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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q

[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2003or[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition period from            to


Commission file number 1-13498

Assisted Living Concepts, Inc.

(Exact name of registrant as
specified in its charter)


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


1349 Empire Central, Suite 900
Dallas, TX 75247(Address of principal executive offices)

(214) 424-4000(Registrants telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [   ]

The Registrant had 6,432,091 shares of common stock, $.01 par value,
outstanding at November 6, 2003.



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TABLE OF CONTENTS



|                                               |                                                                                               |                                            |  |  |  |  |  | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                
|                                               | Item 1. Financial Statements                                                                 
|                                               |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                               |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                               | Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|                                               | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION                   
|                                               | Item 1. Legal Proceedings                                                                    
|                                               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                    
|EXHIBIT INDEX                                 
|EX-12 Ratio of Earnings to Fixed Charges      
|EX-31.1 Certification Pursuant to Section 302 
|EX-31.2 Certification Pursuant to Section 302 
|EX-32.1 Certification Purusant to Section 1350
|EX-32.2 Certification Purusant to Section 1350



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ASSISTED LIVING CONCEPTS, INC.

FORM 10-Q
September 30, 2003

INDEX

PagePART I  FINANCIAL INFORMATIONItem 1
    
    Financial StatementsConsolidated Balance Sheets, December 31, 2002 and September 30, 2003
    
    
    3Consolidated Statements of Operations, Three and Nine Months Ended September 30, 2002 and 2003
    
    
    4Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2002 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    23Item 4
    
    Controls and Procedures
    
    
    23PART II  OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    24Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    24Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    24


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PART I  FINANCIAL INFORMATION







Item 1. Financial Statements







ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)

ASSETS

December 31,
    
    September 30,2002
    
    2003(Unaudited)Current assets:Cash and cash equivalents
    
    $
    7,165
    
    
    $
    10,904Cash restricted for resident security deposits
    
    
    1,929
    
    
    
    1,562Accounts receivable, net of allowance for doubtful accounts of $230 at
December 31, 2002 and $682 at September 30, 2003
    
    
    2,715
    
    
    
    3,783Prepaid insurance
    
    
    343
    
    
    
    1,074Prepaid expenses
    
    
    991
    
    
    
    1,001Assets held for sale
    
    
    9,727
    
    
    
    Cash restricted for workers compensation claims
    
    
    4,696
    
    
    
    4,377Other current assets
    
    
    3,193
    
    
    
    4,127Total current assets
    
    
    30,759
    
    
    
    26,828Restricted cash
    
    
    5,315
    
    
    
    1,010Property and equipment, net
    
    
    177,930
    
    
    
    183,301Deferred income taxes
    
    
    
    
    
    
    1,673Other assets, net
    
    
    2,036
    
    
    
    1,272Total assets
    
    $
    216,040
    
    
    $
    214,084LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    769
    
    
    $
    1,170Accrued real estate taxes
    
    
    4,836
    
    
    
    4,750Accrued interest expense
    
    
    2,174
    
    
    
    1,136Accrued payroll expense
    
    
    5,021
    
    
    
    4,767Other accrued expenses
    
    
    5,718
    
    
    
    6,539Income taxes payable
    
    
    
    
    
    
    1,827Resident security deposits
    
    
    1,991
    
    
    
    1,400Other current liabilities
    
    
    976
    
    
    
    772Current portion of unfavorable lease adjustment
    
    
    607
    
    
    
    490Current portion of long-term debt and capital lease obligations
    
    
    11,521
    
    
    
    2,860Total current liabilities
    
    
    33,613
    
    
    
    25,711Other liabilities
    
    
    463
    
    
    
    641Unfavorable lease adjustment, net of current portion
    
    
    2,508
    
    
    
    2,449Long-term debt and capital lease obligations, net of current portion
    
    
    109,078
    
    
    
    102,705Senior and Junior Secured notes
    
    
    41,993
    
    
    
    50,100Total liabilities
    
    
    187,655
    
    
    
    181,606Commitments and contingenciesShareholders equity:Preferred stock, $.01 par value; 3,250,000 shares authorized;
none issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 20,000,000 shares authorized; issued
and outstanding 6,431,759 shares at December 31, 2002 and 6,432,091
shares at September 30, 2003 (68,241 shares to be issued upon
settlement of pending claims)
    
    
    65
    
    
    
    65Additional paid-in capital
    
    
    32,734
    
    
    
    34,057Accumulated deficit
    
    
    (4,414
    )
    
    
    (1,644
    )Total shareholders equity
    
    
    28,385
    
    
    
    32,478Total liabilities and shareholders equity
    
    $
    216,040
    
    
    $
    214,084


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

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ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2002
    
    2003
    
    2002
    
    2003Revenue
    
    $
    39,069
    
    
    $
    42,443
    
    
    $
    113,896
    
    
    $
    125,519Operating expenses:Residence operating expenses
    
    
    27,157
    
    
    
    28,397
    
    
    
    78,784
    
    
    
    83,840Corporate general and administrative
    
    
    4,178
    
    
    
    4,546
    
    
    
    14,074
    
    
    
    13,648Building rentals
    
    
    3,061
    
    
    
    3,319
    
    
    
    9,166
    
    
    
    9,543Depreciation and amortization
    
    
    1,692
    
    
    
    1,736
    
    
    
    4,942
    
    
    
    5,113Total operating expenses
    
    
    36,088
    
    
    
    37,998
    
    
    
    106,966
    
    
    
    112,144Operating income
    
    
    2,981
    
    
    
    4,445
    
    
    
    6,930
    
    
    
    13,375Other income (expense):Interest expense
    
    
    (3,545
    )
    
    
    (3,375
    )
    
    
    (10,602
    )
    
    
    (10,233
    )Interest income
    
    
    55
    
    
    
    97
    
    
    
    160
    
    
    
    163Other income (expense), net
    
    
    14
    
    
    
    
    
    
    
    36
    
    
    
    (71
    )Total other expense, net
    
    
    (3,476
    )
    
    
    (3,278
    )
    
    
    (10,406
    )
    
    
    (10,141
    )Income (loss) before debt restructure, reorganization
costs, and discontinued operations
    
    
    (495
    )
    
    
    1,167
    
    
    
    (3,476
    )
    
    
    3,234Debt restructure and reorganization costs
    
    
    (14
    )
    
    
    
    
    
    
    (680
    )
    
    
    Income (loss) from continuing operations before income
taxes
    
    
    (509
    )
    
    
    1,167
    
    
    
    (4,156
    )
    
    
    3,234Income tax expense
    
    
    
    
    
    
    191
    
    
    
    
    
    
    
    958Income (loss) from continuing operations
    
    
    (509
    )
    
    
    976
    
    
    
    (4,156
    )
    
    
    2,276Discontinued operations:Income (loss) from operations (including gain and loss
on sale of assets)
    
    
    (54
    )
    
    
    
    
    
    
    (486
    )
    
    
    830Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    336Income (loss) from discontinued operations
    
    
    (54
    )
    
    
    
    
    
    
    (486
    )
    
    
    494Net income (loss)
    
    $
    (563
    )
    
    $
    976
    
    
    $
    (4,642
    )
    
    $
    2,770Basic earnings per share:Income (loss) from continuing operations
    
    $
    (0.08
    )
    
    $
    0.15
    
    
    $
    (0.64
    )
    
    $
    0.35Income (loss) from discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.07
    )
    
    
    0.08Net income (loss)
    
    $
    (0.09
    )
    
    $
    0.15
    
    
    $
    (0.71
    )
    
    $
    0.43Diluted earnings per share:Income (loss) from continuing operations
    
    $
    (0.08
    )
    
    $
    0.14
    
    
    $
    (0.64
    )
    
    $
    0.34Income (loss) from discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.07
    )
    
    
    0.08Net income (loss)
    
    $
    (0.09
    )
    
    $
    0.14
    
    
    $
    (0.71
    )
    
    $
    0.42


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

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ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

Nine Months EndedSeptember 30,2002
    
    2003Operating Activities:Net income (loss)
    
    $
    (4,642
    )
    
    $
    2,770Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    5,051
    
    
    
    5,113Stock-based compensation expense
    
    
    
    
    
    
    163Amortization of debt issuance costs
    
    
    80
    
    
    
    83Amortization of fair value adjustment to building rentals
    
    
    (511
    )
    
    
    (176
    )Amortization of fair market adjustment to long-term debt
    
    
    320
    
    
    
    306Amortization of discount on long-term debt
    
    
    328
    
    
    
    424Straight line adjustment to building rentals
    
    
    282
    
    
    
    90Interest paid-in-kind
    
    
    915
    
    
    
    1,003Provision for doubtful accounts
    
    
    207
    
    
    
    658(Gain) loss on sale or disposal of assets
    
    
    545
    
    
    
    (833
    )Changes in assets and liabilities:Accounts receivable
    
    
    (296
    )
    
    
    (1,726
    )Prepaid expenses
    
    
    (584
    )
    
    
    (741
    )Other current assets
    
    
    225
    
    
    
    (39
    )Other assets
    
    
    (80
    )
    
    
    (216
    )Accounts payable
    
    
    (371
    )
    
    
    401Accrued expenses
    
    
    (1,502
    )
    
    
    (555
    )Other liabilities
    
    
    (82
    )
    
    
    607Net cash provided by (used in) operating activities
    
    
    (115
    )
    
    
    7,332Investing Activities:Decrease (increase) in restricted cash
    
    
    (2,263
    )
    
    
    4,991Purchases of property and equipment
    
    
    (2,207
    )
    
    
    (2,493
    )Sales of properties
    
    
    
    
    
    
    2,569Net cash provided by (used in) investing activities
    
    
    (4,470
    )
    
    
    5,067Financing Activities:Proceeds from long-term debt
    
    
    3,508
    
    
    
    Payments on long-term debt and capital lease obligations
    
    
    (1,948
    )
    
    
    (8,660
    )Debt issuance costs
    
    
    (79
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    1,481
    
    
    
    (8,660
    )Net increase (decrease) in cash and cash equivalents
    
    
    (3,104
    )
    
    
    3,739Cash and cash equivalents, beginning of period
    
    
    6,077
    
    
    
    7,165Cash and cash equivalents, end of period
    
    $
    2,973
    
    
    $
    10,904Supplemental disclosure of cash flow information:Cash payments for interest
    
    $
    8,472
    
    
    $
    9,880


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

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ASSISTED LIVING CONCEPTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. The Company

Assisted Living Concepts, Inc., (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. Basis of Presentation

The condensed consolidated financial statements included herein have been
prepared by the Company without audit and in the opinion of management include
all adjustments (all of which are normal and recurring) necessary for a fair
presentation of the results of operations for each of the three and nine month
periods ended September 30, 2002 and 2003, pursuant to the rules and
regulations of the Securities and Exchange Commission. The accompanying
condensed consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to the prior period financial statements to conform to the
current period presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to such rules and regulations; however the
Company believes that the disclosures in the accompanying financial statements
are adequate to make the information presented not misleading.

The accompanying condensed consolidated financial statements should be read in
conjunction with the Companys annual report on Form 10-K for the fiscal year
ended December 31, 2002 filed with the Securities and Exchange Commission. The
results of operations for the three and nine month periods ended September 30,
2003 are not necessarily indicative of the results for a full year.

The results of operations for the three and nine month periods ended September
30, 2002 and 2003 reflect the continuing operations of 177 residences. Results
of operations for five residences sold on September 30, 2002 and two residences
sold in March 2003 are included in discontinued operations in the accompanying
financial statements. (See Note 5).

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3. Long-Term Debt

As of December 31, 2002 and September 30, 2003, long-term debt consists of the
following (in thousands):

December 31, 2002
    
    September 30, 2003Carrying
    
    Principal
    
    Carrying
    
    PrincipalAmount
    
    Amount
    
    Amount
    
    AmountTrust Deed Notes, payable to the State of Oregon
Housing and Community Services Department
(OHCS) due 2028
    
    $
    9,688
    
    
    $
    9,585
    
    
    $
    9,553
    
    
    $
    9,456Variable Rate Multifamily Revenue Bonds, payable
to the Washington State Housing Finance
Commission Department due 2028
    
    
    7,217
    
    
    
    7,295
    
    
    
    7,221
    
    
    
    7,295Variable Rate Demand Housing Revenue Bonds, Series
1997, payable to the Idaho Housing and Finance
Association due 2017
    
    
    6,277
    
    
    
    6,345
    
    
    
    5,995
    
    
    
    6,060Variable Rate Demand Housing Revenue Bonds, Series
A-1 and A-2 payable to the State of Ohio Housing
Finance Agency due 2018
    
    
    11,451
    
    
    
    11,575
    
    
    
    9,987
    
    
    
    10,105Housing and Urban Development Insured
Mortgages due 2035
    
    
    7,329
    
    
    
    7,410
    
    
    
    7,287
    
    
    
    7,372New Senior Secured Notes due 2009
    
    
    35,750
    
    
    
    35,750
    
    
    
    34,350
    
    
    
    34,350New Junior Secured Notes due 2012
    
    
    13,925
    
    
    
    16,225
    
    
    
    15,750
    
    
    
    17,497Mortgages payable due 2008
    
    
    27,995
    
    
    
    27,948
    
    
    
    27,542
    
    
    
    27,534G.E. Capital (Previously Heller Healthcare Finance,
Inc.) Credit Facility due 2005
    
    
    42,691
    
    
    
    43,516
    
    
    
    37,980
    
    
    
    38,496Capital lease obligations
    
    
    269
    
    
    
    269
    
    
    
    
    
    
    
    Total long-term debt
    
    
    162,592
    
    
    $
    165,918
    
    
    
    155,665
    
    
    $
    158,165Less current portion
    
    
    11,521
    
    
    
    
    
    
    
    2,860Long-term debt
    
    $
    151,071
    
    
    
    
    
    
    $
    152,805


The Trust Deed Notes payable to OHCS are secured by buildings, land, furniture
and fixtures of six Oregon residences. The notes are payable in monthly
installments including interest at effective rates ranging from 7.375% to 9.0%.

The Variable Rate Multifamily Revenue Bonds are payable to the Washington State
Housing Finance Commission Department and at September 30, 2003 are secured by
a $7.4 million letter of credit and by buildings, land, furniture and fixtures
of the five Washington residences and had an interest rate of 1.2% at September
30, 2003. The letter of credit expires in January 2005 and had an annual fee of
2.0% at September 30, 2003.

The Variable Rate Demand Housing Revenue Bonds, Series 1997 are payable to the
State of Idaho Housing and Finance Association and at September 30, 2003 are
secured by a $6.2 million letter of credit and by buildings, land, furniture
and fixtures of four Idaho residences and had an interest rate of 1.2% at
September 30, 2003. The letter of credit expires in January 2005 and had an
annual fee of 2.0% at September 30, 2003.

The Variable Rate Demand Housing Revenue Bonds are payable to the State of Ohio
Housing Finance Agency (OHFA) and at September 30, 2003 are secured by a
$10.3 million letter of credit and by buildings, land, furniture and fixtures
of six Ohio residences and had an interest rate of 1.2% at September 30, 2003.
The letter of credit expires in January 2005 and had an annual fee of 2.0% at
September 30, 2003.

At September 30, 2003, mortgage loans include three fixed rate loans secured by
seven Texas residences, three Oregon residences and three New Jersey
residences. These loans collectively require monthly principal and interest
payments of $230,000, with balloon payments of $11.8 million, $5.3 million and
$7.2 million due at maturity in May 2008, August 2008 and September 2008,
respectively. These loans bear fixed interest rates from 7.58% to 8.79%.

Housing and Urban Development (HUD) insured mortgages include three separate
loan agreements entered into in 2001. These are fixed rate mortgages, each of
which is secured by a separate facility in Texas. These loans mature between
July 1, 2036 and August 1,

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2036 and collectively require monthly principal and interest payments of
$47,493. The loans bear fixed interest rates between 7.40% and 7.55%.

The GE Capital credit facility is a secured line of credit up to $44.0 million.
This is a variable rate credit facility, secured by 31 facilities. This credit
facility matures in January 2005 and requires monthly principal payments of
$65,000 for 2003 and $80,000 for 2004. The interest on the credit facility is
calculated at LIBOR plus 4.5%, floating monthly (not to be less than 8%) and is
payable monthly in arrears.

On January 1, 2002 the Debtors emerged from the proceedings under Chapter 11 of
the Bankruptcy Code. The Companys Plan of reorganization included the issuance
of $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, and $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.
The New Junior Secured Notes were issued at a discount of $2.6 million. The
discount is being amortized over the life of the New Junior Secured Notes using
the effective interest method. The New Notes are secured by 51 properties as of
September 30, 2003.

In July 2003, the Company completed an open market purchase of a portion of the
Companys outstanding 10% Senior Secured Notes due 2009 and Junior Secured
Notes due 2012. The transaction included the purchase of $147,889 principal
amount of Senior Secured Notes and $34,178 principal amount of Junior Secured
Notes (collectively, the Purchased Notes). Because the purchase of the
Junior Notes is not permitted under the Indentures and constitutes a Default
there under, and the purchase of the Senior Notes may not be permitted and
could constitute Default there under, although this issue is not clear, the
Company cancelled the purchase transaction with the seller in September 2003.

As of the Effective Date, the Successor Company revalued its long-term debt in
conjunction with the implementation of fresh-start reporting. At December 31,
2001, an adjustment of $3.1 million was recorded to reduce long-term debt to
its fair market value. Amortization of this adjustment is computed using the
straight-line method over the individual loan life.

As of September 30, 2003, the following periodic principal payments are
required (in thousands):

October 1, 2003 through December 31, 2003
    
    $
    7202004
    
    
    2,9422005
    
    
    39,4622006
    
    
    2,2582007
    
    
    2,408Thereafter
    
    
    110,375Total
    
    $
    158,165


The Company has a series of reimbursement agreements with U.S. Bank for letters
of credit that secure certain Revenue bonds payable, which total approximately
$23.9 million as of September 30, 2003. An amendment to these agreements
signed in September 2003 released $4.3 million of previously restricted cash to
the Company, extended the expiration of the letters of credit to January 2005,
amended the annual fees to be 2% of the stated amount of the letters of credit,
and set in place new financial covenants. The Company was in compliance with
these new covenants at September 30, 2003. Failure to comply with these
covenants would constitute an event of default, which would allow U.S. Bank to
declare any amounts outstanding under the loan documents to be due and payable.

In addition to the debt agreements with OHCS related to the six owned
residences in Oregon, the Company has entered into Lease Approval Agreements
with OHCS and the lessor of the Oregon Leases, which obligates the Company to
comply with the terms and conditions of the underlying trust deed relating to
the leased buildings. Under the terms of the OHCS debt agreements, the Company
is required to maintain a capital replacement escrow account to cover expected
capital expenditure requirements for the Oregon Leases and the six OHCS loans.

As a further condition of the OHCS debt agreements, the Company is required to
comply with the terms of certain regulatory agreements which provide, among
other things, that in order to preserve the federal income tax exempt status of
the bonds, the Company is required to lease at least 20% of the units of the
projects to low or moderate income persons as defined in Section 142(d) of the
Internal Revenue Code. There are additional requirements as to the age and
physical condition of the residents with which the

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Company must also comply. Non-compliance with these restrictions may result in
an event of default and cause acceleration of the scheduled repayment.

4. Income Taxes

The Company anticipates taxable income for financial reporting purposes for the
year ending December 31, 2003, and accordingly, has provided for federal and
state income taxes on income from continuing operations and discontinued
operations for the nine months ended September 30, 2003. The Company has
recorded such income tax expense at the rate of 31.8% for the nine months ended
September 30, 2003.

The provision for income taxes differs from the applicable U.S. statutory
federal rate as a result of the following items:

Statutory federal income tax rate
    
    
    34.0
    %State income taxes, net of federal benefit
    
    
    5.4
    %Non-deductible expenses
    
    
    0.7
    %Reduction of valuation allowance
    
    
    (8.3
    )%Effective tax rate
    
    
    31.8
    %


For the three months ended September 30, 2003, the company recorded income tax
expense at the rate of 31.8%, less the effect of the change in the estimate
from the six months ended June 30, 2003. The change in the estimate for the
six months ended June 30, 2003 was a reduction of income tax expense of
$180,000, resulting primarily from anticipation of utilization of net operating
loss (NOL) carry-forwards.

At December 31, 2001, the Company had approximately $94 million of NOL
carry-forwards, which will expire between 2009 and 2021. These NOL
carry-forwards have been reduced to approximately $16 million as a result of
the discharge and cancellation of certain pre-petition liabilities under the
Plan. The reduction of the NOL carry-forwards was effective on the date the
liabilities were discharged.

The NOL carry-forwards remaining after the application of the cancellation of
indebtedness provisions are subject to certain provisions of the Internal
Revenue Code, which restricts the utilization of such NOL carry-forwards. In
addition, any net unrealized built-in losses resulting from the excess of tax
basis over the carrying value of the Companys assets (primarily property and
equipment) as of the Effective Date, which are recognized within five years are
also subject to these provisions. Section 382 of the Internal Revenue Code
imposes limitations on the utilization of the NOL carry-forwards and built-in
losses after certain changes of ownership of a loss company. The Company is
deemed to be a loss company for these purposes. Under these provisions, the
Companys ability to utilize these NOL carry-forwards and built-in losses in
the future will generally be subject to an annual limitation of approximately
$1.6 million (the Annual Limitation). There can be no assurance that the
Company will be able to utilize these pre-change NOL carry-forwards or built-in
losses and therefore, the Company established a 100 percent valuation allowance
as of the Effective Date. Pursuant to SOP 90-7, the income tax benefit, if
any, of the future realization of these NOL carry-forwards and built-in losses
will be recorded as an adjustment to additional paid-in capital.

For the year ended December 31, 2002, the Annual Limitation was not utilized
since the Company incurred a loss for financial statement purposes. A 100
percent valuation allowance of approximately $45.0 million was recorded to
offset the associated net deferred tax asset as of December 31, 2002. For the
full fiscal year ending December 31, 2003, the Company anticipates utilizing
the 2003 Annual Limitation as well as the unused 2002 Annual Limitation.

5. Discontinued Operations

During March 2003, the Company sold one residence in Ohio and one residence in
Indiana. The total sales price for these residences was $2.6 million, and the
Company recognized a gain from these sales of $899,000.

In accordance with SFAS No. 144, the results of operations and the gain and
losses from sales have been included in Income (loss) from discontinued
operations in the accompanying financial statements for the three and
nine-month periods ended September 30, 2002 and 2003.

On September 30, 2002 the Company completed the sale of four Florida residences
and one Georgia residence. Consequently, the results of operations for these
residences are included in Income (loss) from discontinued operations in the
accompanying financial statements for the three and nine-month periods ended
September 30, 2002.

9



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##### Table of Contents



6. Stock-based Compensation

Previously, the Company accounted for stock-based compensation plans under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25) and related interpretations. No
stock-based employee compensation expense for stock options was reflected in
Net Income previous to April 1, 2003, as all stock options granted under those
plans had an exercise price equal to the fair market value of the underlying
common stock on the date of grant. Effective April 1, 2003, the Company
adopted the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, and recognizes compensation expense according to the
prospective transition method under SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. Under this method the Company
expenses the fair value of all new stock options granted after January 1, 2003.
The following table illustrates the effect on net income and earnings per
share had the company applied the fair value accounting method to all of the
Companys stock option grants.

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2002
    
    2003
    
    2002
    
    2003Net income (loss), as reported
    
    $
    (563
    )
    
    $
    976
    
    
    $
    (4,642
    )
    
    $
    2,770Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    108Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards granted, net of related tax effects
    
    
    (41
    )
    
    
    (53
    )
    
    
    (54
    )
    
    
    (129
    )Pro forma net income (loss)
    
    $
    (604
    )
    
    $
    969
    
    
    $
    (4,696
    )
    
    $
    2,749Net income (loss) per share:Basic  as reported
    
    $
    (0.09
    )
    
    $
    0.15
    
    
    $
    (0.71
    )
    
    $
    0.43Basic  pro forma
    
    $
    (0.09
    )
    
    $
    0.15
    
    
    $
    (0.72
    )
    
    $
    0.42Diluted  as reported
    
    $
    (0.09
    )
    
    $
    0.14
    
    
    $
    (0.71
    )
    
    $
    0.42Diluted  pro forma
    
    $
    (0.09
    )
    
    $
    0.14
    
    
    $
    (0.72
    )
    
    $
    0.41


7. Income (Loss) Per Share

The weighted average common shares used for basic net income (loss) per common
share were 6,500,000 for the three and nine month periods ended September 30,
2002 and 2003. The effect of dilutive stock options using the treasury stock
method added 263,444 shares for the three month period ended September 30, 2003
and 131,169 shares for the nine month period ended September 30, 2003. The
effect of options for the three and nine month periods ended September 30, 2002
is not considered since their effect is antidilutive.

8. Subsidiary Guarantee of New Notes

The New Notes, issued by the Company, are publicly traded and the repayment of
these notes is guaranteed by three wholly owned subsidiaries of the Company:
ALC Indiana, Inc., Home and Community Care, Inc. (HCI) and Carriage House
Assisted Living, Inc. (Carriage House). The following information is
presented as required under the Securities and Exchange Commission Financial
Reporting Release No. 55 in connection with the guarantee of the New Notes by
the Companys wholly owned subsidiaries. The operating and investing activities
of the separate legal entities included in the consolidating financial
statements are fully interdependent and integrated with the Company and each
other.

10



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
September 30, 2003
(in thousands, except share amounts)
(unaudited)

Wholly-Owned SubsidiariesALC
    
    
    
    
    
    
    
    
    
    Non-Indiana,
    
    Carriage
    
    
    
    
    
    Participating
    
    Consolidating
    
    ConsolidatedALC, Inc.
    
    Inc.
    
    House
    
    HCI
    
    Subsidiaries
    
    Adjustments
    
    TotalASSETSCurrent Assets:Cash and cash equivalents
    
    $
    10,904
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,904Cash restricted for resident
security deposits
    
    
    1,562
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,562Accounts receivable, net of
allowance for doubtful accounts
    
    
    3,510
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273
    
    
    
    
    
    
    
    3,783Prepaid insurance
    
    
    1,074
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,074Prepaid expenses
    
    
    923
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    1,001Cash restricted for workers
compensation claims
    
    
    4,377
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,377Other current assets
    
    
    1,652
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,475
    
    
    
    
    
    
    
    4,127Total current assets
    
    
    24,002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,826
    
    
    
    
    
    
    
    26,828Restricted cash
    
    
    1,010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,010Receivable (payable) from subsidiaries/
parent
    
    
    (3,622
    )
    
    
    5,498
    
    
    
    (925
    )
    
    
    3,309
    
    
    
    (4,260
    )
    
    
    
    
    
    
    Property and equipment, net
    
    
    85,655
    
    
    
    12,365
    
    
    
    3,465
    
    
    
    4,082
    
    
    
    77,734
    
    
    
    
    
    
    
    183,301Investment in subsidiaries
    
    
    28,255
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,255
    )
    
    
    Deferred income taxes
    
    
    1,673
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,673Other assets, net
    
    
    1,271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1,272Total assets
    
    $
    138,244
    
    
    $
    17,863
    
    
    $
    2,540
    
    
    $
    7,391
    
    
    $
    76,301
    
    
    $
    (28,255
    )
    
    $
    214,084LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,067
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    103
    
    
    $
    
    
    
    $
    1,170Accrued real estate taxes
    
    
    2,938
    
    
    
    491
    
    
    
    178
    
    
    
    125
    
    
    
    1,018
    
    
    
    
    
    
    
    4,750Accrued interest expense
    
    
    964
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    1,136Accrued payroll expense
    
    
    4,694
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    4,767Other accrued expenses
    
    
    6,533
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6,539Resident security deposits
    
    
    1,274
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    1,400Other current liabilities
    
    
    2,202
    
    
    
    369
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    2,599Current portion of unfavorable
lease adjustment
    
    
    424
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    490Current portion of long-term
debt and capital lease
obligation, net of current portion
    
    
    1,299
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,561
    
    
    
    
    
    
    
    2,860Total current liabilities
    
    
    21,395
    
    
    
    860
    
    
    
    244
    
    
    
    125
    
    
    
    3,087
    
    
    
    
    
    
    
    25,711Other liabilities
    
    
    601
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    641Unfavorable lease adjustment
    
    
    2,041
    
    
    
    
    
    
    
    340
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    2,449Long-term debt and capital lease
obligation
    
    
    81,556
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71,249
    
    
    
    
    
    
    
    152,805Total liabilities
    
    
    105,593
    
    
    
    860
    
    
    
    624
    
    
    
    125
    
    
    
    74,404
    
    
    
    
    
    
    
    181,606Shareholders equity:Common stock
    
    
    65
    
    
    
    16,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,342
    )
    
    
    65Additional paid-in capital
    
    
    34,230
    
    
    
    
    
    
    
    2,549
    
    
    
    7,365
    
    
    
    5,667
    
    
    
    (15,754
    )
    
    
    34,057Accumulated deficit
    
    
    (1,644
    )
    
    
    661
    
    
    
    (633
    )
    
    
    (99
    )
    
    
    (3,770
    )
    
    
    3,841
    
    
    
    (1,644
    )Total shareholders equity
    
    
    32,651
    
    
    
    17,003
    
    
    
    1,916
    
    
    
    7,266
    
    
    
    1,897
    
    
    
    (28,255
    )
    
    
    32,478Total liabilities and
shareholders equity
    
    $
    138,244
    
    
    $
    17,863
    
    
    $
    2,540
    
    
    $
    7,391
    
    
    $
    76,301
    
    
    $
    (28,255
    )
    
    $
    214,084


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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
(in thousands, except share amounts)

Wholly-Owned SubsidiariesNon-ALC
    
    Carriage
    
    
    
    
    
    Participating
    
    Consolidating
    
    ConsolidatedALC, Inc.
    
    Indiana, Inc.
    
    House
    
    HCI
    
    Subsidiaries
    
    Adjustments
    
    TotalASSETSCurrent Assets:Cash and cash equivalents
    
    $
    7,165
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,165Cash restricted for resident
security deposits
    
    
    1,929
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,929Accounts receivable, net of allowance
for doubtful accounts
    
    
    2,446
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    266
    
    
    
    
    
    
    
    2,715Prepaid insurance
    
    
    343
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343Prepaid expenses
    
    
    946
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    991Assets held for sale
    
    
    9,727
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,727Cash restricted for workers
compensation claims
    
    
    4,696
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,696Other current assets
    
    
    1,199
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    1,991
    
    
    
    
    
    
    
    3,193Total current assets
    
    
    28,451
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    2,302
    
    
    
    
    
    
    
    30,759Restricted cash
    
    
    5,315
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,315Receivable from subsidiaries/parent
    
    
    (6,489
    )
    
    
    6,454
    
    
    
    (1,236
    )
    
    
    2,780
    
    
    
    (1,509
    )
    
    
    
    
    
    
    Property and equipment, net
    
    
    81,328
    
    
    
    12,565
    
    
    
    3,558
    
    
    
    4,176
    
    
    
    76,303
    
    
    
    
    
    
    
    177,930Investment in subsidiaries
    
    
    27,632
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,632
    )
    
    
    Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other assets, net
    
    
    1,635
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    401
    
    
    
    
    
    
    
    2,036Total assets
    
    $
    137,872
    
    
    $
    19,019
    
    
    $
    2,322
    
    
    $
    6,962
    
    
    $
    77,497
    
    
    $
    (27,632
    )
    
    $
    216,040LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    234
    
    
    $
    
    
    
    $
    
    
    
    $
    1
    
    
    $
    534
    
    
    $
    
    
    
    $
    769Accrued real estate taxes
    
    
    2,830
    
    
    
    285
    
    
    
    234
    
    
    
    71
    
    
    
    1,416
    
    
    
    
    
    
    
    4,836Accrued interest expense
    
    
    2,147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    2,174Accrued payroll expense
    
    
    4,960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    5,021Other accrued expenses
    
    
    5,669
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    5,718Resident security deposits
    
    
    1,779
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    213
    
    
    
    
    
    
    
    1,991Other current liabilities
    
    
    976
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    976Current portion of unfavorable
lease adjustment
    
    
    525
    
    
    
    
    
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    607Current portion of long-term
debt and capital lease
obligation
    
    
    8,817
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,704
    
    
    
    
    
    
    
    11,521Total current liabilities
    
    
    27,937
    
    
    
    285
    
    
    
    316
    
    
    
    71
    
    
    
    5,004
    
    
    
    
    
    
    
    33,613Other liabilities
    
    
    430
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    463Unfavorable lease adjustment, net of
current portion
    
    
    2,095
    
    
    
    
    
    
    
    347
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    2,508Long-term debt and capital
lease obligation, net of
current portion
    
    
    78,852
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,219
    
    
    
    
    
    
    
    151,071Total liabilities
    
    
    109,314
    
    
    
    285
    
    
    
    696
    
    
    
    71
    
    
    
    77,289
    
    
    
    
    
    
    
    187,655Commitments and contingenciesShareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    65
    
    
    
    16,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,342
    )
    
    
    65Additional paid-in capital
    
    
    32,907
    
    
    
    
    
    
    
    2,548
    
    
    
    7,365
    
    
    
    5,667
    
    
    
    (15,753
    )
    
    
    32,734Accumulated deficit
    
    
    (4,414
    )
    
    
    2,392
    
    
    
    (922
    )
    
    
    (474
    )
    
    
    (5,459
    )
    
    
    4,463
    
    
    
    (4,414
    )Total shareholders equity
    
    
    28,558
    
    
    
    18,734
    
    
    
    1,626
    
    
    
    6,891
    
    
    
    208
    
    
    
    (27,632
    )
    
    
    28,385Total liabilities and
shareholders equity
    
    $
    137,872
    
    
    $
    19,019
    
    
    $
    2,322
    
    
    $
    6,962
    
    
    $
    77,497
    
    
    $
    (27,632
    )
    
    $
    216,040


12



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2003
(in thousands)
(unaudited)

Wholly-Owned SubsidiariesALC
    
    
    
    
    
    
    
    
    
    Non-Indiana,
    
    Carriage
    
    
    
    
    
    participating
    
    ConsolidatedALC,Inc.
    
    Inc.
    
    House
    
    HCI
    
    Subsidiaries
    
    TotalRevenue
    
    $
    114,239
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    11,280
    
    
    $
    125,519Operating expenses:Residence operating expenses
    
    
    75,142
    
    
    
    284
    
    
    
    189
    
    
    
    
    
    
    
    8,225
    
    
    
    83,840Corporate general and administrative
    
    
    13,648
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,648Building rentals
    
    
    8,845
    
    
    
    
    
    
    
    698
    
    
    
    
    
    
    
    
    
    
    
    9,543Depreciation and amortization
    
    
    2,576
    
    
    
    306
    
    
    
    103
    
    
    
    99
    
    
    
    2,029
    
    
    
    5,113Total operating expenses
    
    
    100,211
    
    
    
    590
    
    
    
    990
    
    
    
    99
    
    
    
    10,254
    
    
    
    112,144Operating income (loss)
    
    
    14,028
    
    
    
    (590
    )
    
    
    (990
    )
    
    
    (99
    )
    
    
    1,026
    
    
    
    13,375Other income (expense):Interest expense
    
    
    (5,246
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,987
    )
    
    
    (10,233
    )Interest income
    
    
    163
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163Management fee income (expense)
    
    
    (548
    )
    
    
    
    
    
    
    357
    
    
    
    
    
    
    
    191
    
    
    
    Lease income (expense)
    
    
    (1,620
    )
    
    
    1,620
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other expense, net
    
    
    (71
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71
    )Total other expense, net
    
    
    (7,322
    )
    
    
    1,620
    
    
    
    357
    
    
    
    
    
    
    
    (4,796
    )
    
    
    (10,141
    )Income (loss) from continuing operations
before income taxes
    
    
    6,706
    
    
    
    1,030
    
    
    
    (633
    )
    
    
    (99
    )
    
    
    (3,770
    )
    
    
    3,234Income tax expense
    
    
    589
    
    
    
    369
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    958Income (loss) from continuing operations
    
    
    6,117
    
    
    
    661
    
    
    
    (633
    )
    
    
    (99
    )
    
    
    (3,770
    )
    
    
    2,276Income (loss) from discontinued operations
(including gain on sale of assets)
    
    
    830
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    830Income tax expense
    
    
    336
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    336Income from discontinued operations
    
    
    494
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    494Net income (loss)
    
    $
    6,611
    
    
    $
    661
    
    
    $
    (633
    )
    
    $
    (99
    )
    
    $
    (3,770
    )
    
    $
    2,770


13



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2002
(in thousands)
(unaudited)

Wholly-Owned SubsidiariesALC
    
    
    
    
    
    
    
    
    
    Non-Indiana,
    
    Carriage
    
    
    
    
    
    Participating
    
    ConsolidatedALC, Inc.
    
    Inc.
    
    House
    
    HCI
    
    Subsidiaries
    
    TotalRevenue
    
    $
    104,130
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9,766
    
    
    $
    113,896Operating expenses:Residence operating expenses
    
    
    70,923
    
    
    
    222
    
    
    
    179
    
    
    
    
    
    
    
    7,460
    
    
    
    78,784Corporate general and administrative
    
    
    14,074
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,074Building rentals
    
    
    8,509
    
    
    
    
    
    
    
    657
    
    
    
    
    
    
    
    
    
    
    
    9,166Depreciation and amortization
    
    
    2,496
    
    
    
    300
    
    
    
    97
    
    
    
    98
    
    
    
    1,951
    
    
    
    4,942Total operating expenses
    
    
    96,002
    
    
    
    522
    
    
    
    933
    
    
    
    98
    
    
    
    9,411
    
    
    
    106,966Operating income (loss)
    
    
    8,128
    
    
    
    (522
    )
    
    
    (933
    )
    
    
    (98
    )
    
    
    355
    
    
    
    6,930Other income (expense):Interest expense
    
    
    (5,622
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,980
    )
    
    
    (10,602
    )Interest income
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160Management fee income (expense)
    
    
    371
    
    
    
    
    
    
    
    (230
    )
    
    
    
    
    
    
    (141
    )
    
    
    Lease income (expense)
    
    
    (1,620
    )
    
    
    1,620
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Total other income (expense), net
    
    
    (6,675
    )
    
    
    1,620
    
    
    
    (230
    )
    
    
    
    
    
    
    (5,121
    )
    
    
    (10,406
    )Income (loss) before debt restructure, and reorganization
cost, and discontinued operations
    
    
    1,453
    
    
    
    1,098
    
    
    
    (1,163
    )
    
    
    (98
    )
    
    
    (4,766
    )
    
    
    (3,476
    )Debt restructure and reorganization costs
    
    
    (680
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (680
    )Income (loss) from continuing operations
    
    
    773
    
    
    
    1,098
    
    
    
    (1,163
    )
    
    
    (98
    )
    
    
    (4,766
    )
    
    
    (4,156
    )Income (loss) from discontinued operations
    
    
    (355
    )
    
    
    
    
    
    
    
    
    
    
    (450
    )
    
    
    319
    
    
    
    (486
    )Net income (loss)
    
    $
    418
    
    
    $
    1,098
    
    
    $
    (1,163
    )
    
    $
    (548
    )
    
    $
    (4,447
    )
    
    $
    (4,642
    )


14



---



##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine months ended September 30, 2003
(in thousands)
(unaudited)

Wholly-Owned SubsidiariesALC
    
    
    
    
    
    
    
    
    
    Non-Indiana,
    
    Carriage
    
    
    
    
    
    Participating
    
    ConsolidatedALC, Inc.
    
    Inc.
    
    House
    
    HCI
    
    Subsidiaries
    
    TotalOperating Activities:Net income
    
    $
    6,611
    
    
    $
    661
    
    
    $
    (633
    )
    
    $
    (99
    )
    
    $
    (3,770
    )
    
    $
    2,770Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    2,576
    
    
    
    306
    
    
    
    103
    
    
    
    99
    
    
    
    2,029
    
    
    
    5,113Stock-based compensation expense
    
    
    163
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163Amortization of deferred financing fees
    
    
    83
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83Amortization of fair value adjustment
to building rentals
    
    
    (153
    )
    
    
    
    
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    (176
    )Amortization of fair market adjustment
to debt
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    299
    
    
    
    306Amortization of note discount
    
    
    424
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    424Straight-line adjustment to building
rentals
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90Interest paid-in-kind
    
    
    1,003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,003Provision for doubtful accounts
    
    
    625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    658Gain on sale of assets
    
    
    (833
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (833
    )Changes in assets and liabilities:Receivable (payable) from subsidiaries/
parent
    
    
    (2,879
    )
    
    
    (1,436
    )
    
    
    612
    
    
    
    (55
    )
    
    
    3,758
    
    
    
    Accounts receivable
    
    
    (1,722
    )
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    (7
    )
    
    
    (1,726
    )Prepaid expenses
    
    
    (708
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    (741
    )Other current assets
    
    
    442
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    (484
    )
    
    
    (39
    )Other assets
    
    
    (616
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    (216
    )Accounts payable
    
    
    833
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (431
    )
    
    
    401Accrued expenses
    
    
    (475
    )
    
    
    206
    
    
    
    (56
    )
    
    
    55
    
    
    
    (285
    )
    
    
    (555
    )Other liabilities
    
    
    203
    
    
    
    369
    
    
    
    7
    
    
    
    
    
    
    
    28
    
    
    
    607Net cash provided by operating activities
    
    
    5,674
    
    
    
    106
    
    
    
    10
    
    
    
    5
    
    
    
    1,537
    
    
    
    7,332Investing Activities:Collections of restricted cash, net
    
    
    4,991
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,991Purchases of property and equipment
    
    
    (1,805
    )
    
    
    (106
    )
    
    
    (10
    )
    
    
    (5
    )
    
    
    (567
    )
    
    
    (2,493
    )Sale of properties
    
    
    2,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,569Net cash provided by (used in) investing activities
    
    
    5,755
    
    
    
    (106
    )
    
    
    (10
    )
    
    
    (5
    )
    
    
    (567
    )
    
    
    5,067Financing Activities:Payments on long-term debt and capital
lease obligation
    
    
    (7,690
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (970
    )
    
    
    (8,660
    )Net cash used in financing activities
    
    
    (7,690
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (970
    )
    
    
    (8,660
    )Net increase in cash and cash equivalents
    
    
    3,739
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,739Cash and cash equivalents, beginning of
period
    
    
    7,165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,165Cash and cash equivalents, end of period
    
    $
    10,904
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,904






---



##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine months ended September 30, 2002
(in thousands)
(unaudited)

Wholly-Owned SubsidiariesALC
    
    
    
    
    
    
    
    
    
    Non-Indiana,
    
    Carriage
    
    
    
    
    
    Participating
    
    ConsolidatedALC, Inc.
    
    Inc
    
    House
    
    HCI
    
    Subsidiaries
    
    TotalOperating Activities:Net loss
    
    $
    418
    
    
    $
    1,098
    
    
    $
    (1,163
    )
    
    $
    (548
    )
    
    $
    (4,447
    )
    
    $
    (4,642
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    2,434
    
    
    
    300
    
    
    
    97
    
    
    
    239
    
    
    
    1,981
    
    
    
    5,051Amortization of deferred financing fees
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80Amortization of fair value adjustment to
building rentals
    
    
    (443
    )
    
    
    
    
    
    
    (68
    )
    
    
    
    
    
    
    
    
    
    
    (511
    )Amortization of fair market adjustment of debt
    
    
    320
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    320Amortization of note discount
    
    
    328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    328Straight-line adjustment to building rentals
    
    
    282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    282Interest paid-in-kind
    
    
    915
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    915Provision for doubtful accounts
    
    
    207
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207Loss on sale of assets
    
    
    286
    
    
    
    
    
    
    
    
    
    
    
    468
    
    
    
    (209
    )
    
    
    545Changes in assets and liabilities:Receivable (payable) from subsidiaries/parent
    
    
    (2,255
    )
    
    
    1,877
    
    
    
    1,267
    
    
    
    (1,960
    )
    
    
    1,071
    
    
    
    Accounts receivable
    
    
    (299
    )
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    (5
    )
    
    
    (296
    )Prepaid expenses
    
    
    (627
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    (584
    )Other current assets
    
    
    599
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    (391
    )
    
    
    225Other assets
    
    
    (2,025
    )
    
    
    
    
    
    
    
    
    
    
    1,810
    
    
    
    135
    
    
    
    (80
    )Accounts payable
    
    
    (199
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (168
    )
    
    
    (371
    )Accrued expenses
    
    
    2,187
    
    
    
    (3,198
    )
    
    
    (54
    )
    
    
    (1
    )
    
    
    (436
    )
    
    
    (1,502
    )Other current liabilities
    
    
    (71
    )
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (82
    )Other liabilities
    
    
    826
    
    
    
    (30
    )
    
    
    25
    
    
    
    (18
    )
    
    
    (803
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    2,963
    
    
    
    47
    
    
    
    104
    
    
    
    
    
    
    
    (3,229
    )
    
    
    (115
    )Investing Activities:Decrease/increase in restricted cash
    
    
    (2,263
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,263
    )Purchases of property and equipment
    
    
    1,628
    
    
    
    (47
    )
    
    
    (104
    )
    
    
    
    
    
    
    (3,684
    )
    
    
    (2,207
    )Net cash used in investing activities
    
    
    (635
    )
    
    
    (47
    )
    
    
    (104
    )
    
    
    
    
    
    
    (3,684
    )
    
    
    (4,470
    )Financing Activities:Proceeds from long-term debt
    
    
    (3,405
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,913
    
    
    
    3,508Payments on long-term debt and capital lease obligation
    
    
    (1,948
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,948
    )Debt issuance costs of offerings and long-term debt
    
    
    (79
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (79
    )Net cash provided by (used in)
financing activities
    
    
    (5,432
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,913
    
    
    
    1,481Net decrease in cash and cash equivalents
    
    
    (3,104
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,104
    )Cash and cash equivalents, beginning of period
    
    
    6,077
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,077Cash and cash equivalents, end of period
    
    $
    2,973
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,973


16



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##### Table of Contents









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

This report on Form 10-Q may be deemed to constitute forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements, including without limitation,
statements containing the words will, believes, anticipates, estimates,
intends, expects, should, could, and words of similar import, are
forward looking statements. These forward-looking statements may be affected by
risks and uncertainties, including without limitation (i) our ability to
control costs and improve operating margins, (ii) our ability to increase
occupancy, (iii) our ability to increase our revenue at a pace which exceeds
expense inflation, (iv) our ability to operate our residences in compliance
with evolving regulatory requirements, (v) the degree to which our future
operating results and financial condition may be affected by a reduction in
Medicaid reimbursement rates, and (vi) our ability to extend or renegotiate our
current debt agreements. 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.

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

General

We operate, 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. As of
September 30, 2003, we had operations in 14 states.

We provide personal care and support services, and make available routine
nursing services (as permitted by applicable law) designed to meet the personal
and health care needs of our residents. We believe that this combination of
residential, personal care, support and health care services provides a
cost-efficient alternative to, and affords an independent lifestyle for,
individuals who do not require the broader array of medical services that
nursing facilities are required by law to provide.

As of September 30, 2003, we operated 177 assisted living residences (6,838
units), of which we owned 122 residences (4,733 units) and leased 55 residences
(2,105 units).

We derive our revenues primarily from resident fees for room, board and care.
Resident fees typically are paid monthly by residents, their families, state
Medicaid agencies or other third parties. Resident fees include revenue derived
from a multi-tiered rate structure, which varies based on the level of care
provided. Resident fees are recognized as revenues when services are provided.
Our expenses include:



| |  |  | residence operating expenses, such as staff payroll, food, property
taxes, utilities, insurance and other direct residence operating
expenses;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general and administrative expenses consisting of regional management
and corporate support functions such as legal, accounting and other
administrative expenses;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | building rentals;
| | - |  | -----------------



| |  |  | depreciation and amortization; and
| | - |  | ----------------------------------



| |  |  | interest expense related to debt.
| | - |  | ---------------------------------

We anticipate that the majority of our revenues will continue to come from
private pay sources. However, we believe that by having located some of our
residences in states with favorable regulatory and reimbursement climates, we
should have a stable source of residents eligible for Medicaid reimbursement to
the extent that private pay residents are not available and, in addition,
provide our private pay residents with alternative sources of income when their
private funds are depleted and they become Medicaid eligible.

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

17



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##### Table of Contents



Fresh-Start Reporting

Upon the Effective Date of our Plan of reorganization, we adopted fresh-start
reporting in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code (SOP 90-7). In connection with the
adoption of fresh-start reporting, a new entity has been deemed created for
financial reporting purposes. For financial reporting purposes, we adopted the
provisions of fresh-start reporting effective December 31, 2001. In adopting
the requirements of fresh-start reporting as of December 31, 2001, we were
required to value our assets and liabilities at their estimated fair value and
eliminate our accumulated deficit at December 31, 2001.

Sales of Residences

During March 2003, the Company sold one residence in Ohio and one residence in
Indiana. The total sales price for these residences was $2.6 million, and the
Company recognized a gain from these sales of $899,000.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate these
estimates, including those related to bad debts, income taxes, professional and
general liability reserves, the carrying value of long-lived assets, financing
operations, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Results of Operations

The following tables set forth, for the periods presented, operating expenses
as a percentage of revenue, the number of total residences and units operated,
average occupancy and rental rates and the sources of our revenue. The portion
of revenues received from state Medicaid agencies are labeled as Medicaid
state paid portion while the portion of our revenues that a Medicaid-eligible
resident must pay out of his or her own resources is labeled Medicaid resident
paid portion.

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2002
    
    2003
    
    2002
    
    2003Revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating expenses:Residence operating expenses
    
    
    69.5
    
    
    
    66.9
    
    
    
    69.2
    
    
    
    66.8Corporate general and administrative
    
    
    10.7
    
    
    
    10.7
    
    
    
    12.4
    
    
    
    10.9Building rentals
    
    
    7.9
    
    
    
    7.8
    
    
    
    8.1
    
    
    
    7.5Depreciation and amortization
    
    
    4.3
    
    
    
    4.1
    
    
    
    4.2
    
    
    
    4.1Total operating expenses
    
    
    92.4
    
    
    
    89.5
    
    
    
    93.9
    
    
    
    89.3Operating income
    
    
    7.6
    
    
    
    10.5
    
    
    
    6.1
    
    
    
    10.7Other income (expense):Interest expense
    
    
    (9.1
    )
    
    
    (8.0
    )
    
    
    (9.4
    )
    
    
    (8.1
    )Interest income
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.1Other income, net
    
    
    0.0
    
    
    
    
    
    
    
    0.0
    
    
    
    (0.1
    )Total other expense, net
    
    
    (8.9
    )
    
    
    (7.8
    )
    
    
    (9.2
    )
    
    
    (8.1
    )Income (loss) before debt restructure, reorganization costs, and
discontinued operations
    
    
    (1.3
    )
    
    
    2.7
    
    
    
    (3.1
    )
    
    
    2.6Debt restructure and reorganization costs
    
    
    (0.0
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    Income (loss) from continuing operations before income taxes
    
    
    (1.3
    )
    
    
    2.7
    
    
    
    (3.6
    )
    
    
    2.6Income tax expense
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.8Income (loss) from continuing operations
    
    
    (1.3
    )
    
    
    2.3
    
    
    
    (3.6
    )
    
    
    1.8Discontinued operations:Income (loss) from operations (including gain on sale of assets)
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    0.7Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Income (loss) from discontinued operations
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    0.4Net income (loss)
    
    
    (1.4
    )
    
    
    2.3
    
    
    
    (4.1
    )
    
    
    2.2


18



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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2002
    
    2003
    
    2002
    
    2003Other Data Relating to Continuing Operations:Residences operated (end of period)
    
    
    177
    
    
    
    177
    
    
    
    177
    
    
    
    177Units operated (end of period)
    
    
    6,847
    
    
    
    6,838
    
    
    
    6,847
    
    
    
    6,838Average occupancy rate (based on occupied units)
    
    
    85.8
    %
    
    
    88.4
    %
    
    
    84.9
    %
    
    
    88.1
    %Average monthly rental rate
    
    $
    2,180
    
    
    $
    2,310
    
    
    $
    2,153
    
    
    $
    2,282Sources of revenue:Medicaid state paid portion
    
    
    13.1
    %
    
    
    14.0
    %
    
    
    12.6
    %
    
    
    13.4
    %Medicaid resident paid portion
    
    
    8.0
    %
    
    
    9.1
    %
    
    
    7.7
    %
    
    
    8.7
    %Private resident paid portion
    
    
    78.9
    %
    
    
    76.9
    %
    
    
    79.7
    %
    
    
    77.9
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %


Three months ended September 30, 2003 compared to three months ended September 30, 2002:

The Company recorded net income of $1.0 million on revenues of $42.4 million
for the three months ended September 30, 2003 (the September 2003 Quarter)
compared to a net loss of $563,000 on revenues of $39.1 million for the three
months ended September 30, 2002 (the September 2002 Quarter).

Revenues increased $3.4 million for the September 2003 Quarter compared to the
September 2002 Quarter primarily due to an increase in average occupancy
percentage of approximately 2.6% and an increase in average rental rate
received from residents of approximately $130 per month. In March 2003 the
Company instituted a rent increase in all its residences.

Residence operating expenses increased $1.2 million for the September 2003
Quarter compared to the September 2002 Quarter but decreased as a percentage of
revenue from 69.5% to 66.9%. Of the increase, $929,000 is attributable to an
increase in payroll expenses, which decreased slightly as a percentage of
revenue. The increase in payroll is primarily due to an increase in benefits
and workers compensation expense, additional personnel, and increased salaries
and wages, including expenses related to employee incentives. An increase in
utilities expense of $329,000 in addition to less significant increases in
other expense categories comprise the remaining increase in residence operating
expenses from the September 2002 Quarter to the September 2003 Quarter. These
increases were offset primarily by a decrease of $284,000 in maintenance costs,
and less significant decreases in other expense categories.

Corporate, general and administrative expenses increased $368,000 for the
September 2003 Quarter compared to the September 2002 Quarter and remained
constant as a percentage of revenue at 10.7%. This increase is primarily
related to $517,000 of bonus expense, $252,000 of legal fees, and other less
significant increases. These increases were offset by less significant
decreases in other corporate overhead items.

Building rentals increased $258,000, or 8.4%, for the September 2003 Quarter compared to
the September 2002 Quarter and decreased as a percentage of revenue from 7.9%
to 7.8%.

Depreciation and amortization expense increased by $44,000 for the September
2003 Quarter compared to the September 2002 Quarter.

Interest expense decreased $170,000 for the September 2003 Quarter compared to
the September 2002 Quarter. The decrease is primarily due to the overall
reduction of indebtedness.

The provision for income tax expense was $191,000 for the September 2003
Quarter. The Company anticipates taxable income for financial reporting
purposes for the year ending December 31, 2003, and accordingly, has provided
for federal and state income taxes on income from continuing operations and
discontinued operations for the three months ended September 30, 2003. The
Company has recorded such income tax expense at the rate of 31.8%, the
estimated effective tax rate for the nine months ended September 30, less the
effect of the change in the estimate from the six months ended June 30, 2003.
The change in the estimate for the six months ended June 30, 2003 was a
reduction of income tax expense of $180,000, resulting primarily from
anticipation of utilization of net operating loss (NOL) carry-forwards. For
income tax return purposes the Company anticipates any taxable income
generated for the year ending December 31, 2003 will be offset in total by NOL
carry-forwards.

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##### Table of Contents



Nine months ended September 30, 2003 compared to nine months ended September 30, 2002:

The
Company recorded net income of $2.8 million on revenues of $125.5 million
for the nine months ended September 30, 2003 compared to a net loss of $4.6
million on revenues of $113.9 million for the nine months ended September 30,
2002.

Revenues increased $11.6 million for the nine months ended September 2003
compared to the nine months ended September 2002 primarily due to an increase
in average occupancy percentage of approximately 3.2% and an increase in
average rental rate received from residents of approximately $129 per month.
In March 2003 the Company instituted a rent increase in all its residences.

Residence operating expenses increased $5.1 million for the nine months ended
September 2003 compared to the nine months ended September 2002 but decreased
as a percentage of revenue from 69.2% to 66.8%. Of the increase, $3.4 million
is attributable to an increase in payroll expenses, which decreased slightly as
a percentage of revenue. The increase in payroll is primarily due to an
increase in benefits and workers compensation expense, additional personnel,
and increased salaries and wages, including expenses related to employee
incentives. An increase in utilities expense of $1.3 million in addition to
less significant increases in other expense categories comprise the remaining
increase in residence operating expenses from the nine months ended September
2002 to the nine months ended September 2003. These increases were offset
primarily by a decrease of $374,000 in maintenance costs and less significant
decreases in other expense categories.

Corporate, general and administrative expenses decreased $426,000 for the nine
months ended September 2003 compared to the nine months ended September 2002
and decreased as a percentage of revenue from 12.4% to 10.9%. This decrease is
primarily related to $768,000 of severance expenses incurred in the nine months
ended September 2002 related to management changes. The Company incurred no
significant severance expenses during the nine months ended September 2003.
Also contributing to the decrease in administrative expenses was a $399,000
decrease in travel related expenses from the nine months ended September 2002
to the nine months ended September 2003. These expenses decreased primarily
due to the completion of the corporate office relocation to Dallas, Texas in
May 2003 and the corporate offices new facilities being more centrally located
to the Companys residences. These decreases were offset primarily by
increases from the nine months ended September 2002 to the nine months ended
September 2003 in bonus expenses of $725,000 and other employee incentives and
hiring expenses.

Building
rentals increased $377,000, or 4.1%, for the nine months ended September 2003
compared to the nine months ended September 2002 and decreased as a percentage
of revenue from 8.1% to 7.5%.

Depreciation and amortization expense increased by $171,000 for the nine months
ended September 2003 compared to the nine months ended September 2002.

Interest expense decreased $369,000 for the nine months ended September 2003
compared to the nine months ended September 2002. The decrease is primarily
due to the overall reduction of indebtedness.

Debt restructure and reorganization costs were $680,000 for the nine months
ended September 2002. These were professional fees, including legal and
investment advisory fees, related to the Companys Plan of Reorganization,
which became effective January 1, 2002. The Company did not incur these
expenses in the nine months ended September 2003.

Results from discontinued operations during the nine months ended September
2002 include results of operations, sales-related expenses from residences that
were subsequently sold and gains and/or losses related to those sales. The
results from discontinued operations during the nine months ended September
2003 include results of operations, sales-related expenses from residences that
were sold during March 2003, and gains and/or losses related to those sales.

Income tax expense was $1.3 million for the nine months ended September 2003.
The Company anticipates taxable income for financial reporting purposes for the
year ending December 31, 2003, and accordingly, has provided for federal and
state income taxes on income from continuing operations and discontinued
operations for the nine months ended September 30, 2003. The Company has
recorded such income tax expense at the rate of 31.8%. For income tax return
purposes the Company anticipates any taxable income generated for the year
ending December 31, 2003 will be offset in total by NOL carry-forwards.

20



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##### Table of Contents



Liquidity and Capital Resources

At September 30, 2003, we had working capital of $1.1 million and unrestricted
cash and cash equivalents of $10.9 million.

Net cash provided by operating activities was $7.3 million during the nine
months ended September 30, 2003. The primary sources were net
income of $2.8
million and $5.1 million for depreciation and
amortization.

Net cash provided by investing activities was $5.1 million during the nine
months ended September 30, 2003. The primary sources were the release of $4.3
million of restricted cash related to the amended agreements with U.S. Bank
(see below) and the sale of properties for $2.6 million. These sources were
offset by purchases of property and equipment totaling $2.5 million.

Net cash used in financing activities was $8.7 million during the nine months
ended September 30, 2003, all of which related to payments on long-term debt.
Of this amount, $4.3 million released from U.S. Bank (see below) was used to
partially pay down the amount outstanding on the G.E. Capital Credit Facility.

Related to the New Notes, in June 2003 the Company received a notice of default
from the Trustee indicating that the Company failed to comply with a
non-financial covenant under the Indentures pertaining to the New Notes that
requires the Company to deliver an annual opinion stating that all filings,
recordings or other actions that are necessary to maintain the Liens under the
Collateral Documents (as such terms are defined under the Indentures pertaining
to the New Notes) have been done, or that no such action is required. The
Company has delivered the required annual opinions to the Trustee and has
received notice from the Trustee that the Default referenced in the Notice has
been cured.

In July 2003, the Company completed an open market purchase of a portion of the
Companys outstanding 10% Senior Secured Notes due 2009 and Junior Secured
Notes due 2012. The transaction included the purchase of $147,889 principal
amount of Senior Secured Notes and $34,178 principal amount of Junior Secured
Notes (collectively, the Purchased Notes). Because the purchase of the
Junior Notes is not permitted under the Indentures and constitutes a Default
there under, and the purchase of the Senior Notes may not be permitted and
could constitute Default there under, although this issue is not clear, the
Company cancelled the purchase transaction with the seller in September 2003.

The Company has a series of reimbursement agreements with U.S. Bank for letters
of credit that secure certain of our Revenue bonds payable, which total
approximately $23.9 million as of September 30, 2003. An amendment to these
agreements signed in September 2003 released $4.3 million of previously
restricted cash to the Company, extended the expiration of the letters of
credit to January 2005, amended the annual fees to be 2% of the stated amount
of the letters of credit, and set in place new financial covenants. The
Company was in compliance with these new covenants at September 30, 2003.
Failure to comply with these covenants would constitute an event of default,
which would allow U.S. Bank to declare any amounts outstanding under the loan
documents to be due and payable. Any such default could have a material
adverse effect on the Company.

Our credit agreements with U.S. Bank contain certain restrictive and financial
covenants, including certain financial ratios. The agreements also require us
to deposit $500,000 in cash collateral with U.S. Bank in the event certain
regulatory actions are commenced with respect to the properties securing our
obligations to U.S. Bank. U.S. Bank is required to release such deposits upon
satisfactory resolution of the regulatory action. As of the date of this
filing, no such deposits have been required.

The Company leases 37 of its facilities, representing 1,426 units, from LTC
Properties, Inc. (LTC). In accordance with the Companys plan of
reorganization, effective January 1, 2002, the Company entered into a Master
Lease Agreement with LTC under which 16 leases were consolidated. This Master
Lease Agreement provides for aggregate rent reductions of $875,000 per year and
restructures the provision related to minimum rent increases for the 16
properties for the initial remaining term. The Master Lease Agreement and
other LTC lease agreements also provides LTC with the option to exercise
certain remedies, including the termination of the Master Lease Agreement and
the other LTC leases, upon the occurrence of an Event of Default. A change of
control of the Company is deemed to be an Event of Default. A change of
control is deemed to occur if, among other things, (i) any person, directly or
indirectly, is or becomes the beneficial owner of thirty percent (30%) or more
of the combined voting power of the Companys outstanding voting securities,
(ii) the stockholders approve under certain conditions a merger or
consolidation of the Company with another corporation or entity, or (iii) the
stockholders approve a plan of liquidation or sale of all or substantially all
of the assets of the Company. If the surviving entity has a net worth of $75
million or more, the change of control does not constitute an Event of Default.
In addition, there are cross default provisions in the LTC leases. At the
same time that the Company entered into the Master Lease Agreement, it also
amended 16 other leases with LTC under which the renewal rights of certain of
those leases are tied together differently than previously with certain other
leases. The lease agreements between the Company and LTC expire according to
the following schedule:

21



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##### Table of Contents



Year of LeaseNumber of LTC Properties
    
    Expiration6
    
    
    
    200718
    
    
    
    20087
    
    
    
    20091
    
    
    
    20105
    
    
    
    2015Total
    
    
    37


Below is summarized financial information for the 37 properties:

Three months ended(in thousands)
    
    June 30,
    
    September 30,
    
    December 31,
    
    March 31,
    
    June 30,
    
    September 30,(unaudited)
    
    2002
    
    2002
    
    2002
    
    2003
    
    2003
    
    2003Revenue
    
    $
    7,921
    
    
    $
    8,315
    
    
    $
    8,292
    
    
    $
    8,448
    
    
    $
    8,776
    
    
    $
    8,855Residence operating expenses
    
    
    5,214
    
    
    
    5,432
    
    
    
    5,493
    
    
    
    5,469
    
    
    
    5,442
    
    
    
    5,552Building rentals
    
    
    2,120
    
    
    
    2,120
    
    
    
    2,120
    
    
    
    2,149
    
    
    
    2,149
    
    
    
    2,236Depreciation & amortization
    
    
    5
    
    
    
    10
    
    
    
    13
    
    
    
    15
    
    
    
    17
    
    
    
    20Total operating expenses
    
    
    7,339
    
    
    
    7,562
    
    
    
    7,626
    
    
    
    7,633
    
    
    
    7,608
    
    
    
    7,808Operating income
    
    $
    582
    
    
    $
    753
    
    
    $
    666
    
    
    $
    815
    
    
    $
    1,168
    
    
    $
    1,047


An Event of Default under the LTC leases including a change of control of the
Company that resulted in the termination of the LTC leases would significantly
impair the Companys cash flow from operations and could have a material
adverse effect on the Company.

Under the Senior Notes and Junior Notes the Company is required to make an
offer (the Change of Control Offer) to repurchase the Senior Notes and the
Junior Notes upon the occurrence of a change of control of the Company. A
change of control as defined in the Indentures includes, among other things,
the acquisition by any person or group of beneficial ownership greater than 50%
of the total voting power of the common stock of the Company. The Change of
Control Offer must be at a price equal to 101% of the principal amount of the
Senior Notes and Junior Notes, together with accrued and unpaid interest. The
occurrence of a change of control under the Indentures could have a material
adverse effect on the Company.

As indicated in Amendment No. 9 to Schedule 13D/A, filed with the SEC on June
13, 2003 on behalf of BRU Holding Co., LLC, BET Associates, L.P., and Bruce E.
Toll (the Filing Persons), Bruce Toll has acquired beneficial ownership of
1,110,426 shares (17.26%) of common stock of the Company. The Filing Persons
further indicated that they have acquired the Companys securities for
investment purposes but are currently re-evaluating their position and possible
alternative future courses of action, including the possibility of seeking to
acquire control of the Company, although no specific plan or proposal has been
formulated. According to Amendment No. 12, to Schedule 13D/A, filed with the
SEC on October 20, 2003, Bruce Toll has acquired beneficial ownership of
1,795,161 shares of common stock of the Company, or 27.91% of the Companys
common stock, (based on 6,431,925 shares of common stock outstanding) and the
Filing Persons have no intent to purchase additional shares which would
increase their beneficial ownership percentage in excess of 29.9%. In the
event the Filing Persons purchase a block of 50,000 or more shares of common
stock during the period from September 18, 2003 through September 17, 2004, Mr.
Toll as agreed to purchase an additional 557,214 shares of common stock from
National Healthcare Investments, Inc. at the highest amount paid for a block of
50,000 or more shares of common stock during such twelve-month period. W.
Andrew Adams, the Companys Chairman of the Board, is President, Chief
Executive Officer and Chairman of the Board of Directors of National Healthcare
Investments, Inc.

Certain of our leases and loan agreements, including the LTC leases, contain
covenants and cross-default provisions such that a default on one of those
agreements could cause us to be in default on one or more other agreements
which would have a material adverse effect on the Company.

Our ability to make payments on and to refinance any of our indebtedness, to
satisfy our lease obligations and to fund planned capital expenditures will
depend on our ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control.

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##### Table of Contents



Based upon our current level of operations, we believe that our current cash on
hand and expected cash flow from operations are sufficient to meet our
liquidity needs for at least the next twelve months.

There can be no assurance, however, that our business will generate sufficient
cash flow from operations, or that currently anticipated cost savings and
operating improvements will be realized on schedule, both of which may be
necessary to enable us to pay our indebtedness, to satisfy our lease
obligations and to fund our other liquidity needs. As a result, we may need to
refinance all or a portion of our indebtedness, on or before maturity. There
can be no assurance that we will be able to refinance any of our indebtedness,
on commercially reasonable terms or at all.







Item 3.Quantitative and Qualitative Disclosure About Market Risk

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

For fixed rate debt, changes in interest rates generally affect the fair market
value of the debt instrument, but not our results of operations or cash flows.
We do not have an obligation to prepay any of our fixed rate debt prior to
maturity, and therefore, interest rate risk and changes in the fair market
value of our fixed rate debt will not have an impact on our results of
operations or cash flows until we decide, or are required, to refinance such
debt.

For variable rate debt, changes in interest rates generally do not impact the
fair market value of the debt instrument, but do affect our future results of
operations and cash flows. We had variable rate debt of $62.0 million
outstanding at September 30, 2003 with a weighted average interest rate of
5.4%, of which $38.5 million has an interest rate floor of 8.0%. Assuming that
our balance of variable rate debt remains constant, each one-percent increase
in interest rates would result in an annual increase in interest expense, and a
corresponding decrease in net cash flows, of $235,000 until the interest rate
floor is exceeded. Conversely, each one-percent decrease in interest rates
would result in an annual decrease in interest expense, and a corresponding
increase in net cash flows, of $235,000.

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.







Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our
Chief Financial Officer, has evaluated our disclosure controls and procedures
(as defined in Securities Exchange Act of 1934 (the Exchange Act) Rules
13a-15(e) and 15d-15(e) as of the end of the period covered by this report
pursuant to Rule 13a-15(b) under the Exchange Act). Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of the period covered by this report, our disclosure controls and
procedures are effective to ensure that information required to be disclosed in
reports that we file or submit under the Exchange Act is (1) recorded,
processed, summarized and reported in a timely manner, and (2) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

Changes in Internal Controls

There has been no change in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially affected or is
reasonably likely to materially affect, our internal control over financial
reporting.

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PART II  OTHER INFORMATION







Item 1.Legal Proceedings

We are involved from time to time in ordinary, routine or regulatory legal
proceedings incidental to our business. As of November 11, 2003, we believe
that such legal proceedings should not have a material adverse effect on our
business.







Item 4.Submission of Matters to a Vote of Security Holders

None







Item 6.Exhibits and Reports on Form 8-K



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

ExhibitNumber12
    
    Ratio of Earnings to Fixed Charges31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| |  |  | We filed a report on Form 8-K on July 29, 2003 pursuant to Item 5 of Form
8-K announcing the Companys receipt of a Notice of cure from BNY Midwest
Trust Company, the Trustee under the Indentures, regarding the annual
opinion requirement.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We filed a report on Form 8-K on August 14, 2003 pursuant to Items 5 and 7
of Form 8-K announcing the Companys financial results for the quarter
ended June 30, 2003.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We filed a report on Form 8-K on September 4, 2003 pursuant to Item 5 of
Form 8-K announcing the death of Richard C. Ladd, a director of the
Company.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

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

ASSISTED LIVING CONCEPTS, INC.
RegistrantBy:
    
    /s/ Matthew PatrickName:
Title:
    
    Matthew PatrickSenior Vice President, Chief Financial Officer,
Secretary and TreasurerNovember 12, 2003By:
    
    /s/ Stephan M. KearneyName:
Title:
    
    Stephan M. KearneyVice President, Controller and
Chief Accounting OfficerNovember 12, 2003


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EXHIBIT INDEX

ExhibitNumber12
    
    Ratio of Earnings to Fixed Charges31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


26