capital lease obligation |                                                      | $       |       |        |   | $       | 550    |        

The accompanying notes are an integral part of
these consolidated financial statements.

6



---



##### 



ASSISTED LIVING CONCEPTS, INC.

(Debtor-in-Possession)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)


1.     The
Company

Assisted Living Concepts, Inc., a Nevada
Corporation, (the Company) owns, leases and operates
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.     Petition for
Relief Under Chapter 11

On October 1, 2001 the Company filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court for the District of
Delaware in Wilmington (the Court). The Company
reached an agreement (the Plan Support Agreement)
for a financial reorganization with the holders (the
Debenture Holders) of $75,857,000 million
aggregate principal amount (out of a total of
$161,250,000 million aggregate principal amount
outstanding, or approximately 47%) of its two series of
convertible subordinated debentures (collectively, the
Debentures) that will be implemented through a
prenegotiated plan of reorganization (the Prenegotiated
Plan).

Pursuant to the Plan Support Agreement, upon the
effective date of the Prenegotiated Plan, (1) the
Debentures and certain other unsecured debt of the Company will
be exchanged for (a) $40.25 million aggregate
principal amount of seven-year secured notes (the New
Senior Secured Notes), bearing interest at 10% per annum,
payable semi-annually in arrears, (b) $15.25 million
aggregate principal amount of ten-year secured notes (the
New Junior Secured Notes and collectively with the
New Senior Secured Notes, the New Notes), bearing
interest payable in additional New Junior Secured Notes for
three years at 8% per annum and thereafter payable in cash at
12% per annum payable semi-annually in arrears, and (c) 96%
of the common stock of the reorganized Company, and
(2) existing holders of the Companys common stock
will exchange their stock for 4% of the common stock of the
reorganized Company.

The New Senior Secured Notes will be secured by
(1) all presently unencumbered real property owned by the
Company and its subsidiaries, and (2) any additional real
property owned by the Company and its subsidiaries that may
become unencumbered on or before the effective date of the
Prenegotiated Plan. The New Junior Secured Note will be secured
by a junior lien on the same collateral securing the New Senior
Secured Notes. If the aforementioned collateral has a fair
market value of less than $75.0 million as determined using
an agreed upon formula, then a junior security interest in the
collateral securing the obligations of certain wholly-owned
subsidiaries of the Company (the Non-Debtor Heller
Borrowers) under an existing financing with Heller
Healthcare Finance, Inc. (Heller), which was amended
in connection with the Companys voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code, will also be
provided to meet this market value requirement. As part of the
filing, and pursuant to the Plan Support Agreement, the Company
expects its vendors and trade creditors to be paid in the
ordinary course and to be unaffected by the bankruptcy filing.
The Plan Support Agreement also requires the Debenture Holders
to fully support the Prenegotiated Plan and binds the
transferees of any Debenture Holders which executed the Plan
Support Agreement to fully comply with the terms of the Plan
Support Agreement.

The implementation of the Prenegotiated Plan is
dependent upon a number of conditions typical in restructures of
this type including, among other things, final documentation
satisfactory to the Debenture Holders, Court approval of the
Prenegotiated Plan and related solicitation materials and the
Companys acquisition of debtor-in-possession financing and
takeout financing upon the Companys exit from bankruptcy.
The Company obtained debtor-in-possession financing from Heller,
which was approved by the Court by Interim Order on
October 3, 2001 and Final Order on October 19, 2001.
On October 26, 2001, the Company and Carriage House filed a
First Amended Plan of Reorganization and a First Amended
Disclosure

7



---



##### 



ASSISTED LIVING CONCEPTS, INC.


(Debtor-in-Possession)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


Statement, which amended the previous filings to
account for developments in the bankruptcy cases from and after
October 1, 2001 and to provide additional disclosure about
certain treatment of claims against and interests in the
debtors. The Disclosure Statement, which establishes the
timetable and procedures regarding the Companys
solicitation of votes for the Prenegotiated Plan, was approved
by the Court on October 30, 2001. A confirmation hearing
has been scheduled on December 5, 2001 and the Company and
Carriage House expect the Prenegotiated Plan to be effective in
early 2002. However, there can be no assurance the Prenegotiated
Plan will become effective in early 2002, or at all. See
Item 2 Risk Factors.

Under Chapter 11, certain claims against the
Company in existence prior to the filing of the petition for
relief under the federal bankruptcy laws are stayed while the
Company continues business operations as Debtor-in-possession.
These claims are reflected in the accompanying consolidated
balance sheet as liabilities subject to compromise.
Additional claims (liabilities subject to compromise) may arise
subsequent to the filing date resulting from rejection of
executory contracts, including leases, and from the
determination by the court (or agreed upon by parties in
interest) of allowed claims for contingent liabilities and other
disputed amounts. Claims secured by certain of the
Companys assets (secured claims) also are
stayed, although the holders of such claims have the right to
move the court for relief from the stay in order to foreclose.
Secured claims are secured primarily by liens on the
Companys real property and equipment.

The Company has received approval from the Court
to pay certain of its prepetition obligations, including
employee wages, benefits, refundable tenant deposits and vendor
payables.

The Company has incurred $2.8 million and
$4.2 million in reorganization costs for the three and nine
months ended September 30, 2001, respectively, and expects
to incur additional reorganization costs of approximately
$2.0 million. Reorganization costs include legal, financial
advisory and other professional fees incurred in relation to the
reorganization. Since the Company does not expect to raise any
new capital as a result of such reorganization, these amounts
are expensed as incurred in the accompanying financial
statements.



| |                                   
| | ----------------------------------
| | Liabilities Subject to
	Compromise

Liabilities subject to compromise primarily
include the Debentures and related accrued interest and amounts
payable under a previous employees separation agreement.
These items are expected to be impacted by the Chapter 11
proceedings and have been separately identified on the
accompanying consolidated financial statements.

3.     Basis of
Presentation and Principles of Consolidation

These consolidated financial statements have been
prepared without being audited, as allowed by the rules and
regulations of the Securities and Exchange Commission. The
accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries that
own, lease and operate assisted living residences. All
significant intercompany accounts and transactions have been
eliminated in consolidation. Certain information and footnote
disclosures that are normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or
omitted as allowed by rules and regulations of the Securities
and Exchange Commission. These consolidated financial statements
should be read in conjunction with the audited consolidated
financial statements and notes included in the Companys
Annual Report on Form 10-K for the year ended
December 31, 2000.

The financial information included in these
financial statements contain all adjustments (which consist of
normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of

8



---



##### 



ASSISTED LIVING CONCEPTS, INC.


(Debtor-in-Possession)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


results for the quarterly periods. The results of
operations for the three and nine month periods ended
September 30, 2001 do not necessarily indicate the results
that are expected for the full year.

These consolidated financial statements have been
prepared assuming the Company will continue as a going concern.
Upon exit from bankruptcy, which is expected by management to be
in early 2002, the Company will adopt fresh start accounting as
defined in American Institute of Certified Public Accountants
Statement of Position 90-7 (SOP 90-7).
Fresh start accounting will be required because holders of
existing voting shares immediately before the filing of
Chapter 11 and Court approval are expected to receive less
than 50% of the voting shares of the emerging entity and its
reorganization value is expected to be less than its
post-petition liabilities and allowed claims. The adoption of
fresh start accounting will result in substantial changes to the
Companys future financial statements. There can be no
assurance the Company will emerge from bankruptcy in early 2002,
or at all. (See Note 2 and Item 2 Management
Discussion and Analysis  Risk Factors).



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications have been made in the
prior periods consolidated financial statements to conform
to the current periods presentation. Such
reclassifications had no effect on previously reported net loss
or total shareholders equity.

4.     Cash, Cash
Equivalents and Cash Held for Tenant Security Deposits

The Companys cash, cash equivalents and
cash held for tenant security deposits consist of the following
(in thousands):

|                                       |                                                                          |              |       |               |  |   |       |       | 
|-------------------------------------- | ------------------------------------------------------------------------ | ------------ | ----- | ------------- |  | - | ----- | ----- | 
|                                       |                                                                          | December 31, |       | September 30,
|                                       |                                                                          | 2000         |       | 2001         
|                                       |                                                                          |              |       |              
|Cash                                   |                                                                          | $            | 2,863 |               |  | $ | 2,028 |      
|Cash equivalents                       |                                                                          |              | 4,581 |               |  |   | 1,130 |      
|Cash held for tenant security deposits |                                                                          |              | 2,445 |               |  |   | 2,430 |      
|                                       |                                                                          |              |       |               |  |   |       |      
|                                       | Total cash, cash equivalents and cash held for
	tenant security deposits |              | $     | 9,889         |  |   | $     | 5,588 | 
|                                       |                                                                          |              |       |               |  |   |       |      

Cash held for tenant security deposits is a
general unrestricted asset of the Company.

5.     Restricted
Cash

Restricted cash consists of the following (in
thousands):

|                                                                                 |                       |              |       |               |  |   |       |       | 
|-------------------------------------------------------------------------------- | --------------------- | ------------ | ----- | ------------- |  | - | ----- | ----- | 
|                                                                                 |                       | December 31, |       | September 30,
|                                                                                 |                       | 2000         |       | 2001         
|                                                                                 |                       |              |       |              
|Cash held for loan agreements with U.S. Bank
	National Association (U.S. Bank) |                       | $            | 4,354 |               |  | $ | 4,318 |      
|Cash held in accordance with lease agreements                                    |                       |              | 1,001 |               |  |   | 922   |      
|Workers compensation deposits                                                   |                       |              | 1,072 |               |  |   | 2,750 |      
|State regulated restricted tenant security
	deposits                             |                       |              | 39    |               |  |   | 40    |      
|                                                                                 |                       |              |       |               |  |   |       |      
|                                                                                 | Total restricted cash |              | $     | 6,466         |  |   | $     | 8,030 | 
|                                                                                 |                       |              |       |               |  |   |       |      

9



---



##### 



ASSISTED LIVING CONCEPTS, INC.


(Debtor-in-Possession)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


6.     Property and
Equipment

The Companys property and equipment, stated
at cost, consists of the following (in thousands):

|                              |                              |              |         |               |  |   |         |         | 
|----------------------------- | ---------------------------- | ------------ | ------- | ------------- |  | - | ------- | ------- | 
|                              |                              | December 31, |         | September 30,
|                              |                              | 2000         |         | 2001         
|                              |                              |              |         |              
|Land and improvements         |                              | $            | 21,378  |               |  | $ | 21,383  |        
|Buildings and improvements    |                              |              | 287,178 |               |  |   | 287,574 |        
|Equipment                     |                              |              | 7,149   |               |  |   | 7,609   |        
|Furniture                     |                              |              | 8,638   |               |  |   | 8,687   |        
|                              |                              |              |         |               |  |   |         |        
|                              | Total property and equipment |              |         | 324,343       |  |   |         | 325,253 | 
|Less accumulated depreciation |                              |              | 25,599  |               |  |   | 32,501  |        
|                              |                              |              |         |               |  |   |         |        
|Property and equipment, net   |                              | $            | 298,744 |               |  | $ | 292,752 |        
|                              |                              |              |         |               |  |   |         |        

7.     Long-Term
Debt



| |                    
| | -------------------
| | Equipment Financing

Effective February 22, 2001, the Company
entered into a loan agreement to finance technology equipment in
the amount of $550,000. The agreement required an initial
payment of $150,000 (which has been paid) and monthly payments
of $25,000 (principal and interest) until maturity on
August 31, 2002. This loan bears an interest rate of 12.5%
and is secured by the related technology equipment that the
Company purchased during the year ended December 31, 2000.



| |                 
| | ----------------
| | Heller Financing

On March 2, 2001, the Non-Debtor Heller
Borrowers entered into an agreement with Heller Healthcare
Finance, Inc. (Heller) for a line of credit facility
up to $45.0 million (the Existing Facility),
which was guaranteed by the Company. This line was scheduled to
mature on August 31, 2002 and would have been secured by up
to 32 properties. This line carried an interest rate of 3.85%
over the three-month LIBOR rate floating monthly and required
monthly interest-only payments until maturity.

As of June 27, 2001, the Non-Debtor Heller
Borrowers amended the Existing Facility, reducing the aggregate
line of credit available from $45.0 million to
$20.0 million. The Existing Facility was scheduled to
mature on September 28, 2001, which maturity was extended
to October 12, 2001 by Heller, and was secured by 26
properties.

On October 3, 2001, the Company and Carriage
House entered into a debtor-in-possession facility with Heller
in an amount of up to $4.4 million (the DIP
Facility). The DIP Facility was approved by the Court by
Interim Order on October 3, 2001 and by Final Order on
October 19, 2001. The DIP Facility supplements the Company
and Carriage Houses cash position in order to ensure that
all on-going working capital needs are met and is secured by
eight properties of the Company and Carriage House and a pledge
of certain intercompany notes and the stock of certain
subsidiaries of the Company (collectively, the DIP
Collateral). The DIP Facility matures upon the earlier of
the Companys emergence from bankruptcy or twelve months
from the effective date of the DIP Facility. Principal is
payable at maturity and interest is calculated at 5.0% over
three month LIBOR, floating monthly, and payable monthly in
arrears. As of October 31, 2001, the Company has drawn
$1.0 million on this DIP Facility.

Concurrent with the closing of the DIP Facility,
the Company and the Non-Debtor Heller Borrowers entered into a
further amendment of the Existing Facility (the Second
Amendment), which amendment,

10



---



##### 



ASSISTED LIVING CONCEPTS, INC.


(Debtor-in-Possession)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


among other things, extends the maturity of the
Existing Facility to be coterminous with the DIP Facility,
amends the interest to be calculated at 5.0% over three month
LIBOR, floating monthly, payable monthly in arrears, and permits
the financing of the acquisition by Texas ALC Partners, L.P.
(Texas ALC) of sixteen properties currently leased
by Texas ALC from the current lessor thereunder,
T and F Properties, L.P. (the Meditrust
Properties and the acquisition by Texas ALC, the
Meditrust Acquisition). The purchase of the
Meditrust Properties was completed on October 24, 2001. The
DIP Collateral and the collateral for the Existing Facility
(including the Meditrust Properties when acquired)
cross-collateralize both the DIP Facility and the Existing
Facility, as amended. The extension of the Company guarantee was
approved by the Court. Fees incurred to date, including
commitment fees, funding fees, closing fees and professional
fees associated with the establishment of the Heller credit
facility are $3.8 million (of which $500,000 was paid in
2000). The balance outstanding under the Heller facilities is
$39.5 million (including $1.0 million under the DIP
Facility) at October 31, 2001.

The DIP Facility may be refinanced through the
Existing Facility, as amended by the second amendment in
connection with the exit from bankruptcy (the Exit
Facility). The principal amount of the Exit Facility will
not exceed $44.0 million and will mature 36 months
from the date on which the Company exits from bankruptcy.
Principal will be payable monthly in a monthly amount of $50,000
for the first year, $65,000 for the second year and $80,000 for
the last year of the Exit Facility term. Interest will be
calculated at 4.5% over three month LIBOR, floating monthly (not
to be less than 8%), and payable monthly in arrears. The Exit
Facility is to be secured by 32 properties owned by the
Non-Debtor Heller Borrowers. The Company will remain liable for
the entire amount of the Exit Facility as a guarantor.



| |                                                         
| | --------------------------------------------------------
| | Housing and Urban Development
	(HUD) Insured Financing

On June 14, 2001, the Company entered into
two loan agreements for $1.8 million and $2.7 million,
and on July 19, 2001, the Company entered into a loan
agreement for $3.0 million, with Red Mortgage Capital, Inc.
(Red Mortgage) for long-term HUD insured financing.
Each loan is secured by a property in Texas and the loans mature
between July 1, 2036 and August 1, 2036 and
collectively require monthly principal and interest payments of
$50,000. The loans bear fixed annual interest rates between
7.40% and 7.55%. Of the $7.5 million in proceeds,
$4.0 million was used to pay off bridge financing provided
by Red Mortgage, $350,000 was used for loan closing costs,
$3.0 million was used to pay down the Heller line of credit
and the remaining proceeds were used to fund escrow accounts.



| |                         
| | ------------------------
| | U.S. Bank Loan Amendment

On March 12, 2001, in exchange for a waiver
of U.S. Banks right to declare an event of default for the
Companys failure to comply with certain financial
covenants as of December 31, 2000 and March 31, 2001,
and for the modification of certain financial covenants, the
Company agreed to maintain minimum cash balances of
$11.0 million at the end of each fiscal quarter, except for
the fiscal quarter ending September 30, 2001 which has a
required minimum balance of $8.0 million. The amendment
also requires 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 its
obligations to U.S. Bank. U.S. Bank is required to
release such deposits upon satisfactory resolution of the
regulatory action. As of the date of this filing, no such
additional deposits have been required. Failure to comply with
any covenant constitutes an event of default, which will allow
U.S. Bank (at its discretion) to declare any amounts
outstanding under the loan documents to be due and payable.

11



---



##### 



ASSISTED LIVING CONCEPTS, INC.


(Debtor-in-Possession)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


In May, 2001, the Company received a waiver of
U.S. Banks right to declare an event of default for
the Companys failure to meet the March 31, 2001 cash
balance requirements set forth in the March 12, 2001
U.S. Bank loan amendment.

Additionally, in August, 2001, the Company
received a waiver of U.S. Banks right to declare an event
of default for the Companys failure to meet the
June 30, 2001, September 30, 2001 and probable failure
to meet the December 31, 2001 cash balance requirements and
other financial ratios set forth in the amended U.S. Bank
loan agreement. There can be no assurance that the Company will
be able to meet these requirements as of the end of future
quarters or that U.S. Bank will grant waivers of any such
future failure to meet these requirements.

Many of the Companys debt instruments and
leases contain cross-default provisions pursuant to
which a default under one obligation can cause a default under
one or more other obligations. Accordingly, if enforced, the
Company could experience a material adverse effect on its
financial condition.

8.     Litigation



| |                           
| | --------------------------
| | Insurance Coverage Dispute

In September, 2000, the Company reached an
agreement to settle the class action litigation relating to the
restatement of its consolidated financial statements for the
years ended December 31, 1996 and 1997 and the first three
fiscal quarters of 1998. This agreement received final court
approval on November 30, 2000 and the Company was dismissed
from the litigation with prejudice. On September 28, 2001,
the Company made its final installment of $1.0 million on
its promissory note for the class action litigation settlement.
Although the Company has been dismissed from the litigation with
prejudice, an outstanding dispute regarding coverage exists with
the Companys prior directors, officers and corporate
liability insurance carriers. The Company and the insurance
carriers agreed to resolve this dispute through binding
arbitration, and the Company filed a complaint for a declaratory
judgment that the Company is not liable to the carriers as
claimed. The carriers counter-claimed to recover an amount
capped at $4.0 million. The Company believes it has strong
defenses regarding this dispute and consequently has not
recorded a liability in relation to this matter.

After filing for bankruptcy on October 1,
2001, the Company made a motion for dismissal of its complaint
for declaratory relief in the arbitration based upon having
filed for bankruptcy protection. An objection was filed to the
Companys motion.



| |                 
| | ----------------
| | Other Litigation

In addition to the matter referred to above, the
Company is involved in various lawsuits and claims arising in
the normal course of business. In the aggregate, settlement of
such suits and claims should not have a material adverse effect
on the Companys financial condition, results of
operations, cash flow and liquidity.

9.     Subsequent
Events



| |                  
| | -----------------
| | Chapter 11 Filing

On October 1, 2001, the Company filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy Code
in the United States Bankruptcy Court for the District of
Delaware in Wilmington. See Note 2.

On October 3, 2001, the Court issued an
Interim Order approving the DIP Facility with Heller in the
principal amount of $4.4 million, on which the Company drew
the initial amount of $1.0 million on October 4, 2001.
On October 19, 2001, the Court issued its Final Order of
the DIP Facility and also approved the Companys guaranty
of financing by the Non-Debtor Heller Borrowers of the Meditrust
Acquisition pursuant

12



---



##### 



ASSISTED LIVING CONCEPTS, INC.


(Debtor-in-Possession)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


to the Second Amendment, among other things. On
October 26, 2001, the Company and Carriage House filed a
First Amended Plan of Reorganization and a First Amended
Disclosure Statement, which amended the previous filings to
account for developments in the bankruptcy cases from and after
October 1, 2001 and to provide additional disclosure about
certain treatment of claims against and interests in the
debtors. The disclosure statement, which establishes the
timetable and procedures regarding the Companys
solicitation of votes for the Prenegotiated Plan, was approved
by the Court on October 30, 2001. See Notes 2
and 7.



| |                    
| | -------------------
| | AMEX Listing Status

On October 25, 2001, the Company received
notice from the American Stock Exchange (AMEX) that
pursuant to the SECs approval of AMEXs application
to strike the Companys common stock and its two series of
convertible subordinated debentures from listing and
registration on AMEX. These securities were delisted and ceased
trading on the AMEX on October 26, 2001. The Companys
common stock is currently listed on the over-the-counter
bulletin board.

13



---



##### 



Item 2.     Managements Discussion and Analysis of Financial Condition
and Results of Operations

References in this section to ALC,
the Company, us or we refer
to Assisted Living Concepts, Inc. and its wholly-owned
subsidiaries.

Overview

We operate, own and lease 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. 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. As of
September 30, 2001, we had operations in 16 states.

We experienced significant and rapid growth
between 1994 and 1998, primarily through the development of
assisted living residences and, to a lesser extent, through the
acquisition of assisted living residences, opening our last
twenty residences in 1999. At the closing of our initial public
offering in November 1994, we had an operating base of five
leased residences (137 units) located in Oregon. As of
September 30, 2001, we operated 185 residences (7,149
units), of which we owned 115 residences (4,515 units) and
leased 70 residences (2,634 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 operating 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                                                                                                                                  
|
| |  | reorganization costs.                                                                                                                                               

We anticipate that the majority of our revenues
will continue to come from private pay sources. However, we
believe that by having located 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 support when their private funds are depleted and
they become Medicaid eligible.

Although we manage the mix of private paying
tenants and Medicaid paying tenants residing in our facilities,
any significant increase in our Medicaid population could have
an adverse effect on our financial position, results of
operations or cash flows, particularly if states operating these
programs continue to limit, or more aggressively seek limits on,
reimbursement rates. See Risk Factors  We
depend on reimbursement by governmental payors and other third
parties for a significant portion of our revenues.

14



---



##### 



Results of Operations



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Three months ended September 30, 2001
	compared to three months ended September  30,
	2000:

The following table sets forth, for the periods
presented, results of operations (in millions), 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 Ended September 30,  |       | Three Months  
|                                                        |                                      |                                   |       | Ended         
|                                                        |                                      |                                   |       | Percentage     |       | September 30,
|                                                        |                                      |                                   |       | Increase/      |       | Increase/     |       |         
|                                                        |                                      | 2000                              |       | 2001           |       | Decrease      |       | Decrease |       | 2000 |     | 2001 
|                                                        |                                      |                                   |       |                |       |               |       |          |       |      |     |      
|                                                        |                                      |                                   |       |               
|                                                        |                                      | (In millions, except percentages) |       | (As percentage
|                                                        |                                      |                                   |       | of revenue)   
|Revenue                                                 |                                      | $                                 | 35.3  |                |       | $             | 38.0  |          |       | $    | 2.7 |       |      |   | 7.6  | %      |       |    | 100.0 | %     |       |    | 100.0 | %    
|Operating expenses:                                     |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|                                                        | Residence operating expenses         |                                   |       | 24.1           |       |               |       | 26.1     |       |      |     | 2.0   |      |   |      | 8.3    | %     |    |       | 68.1  | %     |    |       | 68.7  | %    
|                                                        | Corporate general and administrative |                                   |       | 3.2            |       |               |       | 4.5      |       |      |     | 1.3   |      |   |      | 40.1   | %     |    |       | 9.1   | %     |    |       | 12.0  | %    
|                                                        | Building rentals                     |                                   |       | 4.0            |       |               |       | 4.1      |       |      |     | .1    |      |   |      | 2.5    | %     |    |       | 11.4  | %     |    |       | 10.8  | %    
|                                                        | Depreciation and amortization        |                                   |       | 2.6            |       |               |       | 2.6      |       |      |     |      |      |   |      |       |       |    |       | 7.4   | %     |    |       | 6.7   | %    
|                                                        | Litigation settlement                |                                   |       | 10.0           |       |               |       |         |       |      |     | (10.0 | )    |   |      | (100.0 | )%    |    |       | 28.4  | %     |    |       |      |      
|                                                        |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|                                                        |                                      | Total operating expenses          |       |                | 43.9  |               |       |          | 37.3  |      |     |       | (6.6 | ) |      |        | (15.0 | )% |       |       | 124.4 | %  |       |       | 98.2  | % 
|                                                        |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|Operating income                                        |                                      |                                   | (8.6  | )              |       |               | 0.7   |          |       |      | 6.5 |       |      |   | 75.6 | %      |       |    | (24.4 | )%    |       |    | 1.8   | %    
|                                                        |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|Other income (expense):                                 |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|                                                        | Interest expense                     |                                   |       | (4.1           | )     |               |       | (5.3     | )     |      |     | (1.2  | )    |   |      | (29.3  | )%    |    |       | (11.6 | )%    |    |       | (13.9 | )%   
|                                                        | Interest income                      |                                   |       | 0.2            |       |               |       | 0.1      |       |      |     | (0.1  | )    |   |      | (50.0  | )%    |    |       | 0.5   | %     |    |       | 0.2   | %    
|                                                        | Other income (expense), net          |                                   |       | 0.1            |       |               |       |         |       |      |     | (0.1  | )    |   |      | 100.0  | %     |    |       | 0.3   | %     |    |       |      |      
|                                                        |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|                                                        |                                      | Total other expense               |       |                | (3.8  | )             |       |          | (5.2  | )    |     |       | 1.4  |   |      |        | 36.8  | %  |       |       | (10.7 | )% |       |       | (13.7 | )%
|                                                        |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|                                                        | Net loss before reorganization costs |                                   |       | (12.4          | )     |               |       | (4.5     | )     |      |     | (7.9  | )    |   |      | 63.7   | %     |    |       | (35.3 | )%    |    |       | (12.0 | )%   
|                                                        |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|                                                        | Reorganization costs                 |                                   |       |               |       |               |       | 2.8      |       |      |     | 2.8   |      |   |      | 100.0  | %     |    |       |      |       |    |       | 7.4   | %    
|                                                        |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|Net loss                                                |                                      | $                                 | (12.4 | )              |       | $             | (7.3  | )        |       | $    | 5.1 |       |      |   | 41.1 | %      |       |    | (35.3 | )%    |       |    | (19.3 | )%   
|                                                        |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|Other Data:                                             |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|Residences operated (end of period)                     |                                      |                                   | 185   |                |       |               | 185   |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|Units operated (end of period)                          |                                      |                                   | 7,149 |                |       |               | 7,149 |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|Average occupancy rate (based on occupied units)        |                                      |                                   | 81.35 | %              |       |               | 84.34 | %        |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|End of period occupancy rate (based on occupied
	units) |                                      |                                   | 82.68 | %              |       |               | 84.89 | %        |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|Average monthly rental rate                             |                                      | $                                 | 2,002 |                |       | $             | 2,082 |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|Sources of revenue:                                     |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|                                                        | Medicaid state paid portion          |                                   |       | 11.3           | %     |               |       | 12.4     | %     |      |     |       |      |   |      |        |       |    |       |       |       |    |       |       |      
|                                                        | Medicaid resident paid portion       |                                   |       | 6.3            |       |               |       | 6.6      |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |       |      
|                                                        | Private resident paid portion        |                                   |       | 82.4           |       |               |       | 81.0     |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |       |      
|                                                        |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      
|                                                        |                                      | Total                             |       |                | 100.0 | %             |       |          | 100.0 | %    |     |       |      |   |      |        |       |    |       |       |       |    |       |       |       |   
|                                                        |                                      |                                   |       |                |       |               |       |          |       |      |     |       |      |   |      |        |       |    |       |       |       |    |       |      

We incurred a net loss of $7.3 million, or
$0.43 per basic and diluted common share, on revenue of
$38.0 million for the three months ended September 30, 2001
(the September 2001 Quarter) as compared

15



---



##### 



to a net loss of $12.4 million or $0.73 per basic
and diluted common share, on revenues of $35.3 million for the
three months ended September 30, 2000 (the September
2000 Quarter).


Revenues.Revenues
were $38.0 million for the September 2001 Quarter as
compared to $35.3 million for the September 2000 Quarter, a
net increase of $2.7 million. The increase in revenue was
attributable to a combination of an increase in average
occupancy to 84.34% and average monthly rental rate to $2,082
for the September 2001 Quarter as compared to average occupancy
of 81.35% and average monthly rental rate of $2,002 for
September 2000 Quarter.

Residence Operating Expenses.Residence operating expenses were
$26.1 million for the September 2001 Quarter as compared to
$24.1 million for the September 2000 Quarter, a net
increase of $2.0 million.

The principal elements of the increase in
operating expenses include:



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $1.9 million related to increases in payroll
	costs due to increases in occupancy, wages, benefits, and
	medical and workers compensation insurance premiums;
|
| |  | $200,000 related to a 10% increase in utility
	costs;                                                                                                         
|
| |  | $100,000 related to an increase in kitchen
	expense as a result of increases in occupancy; and                                                                
|
| |  | $500,000 related to increases in professional and
	property liability insurance premiums and deductibles or
	retentions.                                      

These increases were offset by the following
decreases:



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | a decrease of $400,000 in property tax expense as
	a result of changes in assessments and related estimates; and
|
| |  | a decrease of $300,000 in bad debt expense due to
	more timely collection of aged accounts receivables.         

Corporate, General and Administrative.Corporate, general and administrative
expenses were $4.5 million for the September 2001 Quarter
compared to $3.2 million for the September 2000 Quarter, an
increase of approximately $1.3 million. The September 2000
Quarter included a reduction of $900,000 related to an insurance
reimbursement for legal and professional fees incurred in prior
periods in connection with the class action litigation.
Excluding the $900,000 reimbursement, the September 2000 Quarter
was $4.1 million as compared to $4.5 million in the
September 2001 Quarter, an increase of $400,000 which was due
primarily to an increase in payroll and related expenses.

Building Rentals.Building rentals were
$4.1 million for the September 2001 Quarter as compared to
$4.0 million for the September 2000 Quarter, an increase of
$100,000. The increase was due to annual rent escalators.

Depreciation and Amortization.Depreciation and amortization expense
was $2.6 million in the September 2001 Quarter as compared
to $2.6 million in the September 2000 Quarter.

Interest Expense.Interest expense was $5.3 million
for the September 2001 Quarter compared to $4.1 million for
the September 2000 Quarter, an increase of $1.2 million.
The increase was related to interest incurred on our
$4.0 million bridge loan entered into in November 2000,
interest incurred on HUD loans with principal of
$7.5 million, and interest costs associated with our draws
of $15.0 million on the Heller line of credit and the
related amortization of financing fees associated with this line
which was entered into in March 2001.

Interest Income.Interest income was $95,000 for the
September 2001 Quarter compared to $187,000 for the September
2000 Quarter, a decrease of $92,000. This decrease is the result
of decreased balances in cash and cash equivalents.

Reorganization Costs.Reorganization costs were
$2.8 million for the September 2001 Quarter. These include
professional fees, such as legal and financial advisory fees
incurred by the unofficial committee representing 47% of the
Debenture Holders (the Committee) and us related to
the reorganization. Since we

16



---



##### 



do not expect to raise any new capital as a
result of such reorganization, these amounts are expensed as
incurred in the accompanying consolidated financial statements.


Net Loss.As a
result of the above, we incurred a net loss of $7.3 million
or $0.43 per basic and diluted common share for the September
2001 Quarter, compared to a net loss of $12.4 million, or
$0.73 per basic and diluted common share, for the September 2000
Quarter.

17



---



##### 





| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Nine months ended September 30, 2001
	compared to nine months ended September  30,
	2000:

The following table sets forth, for the periods
presented, results of operations (in millions), 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.

|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |       |       |   
|------------------------------------------------------- | ------------------------------------------ | --------------------------------- | ----- | --------------- | ----- | --------- | ----- | -------- | ----- | ---- | ---- | ----- | ---- | - | ----- | ------ | ----- | -- | ----- | ----- | ----- | -- | ----- | ----- | ----- | --
|                                                        |                                            |                                   |       |                
|                                                        |                                            | Nine Months Ended September 30,   |       | Nine Months    
|                                                        |                                            |                                   |       | Ended September
|                                                        |                                            |                                   |       | Percentage      |       | 30,      
|                                                        |                                            |                                   |       | Increase/       |       | Increase/ |       |         
|                                                        |                                            | 2000                              |       | 2001            |       | Decrease  |       | Decrease |       | 2000 |      | 2001 
|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |      
|                                                        |                                            |                                   |       |                
|                                                        |                                            | (In millions, except percentages) |       | (As percentage 
|                                                        |                                            |                                   |       | of revenue)    
|Revenue                                                 |                                            | $                                 | 102.6 |                 |       | $         | 112.3 |          |       | $    | 9.7  |       |      |   | 9.5   | %      |       |    | 100.0 | %     |       |    | 100.0 | %    
|Operating expenses:                                     |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|                                                        | Residence operating expenses               |                                   |       | 69.0            |       |           |       | 76.6     |       |      |      | 7.6   |      |   |       | 11.0   | %     |    |       | 67.3  | %     |    |       | 68.2  | %    
|                                                        | Corporate general and administrative       |                                   |       | 12.3            |       |           |       | 13.2     |       |      |      | 0.9   |      |   |       | 7.3    | %     |    |       | 12.0  | %     |    |       | 11.8  | %    
|                                                        | Building rentals                           |                                   |       | 12.0            |       |           |       | 12.4     |       |      |      | 0.4   |      |   |       | 3.3    | %     |    |       | 11.7  | %     |    |       | 11.1  | %    
|                                                        | Depreciation and amortization              |                                   |       | 7.4             |       |           |       | 7.7      |       |      |      | 0.3   |      |   |       | 4.1    | %     |    |       | 7.2   | %     |    |       | 6.8   | %    
|                                                        | Litigation settlement                      |                                   |       | 10.0            |       |           |       |         |       |      |      | (10.0 | )    |   |       | (100.0 | )%    |    |       | 9.7   | %     |    |       |      |      
|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|                                                        |                                            | Total operating expenses          |       |                 | 110.7 |           |       |          | 109.9 |      |      |       | 9.2  |   |       |        | (9.1  | )% |       |       | 107.9 | %  |       |       | 97.9  | % 
|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|Operating income                                        |                                            |                                   | (8.1  | )               |       |           | 2.4   |          |       |      | 10.5 |       |      |   | 129.6 | %      |       |    | (7.9  | )%    |       |    | 2.1   | %    
|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|Other income (expense):                                 |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|                                                        | Interest expense                           |                                   |       | (12.3           | )     |           |       | (14.6    | )     |      |      | (2.3  | )    |   |       | (18.9  | )%    |    |       | (12.0 | )%    |    |       | (13.0 | )%   
|                                                        | Interest income                            |                                   |       | 0.6             |       |           |       | 0.4      |       |      |      | (0.2  | )    |   |       | (33.0  | )%    |    |       | 0.6   | %     |    |       | 0.4   | %    
|                                                        | Gain (loss) on sale and disposal of assets |                                   |       |                |       |           |       | (0.1     | )     |      |      | (0.1  | )    |   |       | (100.0 | )%    |    |       |      |       |    |       | (0.1  | )%   
|                                                        | Loss on sale of marketable securities      |                                   |       | (0.4            | )     |           |       |         |       |      |      | 0.4   |      |   |       | 100.0  | %     |    |       | (0.4  | )%    |    |       |      |      
|                                                        | Other income (expense), net                |                                   |       | 0.1             |       |           |       |         |       |      |      | (0.1  | )    |   |       | (100.0 | )%    |    |       | 0.1   | %     |    |       |      |      
|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|                                                        |                                            | Total other expense               |       |                 | (12.0 | )         |       |          | (14.3 | )    |      |       | (2.3 | ) |       |        | (19.2 | )% |       |       | (11.7 | )% |       |       | (12.7 | )%
|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|                                                        | Net loss before reorganization costs       |                                   |       | (20.1           | )     |           |       | (11.9    | )     |      |      | 8.2   |      |   |       | 40.8   | %     |    |       | (19.6 | )%    |    |       | (10.6 | )%   
|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|                                                        | Reorganization costs                       |                                   |       |                |       |           |       | 4.2      |       |      |      | 4.2   |      |   |       | 100.0  | %     |    |       |      |       |    |       | 3.7   | %    
|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|Net loss                                                |                                            | $                                 | (20.1 | )               |       | $         | (16.1 | )        |       | $    | 4.0  |       |      |   | (19.9 | )%     |       |    | (19.6 | )%    |       |    | (14.3 | )%   
|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|Other Data:                                             |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|Residences operated (end of period)                     |                                            |                                   | 185   |                 |       |           | 185   |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|Units operated (end of period)                          |                                            |                                   | 7,149 |                 |       |           | 7,149 |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|Average occupancy rate (based on occupied units)        |                                            |                                   | 79.92 | %               |       |           | 83.87 | %        |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|End of period occupancy rate (based on occupied
	units) |                                            |                                   | 82.68 | %               |       |           | 84.89 | %        |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|Average monthly rental rate                             |                                            | $                                 | 1,974 |                 |       | $         | 2,059 |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|Sources of revenue:                                     |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|                                                        | Medicaid state paid portion                |                                   |       | 10.9            | %     |           |       | 12.4     | %     |      |      |       |      |   |       |        |       |    |       |       |       |    |       |       |      
|                                                        | Medicaid resident paid portion             |                                   |       | 6.1             |       |           |       | 6.8      |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |       |      
|                                                        | Private resident paid portion              |                                   |       | 83.0            |       |           |       | 80.8     |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |       |      
|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      
|                                                        |                                            | Total                             |       |                 | 100.0 | %         |       |          | 100.0 | %    |      |       |      |   |       |        |       |    |       |       |       |    |       |       |       |   
|                                                        |                                            |                                   |       |                 |       |           |       |          |       |      |      |       |      |   |       |        |       |    |       |       |       |    |       |      

18



---



##### 



We incurred a net loss of $16.1 million, or
$0.94 per basic and diluted common share, on revenue of
$112.3 million for the nine months ended September 30,
2001 (the September 2001 YTD Period) as compared to
a net loss of $20.1 million or $1.17 per basic and diluted
common share, on revenues of $102.6 million for the nine
months ended September 30, 2000 (the September 2000
YTD Period).

Revenues.Revenues
were $112.3 million for the September 2001 YTD Period as
compared to $102.6 million for the September 2000 YTD
Period, a net increase of $9.7 million. The increase in
revenue was attributable to a combination of an increase in
average occupancy to 83.87% and average monthly rental rate to
$2,059 for the September 2001 YTD Period as compared to average
occupancy of 79.92% and average monthly rental rate of $1,974
for September 2000 YTD Period.

Residence Operating Expenses.Residence operating expenses were
$76.6 million for the September 2001 YTD Period as compared
to $69.0 million for the September 2000 YTD Period, a net
increase of $7.6 million.

The principal elements of the increase in
operating expenses include:



| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $5.7 million related to an related to
	increases in payroll costs due to increased occupancy, increased
	wages and benefits as a result of longer tenure employees, and
	increases in medical and workers compensation insurance
	premiums;
|
| |  | $900,000 related to a 14% increase in utility
	costs;                                                                                                                                                                                       
|
| |  | $150,000 related to increase in recruiting
	expenses;                                                                                                                                                                                       
|
| |  | $450,000 related to tenant care expenses;                                                                                                                                                                                                   
|
| |  | $600,000 related to an increase in kitchen
	expense as a result of increases in occupancy; and                                                                                                                                              
|
| |  | $1.5 million related to increases in
	professional and property liability insurance premiums and
	deductibles or retentions.                                                                                                                

These increases were offset by the following
decreases:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | decrease of $1.1 million in property tax
	expense as a result of changes in assessments and related
	estimates; and
|
| |  | decrease in bad debt expense of $600,000 due to
	more timely collection of aged receivables.                       

Corporate, General and Administrative.Corporate, general and administrative
expenses were $13.2 million for the September 2001 YTD
Period compared to $12.3 million for the September 2000 YTD
Period, an increase of approximately $900,000. The September
2000 YTD period included a reduction of $900,000 related to an
insurance reimbursement for legal and professional fees,
$300,000 of which was incurred in prior periods, in connection
with the class action litigation. Excluding the $900,000
reimbursement, the September 2001 YTD Period was
$13.2 million compared to $13.2 million in the
September 2001 YTD Period. Although total corporate, general and
administrative expenses remained comparable, fluctuations within
this category were as follows:

The principal elements that increased include:



| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | $200,000 related to recruiting and retention
	consulting;                                                                            
|
| |  | $250,000 increase in payroll and related
	expenses; and                                                                              
|
| |  | $100,000 related to public company expense due to
	increased board meetings and related expenses associated with
	the reorganization.

The principal elements that decreased in
corporate, general and administrative expense of:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | $300,000 related to decreases in director and
	officer insurance premiums for 2001 renewals; and
|
| |  | $250,000 related to legal, accounting and
	consulting fees.                                     

19



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##### 



Building Rentals.Building rentals were
$12.4 million for the September 2001 YTD Period as compared
to $12.0 million for the September 2000 YTD period, an
increase of $400,000. The increase was due to scheduled rent
escalators and to a retroactive rent increase of $145,000 paid
to one lessor during the March 2001 Quarter.

Depreciation and Amortization.Depreciation and amortization expense
was $7.7 million in the September 2001 YTD Period as
compared to $7.4 million in the September 2000 YTD Period,
an increase of $300,000. The increase is due to depreciation
expense related to the equipment acquired to support our
communications infrastructure.

Interest Expense.Interest expense was
$14.6 million for the September 2001 YTD Period compared to
$12.3 million for the September 2000 YTD Period, an
increase of $2.3 million. The increase was related to
interest incurred on our $4.0 million bridge loan entered
into in November 2000, interest on HUD loans with principal of
$7.5 million and interest costs associated with our draws
of $15.0 million on the Heller line of credit and the
related amortization of financing fees associated with this line
which was entered into in March 2001.

Interest Income.Interest income was $382,000 for the
September 2001 YTD Period compared to $576,000 for the September
2000 YTD Period, a decrease of $194,000. This decrease is the
result of decreased balances in cash and cash equivalents.

Reorganization Costs.Reorganization costs were
$4.2 million for the September 2001 YTD Period. These
include professional fees, such as legal and financial advisory
fees, incurred by the Committee and us related to the
reorganization. Since we do not expect to raise any new capital
as a result of such reorganization, these amounts are expensed
as incurred in the accompanying consolidated financial
statements.

Net Loss.As a
result of the above, we incurred a net loss of
$16.1 million or $0.94 per basic and diluted common share
for the September 2001 YTD Period, compared to a net loss of
$20.1 million, or $1.17 per basic and diluted common share,
for the September 2000 YTD Period.

Liquidity and Capital Resources

At September 30, 2001, we had a working
capital deficit of $20.4 million (including Heller line of
credit of $15.0 million) and unrestricted cash, cash
equivalents and cash held for tenant security deposits of
$5.6 million.

Net cash used in operating activities was
$14.7 million during the nine months ended
September 30, 2001. The primary uses were an increase of
$1.6 million in other current assets and a
$8.3 million decrease in other current liabilities
consisting primarily of payments of $7.8 million on our
class action litigation settlement payable. These uses were
offset by a decrease of $1.7 million in prepaid expenses.

Net cash used in investing activities was
$3.1 million during the nine months ended
September 30, 2001. The primary uses were an increase of
$1.6 million in restricted cash related to workers
compensation deposits required by our insurance carrier (funds
will be withdrawn from this account as 2001 workers
compensation claims are incurred and paid) and capital
expenditures of $1.5 million.

Net cash provided by financing activities was
$13.5 million during the nine months ended
September 30, 2001. We received proceeds of
$7.5 million in connection with long-term HUD insured
financing secured by three Texas properties and
$18.0 million in draws on our Heller line of credit during
the nine months ended September 30, 2001. Costs associated
with the closing of the HUD insured financings and the
establishment of the Heller line of credit were $350,000 and
$3.8 million ($500,000 of which was paid in 2000),
respectively. Of the $7.5 million in proceeds we received
from the HUD insured financing, $4.0 million was used to
pay off our $4.0 million bridge loan payable, $350,000 was
used for HUD insured loan closing costs, $3.0 million was
used to pay down the Heller line of credit and the remaining
proceeds were used to fund escrow accounts. Principal payments
on long term debt and capital lease obligations were
$4.3 million for the nine months ended September 30,
2001.

20



---



##### 



On October 1, 2001 the Company and its
wholly owned subsidiary Carriage House Assisted Living, Inc.
(Carriage House) filed a voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware in Wilmington (the
Court). We reached an agreement (the Plan
Support Agreement) for a financial reorganization with the
holders (the Debenture Holders) of
$75,857,000 million aggregate principal amount (out of a
total of $161,250,000 million aggregate principal amount
outstanding, or approximately 47%) of our two series of
convertible subordinated debentures (collectively, the
Debentures) that will be implemented through a
prenegotiated plan of reorganization (the Prenegotiated
Plan).

Pursuant to the Plan Support Agreement, upon the
effective date of the Prenegotiated Plan, (1) the
Debentures and certain of our other unsecured debt of will be
exchanged for (a) $40.25 million aggregate principal
amount of seven-year secured notes (the New Senior Secured
Notes), bearing interest at 10% per annum, payable
semi-annually in arrears, (b) $15.25 million aggregate
principal amount of ten-year secured notes (the New Junior
Secured Notes and collectively with the New Senior Secured
Notes, the New Notes), bearing interest payable in
additional New Junior Secured Notes for three years at 8% per
annum and thereafter payable in cash at 12% per annum payable
semi-annually in arrears, and (c) 96% of the common stock
of the reorganized Company, and (2) existing holders of the
our common stock will exchange their stock for 4% of the common
stock of the reorganized Company.

The New Senior Secured Notes will be secured by
(1) all presently unencumbered real property owned by us,
and (2) any additional real property owned by us that may
become unencumbered on or before the effective date of the
Prenegotiated Plan. The New Junior Secured Note will be secured
by a junior lien on the same collateral securing the New Senior
Secured Notes. If the aforementioned collateral has a fair
market value of less than $75.0 million as determined using
an agreed upon formula, then a junior security interest in the
collateral securing obligations of certain of our wholly-owned
subsidiaries (the Non-Debtor Heller Borrowers) under
a proposed financing with Heller Healthcare Finance, Inc.
(Heller), which was amended in connection with our
voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code, will also be provided to meet this market value
requirement. As part of the filing, and pursuant to the Plan
Support Agreement, we expect our vendors and trade creditors to
be paid in the ordinary course and to be unaffected by the
bankruptcy filing. The Plan Support Agreement also requires the
Debenture Holders to fully support the Prenegotiated Plan and
binds the transferees of any Debenture Holders which executed
the Plan Support Agreement to fully comply with the terms of the
Plan Support Agreement.

The implementation of the Prenegotiated Plan is
dependent upon a number of conditions typical in restructures of
this type including, among other things, final documentation
satisfactory to the Debenture Holders, Court approval of the
Prenegotiated Plan and related solicitation materials and our
acquisition of debtor-in-possession financing and takeout
financing upon our exit from bankruptcy. We obtained
debtor-in-possession financing from Heller, which was approved
by the Court by Interim Order on October 3, 2001 and Final
Order on October 19, 2001. Except as otherwise ordered by
the Court, a party who deems it necessary to file a proof of
claim must do so by November 15, 2001. We have a
confirmation hearing scheduled on December 5, 2001 and
expect the Prenegotiated Plan to be effective in early 2002.
However, there can be no assurance the Prenegotiated Plan will
become effective in early 2002, or at all. See Item 2 Risk
Factors.

We have incurred $2.8 million and
$4.2 million in reorganization costs for the three and nine
months ended September 30, 2001, respectively, and expect
to incur additional reorganization costs of approximately $2.0
million. Reorganization costs include legal, financial advisory
and other professional fees incurred by the Committee and us
related to reorganization. Since we do not expect to raise any
new capital as a result of such reorganization, these amounts
are expensed as incurred in the accompanying consolidated
financial statements.

On March 12, 2001, in exchange for a waiver
of U.S. Banks right to declare an event of default for our
failure to comply with certain financial covenants as of
December 31, 2000 and March 31, 2001, and for the
modification of certain financial covenants, we agreed to
maintain minimum cash balances of $11.0 million at the end
of each fiscal quarter, except for the fiscal quarter ending
June 30, 2001, which had a required minimum balance of
$8.0 million. The amendment also requires us to deposit
$500,000 in cash collateral with

21



---



##### 



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.


In May, 2001, we received a waiver of U.S.
Banks right to declare an event of default for our failure
to meet the March 31, 2001 cash balance requirements set
forth in the March 12, 2001 U.S. Bank loan amendment.

In August, 2001, we received a waiver of U.S.
Banks right to declare an event of default for our failure
to meet the September 30, 2001 and probable failure to meet
the December 31, 2001 cash balance requirements and other
financial ratios set forth in the amended U.S. Bank loan
agreement. There can be no assurance that we will be able to
meet these requirements as of the end of future quarters or that
U.S. Bank will grant waivers of any such future failure to meet
these requirements.

Failure to comply with any covenant constitutes
an event of default, which will allow U.S. Bank (at its
discretion) to declare any amounts outstanding under the loan
documents to be due and payable. Certain of our leases and loan
agreements 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.

On March 2, 2001, the Non-Debtor Heller
Borrowers entered into an agreement with Heller Healthcare
Finance, Inc. (Heller) for a line of credit facility
up to $45.0 million (the Existing Facility),
which we guaranteed. This line was scheduled to mature on
August 31, 2002 and would have been secured by up to
32 properties. This line carried an interest rate of 3.85%
over the three-month LIBOR rate floating monthly and required
monthly interest-only payments until maturity.

As of June 27, 2001, the Non-Debtor Heller
Borrowers amended the Existing Facility, reducing the aggregate
line of credit available from $45.0 million to
$20.0 million. The Existing Facility, was scheduled to
mature on September 28, 2001, which maturity was extended
to October 12, 2001 by Heller, and was secured by
26 properties.

On October 3, 2001, the Company and Carriage
House entered into a debtor-in-possession facility with Heller
in an amount of up to $4.4 million (the DIP
Facility). The DIP Facility was approved by the Court by
Interim Order on October 3, 2001 and by Final Order on
October 19, 2001. The DIP Facility supplements our cash
position in order to ensure that all on-going working capital
needs are met and is secured by eight of our properties and a
pledge of certain intercompany notes and the stock of certain of
our subsidiaries (collectively, the DIP Collateral).
The DIP Facility matures upon the earlier of our emergence from
bankruptcy or twelve months from the effective date of the DIP
Facility. Principal is payable at maturity and interest is
calculated at 5.0% over three month LIBOR, floating monthly, and
payable monthly in arrears. As of October 31, 2001, the we
have drawn $1.0 million on this DIP Facility.

Concurrent with the closing of the DIP Facility,
the Company and the Non-Debtor Heller Borrowers entered into a
further amendment of the Existing Facility (the Second
Amendment), which amendment, among other things, extends
the maturity of the Existing Facility to be coterminous with the
DIP Facility, amends the interest to be calculated at 5.0% over
three month LIBOR, floating monthly, payable monthly in arrears,
and permits the financing of the acquisition by Texas ALC
Partners, L.P. (Texas ALC) of sixteen properties
currently leased by Texas ALC from the current lessor
thereunder, T and F Properties, L.P. (the
Meditrust Properties and the acquisition by Texas
ALC, the Meditrust Acquisition). The purchase of the
Meditrust Properties was completed on October 24, 2001. The
DIP Collateral and the collateral for the Existing Facility
(including the Meditrust Properties when acquired)
cross-collateralize both the DIP Facility and the Existing
Facility, as amended. The extension of the Company guarantee was
approved by the Court. Fees incurred to date, including
commitment fees, funding fees, closing fees and professional
fees associated with the establishment of the Heller credit
facility are $3.8 million ($500,000 of which was paid in
2000). The balance outstanding under the Heller facilities is
$39.5 million (including $1.0 million under the DIP
Facility) at October 31, 2001.

The DIP Facility may be refinanced through the
Existing Facility, as amended by the Second Amendment in
connection with the exit from bankruptcy (the Exit
Facility). The principal amount of the

22



---



##### 



Exit Facility will not exceed $44.0 million
and will mature 36 months from the date on which we exit
from bankruptcy. Principal will be payable monthly in a monthly
amount of $50,000 for the first year, $65,000 for the second
year and $80,000 for the last year of the Exit Facility term.
Interest will be calculated at 4.5% over three month LIBOR,
floating monthly (not to be less than 8%), and payable monthly
in arrears. The Exit Facility is to be secured by
32 properties owned by the Non-Debtor Heller Borrowers. We
will remain liable for the entire amount of the Exit Facility as
a guarantor.


Approximately $27.2 million of our
indebtedness was secured by letters of credit held by U.S. Bank
as of September 30, 2001, which in some cases have
termination dates prior to the maturity of the underlying debt.
As such letters of credit expire, beginning in 2003, we will
need to obtain replacement letters of credit, post cash
collateral or refinance the underlying debt. There can be no
assurance that we will be able to procure replacement letters of
credit from the same or other lending institutions on terms that
are acceptable to us. 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.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued FASB Statements Nos. 141 and 142
(FAS 141 and FAS 142), Business
Combinations and Goodwill and Other Intangible
Assets. FAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides
guidance on purchase accounting related to the recognition of
intangible assets and accounting for negative goodwill.
FAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Under FAS
142, goodwill will be tested annually and whenever events or
circumstances occur indicating that goodwill might be impaired.
FAS 141 and FAS 142 are effective for all business
combinations initiated after June 30, 2001.

Upon adoption of FAS 142, amortization of
goodwill recorded for business combinations consummated prior to
July 1, 2001 will cease, and intangible assets acquired
prior to July 1, 2001 that do not meet the criteria for
recognition under FAS 141 will be reclassified to goodwill.
Companies are required to adopt FAS 142 for fiscal years
beginning after December 15, 2001. The Company will adopt
FAS 142 on January 1, 2002. In connection with the adoption
of FAS 142, the Company will be required to perform a
transitional goodwill impairment assessment. The Company has not
yet determined the impact these standards will have on its
results of operations and financial position.

In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is required to be adopted for fiscal
years beginning after June 15, 2002 The Company has not yet
determined what effect this statement will have on its financial
statements.

Also in August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived to be Disposed Of. This new
statement also supersedes certain aspects of APB 30,
Reporting the Results of Operations  Reporting
the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, with regard to reporting the effects of a
disposal of a segment of a business and will require expected
future operating losses from discontinued operations to be
reported in discontinued operations in the period incurred
(rather than as of the measurement date as presently required by
APB 30). In addition, more dispositions may qualify for
discontinued operations treatment. The provisions of this
statement are required to be applied for fiscal years beginning
after December 15, 2001 and interim periods within those
fiscal years. The Company has not yet determined what effect
this statement will have on its financial statements.

Risk Factors

Set forth below are the risks that we believe are
material. This report on Form 10-Q, including the risks
discussed below, contains forward-looking statements made
pursuant to the safe harbor provisions of the

23



---



##### 



Private Securities Litigation Reform Act of 1995.
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) the
possibility that we will experience a decrease in occupancy in
our residences, which would adversely affect residence revenues
and operating margins, (iii) our ability to operate our
residences in compliance with evolving regulatory requirements
(iv) the degree to which our future operating results and
financial condition may be affected by a reduction in Medicaid
reimbursement rates, and (v) the possibility that our
Prenegotiated Plan of reorganization will not be approved by the
Court in a timely manner, or at all. In light of such risks and
uncertainties, our actual results could differ materially from
such forward-looking statements. 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.




| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | The commencement of Chapter 11
	proceedings on October 1, 2001 may disrupt our
	operations.

The commencement of the Chapter 11, even in
connection with a prenegotiated plan, could adversely affect our
relationships with trade creditors, landlords, equipment
vendors, employees and residents and their families. If those
relationships are adversely affected, our operations could be
materially affected. Weakened operating results could adversely
affect our ability to obtain confirmation of the Prenegotiated
Plan and maintain our operations. To preserve these
relationships, we expect to continue to pay vendors in the
ordinary course of business.



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we receive insufficient votes regarding
	the Prenegotiated Plan, we will seek confirmation of the
	Prenegotiated Plan under the cramdown provisions of the
	Bankruptcy Code.

The Prenegotiated Plan is subject to vote by
certain interested parties, including the Debenture holders. In
the event that sufficient votes are not received by those
eligible to vote on the Plan, we intend to seek confirmation of
the Plan under the cramdown provisions of section 1129(b)
of the Bankruptcy Code. In order to confirm the Plan using a
cramdown, the Court must determine that, in addition to
satisfying all the other requirements of confirmation, the Plan
does not discriminate unfairly and is fair and
equitable with respect to any interested party which does
not accept the Plan. Although we believe the Plan satisfies the
requirements of Section 1129(b), there can be no assurance
that the Court will decide that all of these requirements have
been satisfied. If the Plan is not confirmed, we may seek to
accomplish an alternative restructuring of our capitalization
and our obligations to creditors and equity holders. There can
be no assurance that the terms of any such alternative
restructuring would be similar to or as favorable to our
creditors and equity holders as those proposed in the
Prenegotiated Plan.

The
Prenegotiated Plan may not be confirmed by the
Court.

Although we believe that the Prenegotiated Plan
satisfies all the requirements for confirmation by the Court,
there can be no assurance that the Court will reach the same
conclusion. The Court may refuse to confirm the Prenegotiated
Plan or may require modifications to the Prenegotiated Plan. In
addition, the Court may require us to resolicit votes from
creditors and equity holders if the Prenegotiated Plan is
modified.

The timing of
the Effective Date is uncertain.

Although a confirmation hearing has been
scheduled on December 5, 2001 and the Company and Carriage
House believe the Prenegotiated Plan will become effect in early
2002, there can be no assurance that this timing or that
conditions precedent to the Prenegotiated Plan will be met.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | We are highly leveraged; our loan and lease
	agreements contain financial covenants.

We are highly leveraged. We had total
indebtedness, including short-term portion, of
$254.5 million and shareholders equity of
$47.7 million as of September 30, 2001. We expect to
obtain relief through approval of

24



---



##### 



the Prenegotiated Plan but will continue to be
highly leveraged (See Item I, Note 2). The degree to
which we are leveraged could have important consequences,
including:




| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | making it difficult to satisfy our debt or lease
	obligations;                                                                                                                                                                                                                            
|
| |  | increasing our vulnerability to general adverse
	economic and industry conditions;                                                                                                                                                                                                        
|
| |  | limiting our ability to obtain additional
	financing;                                                                                                                                                                                                                                     
|
| |  | requiring dedication of a substantial portion of
	our cash flow from operations to the payment of principal and
	interest on our debt and leases, thereby reducing the
	availability of such cash flow to fund working capital, capital
	expenditures or other general corporate purposes;
|
| |  | limiting our flexibility in planning for, or
	reacting to, changes in our business or industry; and                                                                                                                                                                                       
|
| |  | placing us at a competitive disadvantage to less
	leveraged competitors.                                                                                                                                                                                                                  

Several of our debt instruments and leases
contain financial covenants, including debt-to-cash flow and net
worth tests. On March 12, 2001, in exchange for a waiver of
U.S. Banks right to declare an event of default for our
failure to comply with certain financial covenants as of
December 31, 2000 and March 31, 2001, and for the
modification of certain financial covenants, we agreed to
maintain minimum cash balances of $11.0 million at the end
of each fiscal quarter, except for the fiscal quarter ending
June 30, 2001 which had a required minimum balance of
$8.0 million. The amendment also requires 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. As of the date of this filing, no such
additional deposits have been required.

In May, 2001, we received a waiver of U.S.
Banks right to declare an event of default for our failure
to meet the quarterly cash balance requirements set forth in the
March 12, 2001 U.S. Bank loan amendment.

In August, 2001, we received a waiver of U.S.
Banks right to declare an event of default for our failure
to meet the September 30, 2001 and probable failure to meet
the December 31, 2001 quarterly cash balance requirements
and other financial ratios set forth in the amended U.S. Bank
loan agreement. There can be no assurance that we will be able
to meet these requirements as of the end of future quarters or
that U.S. Bank will grant waivers of any such future failure to
meet these requirements.

Failure to comply with any covenant constitutes
an event of default, which will allow U.S. Bank (at its
discretion) to declare any amounts outstanding under the loan
documents to be due and payable. We cannot provide assurance
that we will comply in the future with the modified financial
covenants included in the agreement, or with the financial
covenants set forth in our other debt agreements and leases. If
we fail to comply with one or more of the U.S. Bank covenants or
any other debt or lease covenants (after giving effect to any
applicable cure period), the lender or lessor may declare us in
default of the underlying obligation and exercise any available
remedies, which may include:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | in the case of debt, declaring the entire amount
	of the debt immediately due and payable;
|
| |  | foreclosing on any residences or other collateral
	securing the obligation; and           
|
| |  | in the case of a lease, terminating the lease and
	suing for damages.                     

Many of our debt instruments and leases contain
cross-default provisions pursuant to which a default
under one obligation can cause a default under one or more other
obligations. Accordingly, if enforced, we could experience a
material adverse effect on our financial condition.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | If an active trading market does not
	develop for our securities, stockholders may not be able to
	resell their securities.

On October 25, 2001, we received notice from
the American Stock Exchange (AMEX) that pursuant to
the SECs approval of AMEXs application to strike our
common stock and our two series of convertible subordinated
debentures from listing and registration on AMEX. These
securities were delisted and ceased

25



---



##### 



trading on the AMEX on October 26, 2001. We
do not believe we satisfy the requirements for listing our
securities on any other U.S. exchange or NASDAQ. Our common
stock is currently listed on the over-the-counter bulletin
board. We are exploring other options; however, at this time
there can be no assurances that there will be an active trading
market for our securities.




| |                                                            
| | -----------------------------------------------------------
| | Increases in utility costs could reduce our
	profitability.

Utility costs represent a significant percentage
of our operating costs. The cost of utilities may continue to
rise. While we have not historically included utility surcharges
in the rental rates we charge to our residents, we may do so in
the future. There can be no assurance that we will be able to do
so. Increases in the costs of utilities that we are unable to
pass on to our residents could significantly reduce our profits.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | We are involved in a dispute with our prior
	directors, officers and corporate liability insurance
	carrier.

In September 2000, we reached an agreement to
settle the class action litigation relating to the restatement
of our financial statements for the years ended
December 31, 1996 and 1997 and the first three fiscal
quarters of 1998. This agreement received final court approval
on November 30, 2000 and we were dismissed from the
litigation with prejudice. On September 28, 2001, we made
our final installment of $1.0 million on our promissory
note for the class action litigation settlement. Although we
have been dismissed from the litigation with prejudice, an
outstanding dispute regarding coverage exists with our prior
directors, officers and corporate liability insurance carriers.
The Company and the insurance carriers agreed to resolve this
dispute through binding arbitration, and we filed a complaint
for a declaratory judgment that we are not liable to the
carriers as claimed. We believe we have strong defenses
regarding this dispute and consequently have not recorded a
liability in relation to this matter.

After filing for bankruptcy on October 1,
2001, we made a motion for dismissal of our complaint for
declaratory relief in the arbitration based upon having filed
for bankruptcy protection. The carriers counter-claimed to
recover an amount capped at $4.0 million.

We are party
to other legal proceedings.

Participants in the senior living and long-term
care industry, including us, are routinely subject to lawsuits
and claims. Many of the persons who bring these lawsuits and
claims seek significant monetary damages, and these lawsuits and
claims often result in significant defense costs. As a result,
the defense and ultimate outcome of lawsuits and claims against
us may result in higher operating expenses. Those higher
operating expenses could have a material adverse effect on our
business, financial condition, results of operations, cash flow
or liquidity.



| |                                                                           
| | --------------------------------------------------------------------------
| | We may be liable for losses not covered by
	or in excess of our insurance.

In order to protect ourselves against the
lawsuits and claims made against us, we currently maintain
insurance policies in amounts and covering risks that are
consistent with industry practice. However, as a result of poor
loss experience, a number of insurance carriers have stopped
providing insurance coverage to the long-term care industry, and
those remaining have increased premiums and deductibles
substantially. While nursing homes have been primarily affected,
assisted living companies, including us, have experienced
premium and deductible increases. During our claim year ended
December 31, 2000, our professional liability insurance
coverage included deductible levels of $100,000 per incident.
For the claim year ending December 31, 2001, this
deductible has been replaced with a retention level of $250,000,
except in Florida and Texas in which the retention level is
$500,000. In certain states, particularly Florida and Texas,
many long-term care providers are facing very difficult
renewals. There can be no assurance that we will be able to
obtain liability insurance in the future on commercially
reasonable terms or at all. A claim against us, covered by, or
in excess of, our insurance, could have a material adverse
affect on our operations, cash flows or liquidity.

Our director, officer and corporate liability
insurance policy expires on January 31, 2002. If our Plan
of Reorganization is not yet effective, we may seek an extension
of that policy. There is no guarantee that the policy will be
extended or that we can obtain a new policy, if the Plan has
become effective. If we fail to

26



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##### 



extend the policy or obtain a new policy, there
is no assurance that we can retain our directors and officers.
Also, if we fail to extend the policy or obtain a new policy, we
may be required to cover the cost of any liability under our
current indemnification arrangements with our directors and
officers, which could have a material adverse effect on our
operations, cash flows or liquidity.


We are
subject to significant government regulation.

The operation of assisted living facilities and
the provision of health care services are subject to federal
laws, and state and local licensure, certification and
inspection laws that regulate, among other matters:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | the number of licensed residences and units per
	residence;                
|
| |  | the provision of services;                                                 
|
| |  | equipment;                                                                 
|
| |  | staffing, including professional licensing and
	criminal background checks;
|
| |  | operating policies and procedures;                                         
|
| |  | fire prevention measures;                                                  
|
| |  | environmental matters;                                                     
|
| |  | resident characteristics;                                                  
|
| |  | physical design and compliance with building and
	safety codes;            
|
| |  | confidentiality of medical information;                                    
|
| |  | safe working conditions;                                                   
|
| |  | family leave; and                                                          
|
| |  | disposal of medical waste.                                                 

The cost of compliance with these regulations is
significant for us. In addition, it could adversely affect our
financial condition or results of operations if a court or
regulatory tribunal were to determine we have failed to comply
with any of these laws or regulations. Because these laws and
regulations are amended from time to time, we cannot predict
when and to what extent liability may arise. See
 We must comply with laws and regulations
regarding the confidentiality of medical information,
 We must comply with restrictions imposed by
laws benefiting disabled persons,  We may
incur significant costs and liability as a result of medical
waste and  We may incur significant costs
related to environmental remediation or compliance.

In the ordinary course of business, we receive
and have received notices of deficiencies for failure to comply
with various regulatory requirements. We review such notices
and, in most cases, will agree with the regulator upon the steps
to be taken to bring the facility into compliance with
regulatory requirements. From time to time, we may dispute the
matter and sometimes will seek a hearing if we do not agree with
the regulator. In some cases or upon repeat violations, the
regulator may take one or more adverse actions against a
facility, such as:



| |   |                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the imposition of
	fines we paid $16,000
	and $15,000, respectively, in the aggregate for the year ended
	December 31, 2000 and the nine months ended
	September 30, 2001;                                                                                                                                         
|
| |  | temporary stop placement of admission of new
	residents, or imposition of other conditions to admission of new
	residents to a facility these applied to four residences (two
	in Washington and two in Idaho) in 2000, and were continued for
	two residences into 2001, one of which is still in stop
	placement;
|
| |  | termination of a facilitys Medicaid
	contract;                                                                                                                                                                                                                                                                     
|
| |  | conversion of a facilitys license to
	provisional status;and                                                                                                                                                                                                                                                       

27



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##### 





| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | suspension or revocation of a facilitys
	license,which in both 2000 and 2001
	included one residence in Washington against which the state has
	commenced license revocation procedures. This matter is still
	pending.

The operation of our residences is subject to
federal and state laws prohibiting fraud by health care
providers, including criminal provisions, which prohibit filing
false claims or making false statements to receive payment or
certification under Medicaid, or failing to refund overpayments
or improper payments. Violation of these criminal provisions is
a felony punishable by imprisonment and/or fines. We may be
subject to fines and treble damage claims if we violate the
civil provisions which prohibit the knowing filing of a false
claim or the knowing use of false statements to obtain payment.

State and federal governments are devoting
increasing attention and resources to anti-fraud initiatives
against health care providers. The Health Insurance Portability
and Accountability Act of 1996 (HIPAA) and the
Balanced Budget Act of 1997 expanded the penalties for health
care fraud, including broader provisions for the exclusion of
providers from the Medicaid program. We have established
policies and procedures that we believe are sufficient to ensure
that our facilities will operate in substantial compliance with
these anti-fraud and abuse requirements. While we believe that
our business practices are consistent with Medicaid criteria,
those criteria are often vague and subject to change and
interpretation. Aggressive anti-fraud actions, however, could
have an adverse effect on our financial position, results of
operations or cash flows.

Because our stock has been publicly traded, we
are subject to regulation by the Securities and Exchange
Commission (SEC). In April, 1999, we received a
preliminary inquiry from the SEC regarding the restatement of
our financial statements for the years ended December 31,
1996 and 1997 and the first three quarters of 1998 and related
matters. We provided the SEC with information and documents in
response to the inquiry, and have received no correspondence
from the SEC regarding the inquiry since March 2000. The SEC has
never alleged any violation of law in connection with the
inquiry. There can be no assurance that the SEC will not resume
its inquiry.

We must
comply with laws and regulations regarding the confidentiality
of medical information.

In 1996, the HIPAA law created comprehensive new
requirements regarding the confidentiality of medical
information that is or has been electronically transmitted or
maintained. The Department of Health and Human Services has
enacted regulations implementing the law, and we may have to
significantly change the way we maintain and transmit healthcare
information for our residents to comply with these regulations.

Healthcare providers must take reasonable
steps to ensure that the provider, as well as the
providers business partners, comply with the laws
requirements. Therefore, we may be required to ensure that the
other entities with which we do business are also in compliance
with these laws. HIPAA also created certain consumer rights with
which we may be required to comply, including a right of notice
regarding our information practices, a right of access to
inspect and copy such individuals protected medical
information, and a right to receive an accounting of all
disclosures made by us, with certain exceptions. Significant
changes in these regulations have recently occurred but
enforcement is not expected until April 2003. The costs to
comply with these final regulations could have an adverse effect
on our financial position, results of operations, cash flows and
prospects.

We must
comply with restrictions imposed by laws benefiting disabled
persons.

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 that also may require us to modify existing
residences to allow disabled persons to access the residences.
We believe that our residences are either substantially in
compliance with present requirements or are exempt from them.
However, if required changes cost more than anticipated, or must
be made sooner than anticipated, we would incur additional
costs. Further legislation may impose additional burdens or
restrictions related to access by disabled persons, and the
costs of compliance could be substantial.

28



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##### 





| |                                                                            
| | ---------------------------------------------------------------------------
| | We may incur significant costs and
	liability as a result of medical waste.

Our facilities generate potentially infectious
waste due to the illness or physical condition of the residents,
including blood-soaked bandages, swabs and other medical waste
products and incontinence products of those residents diagnosed
with infectious diseases. The management of potentially
infectious medical waste, including handling, storage,
transportation, treatment and disposal, is subject to regulation
under federal and state laws. These laws and regulations set
forth requirements for managing medical waste, as well as
permit, record keeping, notice and reporting obligations. Any
finding that we are not in compliance with these laws and
regulations could adversely affect our business operations and
financial condition. Because these laws and regulations are
amended from time to time, we cannot predict when and to what
extent liability may arise. In addition, because these
environmental laws vary from state to state, expansion of our
operations to states where we do not currently operate may
subject us to additional restrictions on the manner in which we
operate their facilities.

We may be liable under some laws and regulations
as an owner, operator or an entity that arranges for the
disposal of hazardous or toxic substances at a disposal site. In
that event, we may be liable for the costs of any required
remediation or removal of the hazardous or toxic substances at
the disposal site. In connection with the ownership or operation
of our properties, we could be liable for these costs, as well
as some other costs, including governmental fines and injuries
to persons or properties. As a result, any hazardous or toxic
substances which are present, with or without our knowledge, at
any property held or operated by us could have an adverse effect
on our business, financial condition or results of operations.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | We could incur significant costs related to
	environmental remediation or compliance.

We are subject to various federal, state and
local environmental laws, ordinances and regulations. Some of
these laws, ordinances and regulations hold a current or
previous owner, lessee or operator of real property liable for
the cost of removal or remediation of some hazardous or toxic
substances that could be located on, in or under such property.
These laws and regulations often impose liability whether or not
we knew of, or were responsible for, the presence of the
hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial.
Furthermore, there is no limit to our liability under such laws
and regulations. As a result, our liability could exceed their
propertys value and aggregate assets. The presence of
these substances or failure to remediate these substances
properly may also adversely affect our ability to sell or our
property, or to borrow using our property as collateral.



| |                                                   
| | --------------------------------------------------
| | Many assisted living markets have been
	overbuilt.

Many assisted living markets have been or are
currently being overbuilt, including certain markets in which we
currently operate. In addition, the barriers to entry into the
assisted living industry are not substantial. The effects of
overbuilding include:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | it takes significantly longer for our residences
	to fill up,                             
|
| |  | newly opened facilities may attract residents
	from some or all of our current facilities,
|
| |  | there is pressure to lower or not increase rates
	paid by residents in our residences,    
|
| |  | there is increased competition for workers in
	already tight labor markets, and           
|
| |  | our profit margins are lower until vacant units
	in our residences are filled.            

If we are unable to compete effectively in
markets as a result of overbuilding, we will suffer lower
revenue and may suffer a loss of market share.



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | We may not be able to attract and retain
	qualified employees and control labor costs.

We compete with other providers of long-term care
with respect to attracting and retaining qualified personnel. A
shortage of qualified personnel may require us to enhance our
wage and benefits packages in order to compete. Some of the
states in which we operate impose licensing requirements on
individuals serving

29



---



##### 



as administrators at assisted living residences,
and others may adopt similar requirements. We also depend upon
the available labor pool of low-wage employees. We cannot
guarantee that our labor costs will not increase, or that, if
they do increase, they can be matched by corresponding increases
in revenues.




| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business relies heavily on certain
	markets and an economic downturn or changes in the laws
	affecting our business in those markets could have a material
	adverse effect on our results.

Our business depends significantly on our
properties located in Texas, Indiana, Oregon, Ohio and
Washington. As of September 30, 2001, 21.6% of our
properties were located in Texas, 11.4% in Indiana, 10.3% in
Oregon, 9.7% in Ohio and 8.6% in Washington. An economic
downturn, or changes in the laws affecting our business, in
these markets could have a material adverse effect on our
operating results.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | We depend on reimbursement by governmental
	payors and other third parties for a significant portion of our
	revenues.

Although revenues at a majority of our residences
come primarily from private payors, we derive a substantial
portion of our revenues from reimbursements by third-party
governmental payors, including state Medicaid waiver programs.
We expect that state Medicaid waiver programs will continue to
constitute a significant source of our revenues in the future,
and it is possible that the proportionate percentage of revenue
received by us from Medicaid waiver programs will increase.
There are continuing efforts by governmental payors and by
non-governmental payors, such as commercial insurance companies
and health maintenance organizations, to contain or reduce the
costs of health care by lowering reimbursement rates, increasing
case management review of services and negotiating reduced
contract pricing. Also, there have been, and we expect that
there will continue to be, additional proposals to reduce the
federal and some state budget deficits by limiting Medicaid
reimbursement in general. If any of these proposals are adopted
at either the federal or the state level, such change could have
a material adverse effect on our business, financial condition,
results of operations and prospects. The state of Oregon
recently proposed a substantial reduction in Medicaid funding
which was ultimately not adopted.

The following table sets forth the sources of our
revenue for states where we participate in Medicaid programs.
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
Tenant Paid Portion.

|           |  |                    |      |                    |  |          |      |         |  |         |      |         |  |  |      |   |  |  |      |   |  |  |      |  
|---------- |  | ------------------ | ---- | ------------------ |  | -------- | ---- | ------- |  | ------- | ---- | ------- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|           |  |                    |      |                   
|           |  | Nine Months Ended  |      | Nine Months Ended 
|           |  | September 30, 2000 |      | September 30, 2001
|           |  |                    |      |                   
|           |  |                    |      |                    |  |          |      |        
|           |  | Medicaid           |      | Private            |  | Medicaid |      | Private
|           |  |                    |      |                    |  |          |      |        
|           |  | State              |      | Tenant             |  | Tenant   |      | State   |  | Tenant  |      | Tenant 
|           |  | Paid               |      | Paid               |  | Paid     |      | Paid    |  | Paid    |      | Paid   
|           |  | Portion            |      | Portion            |  | Portion  |      | Portion |  | Portion |      | Portion
|           |  |                    |      |                    |  |          |      |         |  |         |      |        
|Oregon     |  |                    | 28.3 | %                  |  |          | 15.6 | %       |  |         | 56.1 | %       |  |  | 28.0 | % |  |  | 16.3 | % |  |  | 55.7 | %
|Washington |  |                    | 27.2 | %                  |  |          | 14.2 | %       |  |         | 58.6 | %       |  |  | 29.4 | % |  |  | 17.3 | % |  |  | 53.3 | %
|Idaho      |  |                    | 6.4  | %                  |  |          | 3.2  | %       |  |         | 90.4 | %       |  |  | 16.1 | % |  |  | 9.8  | % |  |  | 74.1 | %
|Arizona    |  |                    | 10.2 | %                  |  |          | 7.2  | %       |  |         | 82.6 | %       |  |  | 15.7 | % |  |  | 13.2 | % |  |  | 71.1 | %
|New Jersey |  |                    | 15.4 | %                  |  |          | 7.7  | %       |  |         | 76.9 | %       |  |  | 21.1 | % |  |  | 5.7  | % |  |  | 73.2 | %
|Texas      |  |                    | 13.0 | %                  |  |          | 8.0  | %       |  |         | 79.0 | %       |  |  | 15.1 | % |  |  | 7.6  | % |  |  | 77.3 | %
|Nebraska   |  |                    | 8.1  | %                  |  |          | 4.3  | %       |  |         | 87.6 | %       |  |  | 9.3  | % |  |  | 5.5  | % |  |  | 85.2 | %

In addition, although we manage the mix of
private paying tenants and Medicaid paying tenants residing in
our facilities, any significant increase in our Medicaid
population could have an adverse effect on our financial
position, results of operations or cash flows, particularly if
the states operating these programs continue to limit, or more
aggressively seek limits on, reimbursement rates.

30



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##### 





|        |                                                                                               
|------- | ----------------------------------------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosure
	Regarding Market Risk and Risk Sensitive
	Instruments

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

For fixed rate debt, changes in interest rates
generally affect the fair market value of the debt instrument,
but not our earnings 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
earnings 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 $42.2 million outstanding at
September 30, 2001 with a weighted average interest rate of
4.1%. Assuming that our balance of variable rate debt remains
constant at $42.2 million, each one-percent increase in
interest rates would result in an annual increase in interest
expense, and a corresponding decrease in cash flows, of
$422,000. Conversely, each one-percent decrease in interest
rates would result in an annual decrease in interest expense,
and a corresponding increase in cash flows, of $422,000.

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.

We do not use foreign currency exchange forward
contracts or commodity contracts and do not have foreign
currency exposure.

PART II  OTHER
INFORMATION

Item 1.     Legal Proceedings



| |                           
| | --------------------------
| | Insurance Coverage Dispute

In September 2000, we reached an agreement to
settle the class action litigation relating to the restatement
of our financial statements for the years ended
December 31, 1996 and 1997 and the first three fiscal
quarters of 1998. This agreement received final court approval
on November 30, 2000 and we were dismissed from the
litigation with prejudice. On September 28, 2001, we made
our final installment of $1.0 million on our promissory
note for the class action litigation settlement. Although we
have been dismissed from the litigation with prejudice, an
outstanding dispute regarding coverage exists with our prior
directors, officers and corporate liability insurance carriers.
The Company and the insurance carriers agreed to resolve this
dispute through binding arbitration, and we filed a complaint
for a declaratory judgment that we are not liable to the
carriers as claimed. The carriers counter-claimed to recover an
amount capped at $4.0 million. We believe we have strong
defenses regarding this dispute and consequently have not
recorded a liability in relation to this matter.

After filing for bankruptcy on October 1,
2001, we made a motion for dismissal of our complaint for
declaratory relief in the arbitration based upon having filed
for bankruptcy protection. An objection was filed to our motion.



| |                 
| | ----------------
| | Other Litigation

In addition to the matter referred to above, we
are involved in various lawsuits and claims arising in the
normal course of business. In the aggregate, settlement of such
suits and claims should not have a material

31



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##### 



adverse effect on our financial condition,
results of operations, cash flow and liquidity. However, if
these matters were determined adversely to us, such a
determination could have a material adverse effect on our
financial condition, results of operations, cash flow and
liquidity.


Item 6.     Exhibits and Reports on Form 8-K

(a)  The following documents are filed as
part of this report:

|        |      |  |  |                                                                                                                                                                                                                                                                
|------- | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      | 
|Number  |      | 
|        |      | 
|        | 10.1 |  |  | Loan Agreement between Heller Healthcare Finance,
	Inc. and Assisted Living Concepts, Inc. and Carriage House
	Assisted Living, Inc., as Debtors-in-Possession, dated
	October 3, 2001.                                                                        
|        | 10.2 |  |  | Option Agreement between T and F Properties, L.P.
	and Texas ALC Partners, L.P., dated September 25, 2001.                                                                                                                                                     
|        | 10.3 |  |  | Second Amendment to Loan Documents between
	Assisted Living Concepts, Inc., ALC Ohio, Inc., ALC
	Pennsylvania, Inc., ALC Iowa, Inc., ALC Nebraska, Inc., ALC New
	Jersey, Inc., ALC Indiana, Inc., and Heller Healthcare Finance,
	Inc., dated October 3, 2001.
|        | 10.4 |  |  | Stock Pledge Agreement by Assisted Living
	Concepts, Inc., as Debtors-in-Possession to and in favor of
	Heller Healthcare Finance, Inc. (Security Agreement), dated
	October 3, 2001.                                                                          
|        | 10.5 |  |  | Exercise of Option Agreement between
	T and F Properties, L.P. and Texas ALC Partners, L.P.,
	dated October 22, 2001.                                                                                                                                          
|        | 12   |  |  | Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                             

(b)  Reports on Form 8-K.

On July 10, 2001, we filed a report on
Form 8-K announcing the closing of an amendment to its
secured line of credit facility with Heller Healthcare financial.

On October 1, 2001 we filed a report on
Form 8-K announcing the Company had reached an agreement
for financial reorganization with the holders of its two series
of convertible subordinated debentures that will be implemented
through a pre-negotiated plan of reorganization.

On October 9, 2001, we filed a report on
Form 8-K announcing the Company received notice from the
American Stock Exchange (AMEX) indicating that AMEX
intends to file an application with the Securities and Exchange
Commission to strike the Companys common stock and its two
series of convertible subordinated debentures from listing and
registration on the AMEX.

On October 29, 2001, we filed a report on
Form 8-K announcing the court issuance of an Interim Order
approving debtor-in-possession financing, the acquisition of
sixteen previously leased assisted living facilities and notice
from AMEX that the Companys common stock and two series of
convertible debentures would be delisted.

On November 6, 2001, we filed a report on
Form 8-K announcing the court approval of the
Companys Disclosure Statement on October 30, 2001.

32



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##### 



SIGNATURES

Pursuant to the requirements of Sections 13
or 15(d) the 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.
| | Registrant                    



| |     |                   
| | --- | ------------------
| | By: | /s/ DREW Q. MILLER

| |                      
| | ---------------------
| |                      
| | Name:  Drew Q. Miller

| |        |                       
| | ------ | ----------------------
| | Title: | Senior Vice President,

| |                                       
| | --------------------------------------
| | Chief Financial Officer and
	Treasurer

November 8, 2001



| |     |                         
| | --- | ------------------------
| | By: | /s/ M. CATHERINE MALONEY

| |                            
| | ---------------------------
| |                            
| | Name:  M. Catherine Maloney

| |        |                                             
| | ------ | --------------------------------------------
| | Title: | Vice President and Chief Accounting
	Officer

November 8, 2001

33



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##### 



EXHIBIT INDEX

|        |      |  |  |                                                                                                                                                                                                                                                                
|------- | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      | 
|Number  |      | 
|        |      | 
|        | 10.1 |  |  | Loan Agreement between Heller Healthcare Finance,
	Inc. and Assisted Living Concepts, Inc. and Carriage House
	Assisted Living, Inc., as Debtors-in-Possession, dated
	October 3, 2001.                                                                        
|        | 10.2 |  |  | Option Agreement between T and F Properties, L.P.
	and Texas ALC Partners, L.P., dated September 25, 2001.                                                                                                                                                     
|        | 10.3 |  |  | Second Amendment to Loan Documents between
	Assisted Living Concepts, Inc., ALC Ohio, Inc., ALC
	Pennsylvania, Inc., ALC Iowa, Inc., ALC Nebraska, Inc., ALC New
	Jersey, Inc., ALC Indiana, Inc., and Heller Healthcare Finance,
	Inc., dated October 3, 2001.
|        | 10.4 |  |  | Stock Pledge Agreement by Assisted Living
	Concepts, Inc., as Debtors-in-Possession, to and in favor of
	Heller Healthcare Finance, Inc. (Security Agreement), dated
	October 3, 2001.                                                                         
|        | 10.5 |  |  | Exercise of Option Agreement between
	T and F Properties, L.P. and Texas ALC Partners, L.P.,
	dated October 22, 2001.                                                                                                                                          
|        | 12   |  |  | Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                             

34