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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20459

Form 10-Q



|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|--- |  | ---------------------------------------------------------------------------------------
|   
|    |  | For the quarterly period ended June 30, 2002                                           

or



|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|----- |  | ----------------------------------------------------------------------------------------
|     
|      |  | For the Transition period from            to                                            

Commission file number 1-83938

Assisted Living Concepts, Inc.(Exact name of registrant as specified in its charter)

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

11835 NE Glenn Widing Drive, Building E
Portland, Oregon 97220(Address of principle executive offices)

(503) 252-6233(Registrants telephone number, including area code)

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

The Registrant had 6,431,759 shares of common stock, $.01 par value,
outstanding at August 1, 2002.



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TABLE OF CONTENTS



|                               |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONDENSED 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                            
|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                 
|EXHIBIT 12                    
|EXHIBIT 99.1                  
|EXHIBIT 99.2                  



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ASSISTED LIVING CONCEPTS, INC.

FORM 10-Q
June 30, 2002

INDEX

|                               |  |                                                                                                   |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                   |  | Page
|                               |  |                                                                                                   |  |     
|PART I  FINANCIAL INFORMATION
|Item 1.                        |  | Financial Statements                                                                              |  |     
|                               |  | Condensed
        Consolidated Balance Sheets                                                     |  | 3   
|                               |  | Condensed Consolidated Statements
        of Operations                                           |  | 4   
|                               |  | Condensed
        Consolidated Statements of Cash Flows                                           |  | 5   
|                               |  | Notes to Condensed Consolidated
        Financial Statements                                      |  | 6   
|Item 2.                        |  | Managements
        Discussion and Analysis of Financial Condition and Results of Operations     |  | 16  
|                               |  | Risk Factors                                                                                      |  | 26  
|Item 3.                        |  | Quantitative
        and Qualitative Disclosures About Market Risk and Risk Sensitive Instruments |  | 31  
|PART II  OTHER INFORMATION   
|Item 1.                        |  | Legal Proceedings                                                                                 |  | 32  
|Item 4.                        |  | Submission of Matters to a
        Vote of Security Holders                                       |  | 32  
|Item 6.                        |  | Exhibits
        and Reports on Form 8-K                                                          |  | 32  

2



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PART I  FINANCIAL INFORMATION




Item 1.Financial Statements

ASSISTED LIVING CONCEPTS, INC.




CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)

|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |         |    |         | 
|------------------------------------ | ------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ----------------- | ------- | -------- | ------- | -- | ------- | 
|                                     |                                                                          |                                                                                                                                                                    |                                            |         | Successor Company
|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                  
|                                     |                                                                          |                                                                                                                                                                    |                                            |         | December 31,      |         | June 30,
|                                     |                                                                          |                                                                                                                                                                    |                                            |         | 2001              |         | 2002    
|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |         
|ASSETS                              
|Current Assets:                      |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |        
|                                     | Cash and cash equivalents                                                |                                                                                                                                                                    | $                                          | 6,077   |                   |         | $        | 5,536   |   
|                                     | Cash restricted for resident security deposits                           |                                                                                                                                                                    |                                            | 2,415   |                   |         |          | 2,422   |   
|                                     | Accounts receivable, net of allowance for doubtful accounts: 2002 - $132 |                                                                                                                                                                    |                                            | 2,328   |                   |         |          | 2,332   |   
|                                     | Prepaid expenses                                                         |                                                                                                                                                                    |                                            | 983     |                   |         |          | 2,185   |   
|                                     | Cash restricted for workers compensation claims                         |                                                                                                                                                                    |                                            | 2,825   |                   |         |          | 5,525   |   
|                                     | Assets held for sale                                                     |                                                                                                                                                                    |                                            |        |                   |         |          | 5,557   |   
|                                     | Other current assets                                                     |                                                                                                                                                                    |                                            | 3,862   |                   |         |          | 3,690   |   
|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |        
|                                     |                                                                          |                                                                                                                                                                    | Total current assets                       |         |                   | 18,490  |          |         |    | 27,247  | 
|Restricted cash                      |                                                                          |                                                                                                                                                                    | 5,349                                      |         |                   |         | 5,322    |        
|Property and equipment, net          |                                                                          |                                                                                                                                                                    | 196,548                                    |         |                   |         | 188,711  |        
|Other assets, net                    |                                                                          |                                                                                                                                                                    | 1,866                                      |         |                   |         | 2,003    |        
|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |        
|                                     |                                                                          |                                                                                                                                                                    | Total assets                               |         | $                 | 222,253 |          |         | $  | 223,283 | 
|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |        
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |        
|                                     | Accounts payable                                                         |                                                                                                                                                                    | $                                          | 1,450   |                   |         | $        | 1,232   |   
|                                     | Accrued real estate taxes                                                |                                                                                                                                                                    |                                            | 4,523   |                   |         |          | 3,937   |   
|                                     | Other accrued expenses                                                   |                                                                                                                                                                    |                                            | 12,390  |                   |         |          | 13,650  |   
|                                     | Accrued interest expense payable to related parties                      |                                                                                                                                                                    |                                            |        |                   |         |          | 769     |   
|                                     | Resident security deposits                                               |                                                                                                                                                                    |                                            | 2,471   |                   |         |          | 2,380   |   
|                                     | Other current liabilities                                                |                                                                                                                                                                    |                                            | 652     |                   |         |          | 1,095   |   
|                                     | Current portion of unfavorable lease adjustment                          |                                                                                                                                                                    |                                            | 681     |                   |         |          | 647     |   
|                                     | Current portion of long-term debt and capital lease obligation           |                                                                                                                                                                    |                                            | 2,622   |                   |         |          | 7,696   |   
|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |        
|                                     |                                                                          |                                                                                                                                                                    | Total current liabilities                  |         |                   | 24,789  |          |         |    | 31,406  | 
|                                     | Other liabilities                                                        |                                                                                                                                                                    |                                            | 89      |                   |         |          | 277     |   
|                                     | Unfavorable lease adjustment                                             |                                                                                                                                                                    |                                            | 3,115   |                   |         |          | 2,809   |   
|                                     | Long-term debt and capital lease obligation, net of current portion      |                                                                                                                                                                    |                                            | 161,461 |                   |         |          | 160,072 |   
|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |        
|                                     |                                                                          |                                                                                                                                                                    | Total liabilities                          |         |                   | 189,454 |          |         |    | 194,564 | 
|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |        
|                                     | Commitments and contingencies                                            |                                                                                                                                                                    |                                            |         |                   |         |          |         |   
|                                     | Shareholders 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 (68,241 shares to be issued upon settlement of pending claims) |                                            |         | 65                |         |          |         | 65 |        
|                                     | Additional paid-in capital                                               |                                                                                                                                                                    |                                            | 32,734  |                   |         |          | 32,734  |   
|                                     | Accumulated deficit                                                      |                                                                                                                                                                    |                                            |        |                   |         |          | (4,080  | ) 
|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |        
|                                     |                                                                          |                                                                                                                                                                    | Total shareholders equity                 |         |                   | 32,799  |          |         |    | 28,719  | 
|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |        
|                                     |                                                                          |                                                                                                                                                                    | Total liabilities and shareholders equity |         | $                 | 222,253 |          |         | $  | 223,283 | 
|                                     |                                                                          |                                                                                                                                                                    |                                            |         |                   |         |          |        

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

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ASSISTED LIVING CONCEPTS, INC.




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

|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |        |        |  
|------------------------------------------------------------- | ------------------------------------ | ------------------------ | ------ | ------------- | ------ | ------------- | ------ | ------------- | ------ | ------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                              |                                      |                          |        | Predecessor   |        | Successor     |        | Predecessor   |        | Successor    
|                                                              |                                      |                          |        | Company       |        | Company       |        | Company       |        | Company      
|                                                              |                                      |                          |        |               |        |               |        |               |        |              
|                                                              |                                      |                          |        | Three Months  |        | Three Months  |        | Six Months    |        | Six Months   
|                                                              |                                      |                          |        | Ended         |        | Ended         |        | Ended         |        | Ended        
|                                                              |                                      |                          |        | June 30, 2001 |        | June 30, 2002 |        | June 30, 2001 |        | June 30, 2002
|                                                              |                                      |                          |        |               |        |               |        |               |        |              
|Revenue                                                       |                                      | $                        | 36,493 |               |        | $             | 37,904 |               |        | $             | 72,537 |        |        | $ | 75,024 |       
|Operating expenses:                                           |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|                                                              | Residence operating expenses         |                          |        | 24,136        |        |               |        | 26,268        |        |               |        | 48,900 |        |   |        | 51,846 |       
|                                                              | Corporate general and administrative |                          |        | 4,440         |        |               |        | 5,578         |        |               |        | 8,708  |        |   |        | 9,895  |       
|                                                              | Building rentals                     |                          |        | 1,746         |        |               |        | 948           |        |               |        | 3,600  |        |   |        | 1,865  |       
|                                                              | Building rentals with related party  |                          |        | 2,340         |        |               |        | 2,120         |        |               |        | 4,592  |        |   |        | 4,240  |       
|                                                              | Depreciation and amortization        |                          |        | 2,440         |        |               |        | 1,650         |        |               |        | 4,861  |        |   |        | 3,268  |       
|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|                                                              |                                      | Total operating expenses |        |               | 35,102 |               |        |               | 36,564 |               |        |        | 70,661 |   |        |        | 71,114 |  
|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|Operating income                                              |                                      |                          | 1,391  |               |        |               | 1,340  |               |        |               | 1,876  |        |        |   | 3,910  |       
|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|Other income (expense):                                       |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|                                                              | Interest expense                     |                          |        | (4,905        | )      |               |        | (3,082        | )      |               |        | (9,307 | )      |   |        | (6,288 | )     
|                                                              | Interest expense to related parties  |                          |        |              |        |               |        | (384          | )      |               |        |       |        |   |        | (769   | )     
|                                                              | Interest income                      |                          |        | 138           |        |               |        | 52            |        |               |        | 287    |        |   |        | 106    |       
|                                                              | Other income (expense), net          |                          |        | (99           | )      |               |        | 20            |        |               |        | (69    | )      |   |        | 21     |       
|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|                                                              |                                      | Total other expense, net |        |               | (4,866 | )             |        |               | (3,394 | )             |        |        | (9,089 | ) |        |        | (6,930 | )
|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|Loss before debt restructure and reorganization costs         |                                      |                          | (3,475 | )             |        |               | (2,054 | )             |        |               | (7,213 | )      |        |   | (3,020 | )     
|Debt restructure and reorganization costs                     |                                      |                          | 1,063  |               |        |               | 219    |               |        |               | 1,366  |        |        |   | 666    |       
|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|Loss from continuing operations                               |                                      |                          | (4,538 | )             |        |               | (2,273 | )             |        |               | (8,579 | )      |        |   | (3,686 | )     
|Loss from discontinued operations                             |                                      |                          | (73    | )             |        |               | (357   | )             |        |               | (230   | )      |        |   | (394   | )     
|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|Net loss                                                      |                                      | $                        | (4,611 | )             |        | $             | (2,630 | )             |        | $             | (8,809 | )      |        | $ | (4,080 | )     
|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|Basic and diluted loss per share from continuing operations   |                                      | $                        | (.27   | )             |        | $             | (.35   | )             |        | $             | (.50   | )      |        | $ | (.57   | )     
|Basic and diluted loss per share from discontinued operations |                                      |                          |       |               |        |               | (.05   | )             |        |               | (.01   | )      |        |   | (.06   | )     
|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|Basic and diluted net loss per share                          |                                      | $                        | (.27   | )             |        | $             | (.40   | )             |        | $             | (.51   | )      |        | $ | (.63   | )     
|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       
|Basic and diluted weighted average shares outstanding         |                                      |                          | 17,121 |               |        |               | 6,500  |               |        |               | 17,121 |        |        |   | 6,500  |       
|                                                              |                                      |                          |        |               |        |               |        |               |        |               |        |        |        |   |        |       

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

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ASSISTED LIVING CONCEPTS, INC.




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

|                                                                                        |                                                                                                                                |                                                     |        |               |        |               |        |        |        |  
|--------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------- | ------ | ------------- | ------ | ------------- | ------ | ------ | ------ | -
|                                                                                        |                                                                                                                                |                                                     |        | Predecessor   |        | Successor    
|                                                                                        |                                                                                                                                |                                                     |        | Company       |        | Company      
|                                                                                        |                                                                                                                                |                                                     |        |               |        |              
|                                                                                        |                                                                                                                                |                                                     |        | Six Months    |        | Six Months   
|                                                                                        |                                                                                                                                |                                                     |        | Ended         |        | Ended        
|                                                                                        |                                                                                                                                |                                                     |        | June 30, 2001 |        | June 30, 2002
|                                                                                        |                                                                                                                                |                                                     |        |               |        |              
|Operating Activities:                                                                   |                                                                                                                                |                                                     |        |               |        |               |        |       
|Net loss                                                                                |                                                                                                                                | $                                                   | (8,809 | )             |        | $             | (4,080 | )     
|Adjustment to reconcile net loss to net cash (used in) provided by
operating activities |                                                                                                                                |                                                     |        |               |        |               |        |       
|                                                                                        | Depreciation and amortization                                                                                                  |                                                     |        | 5,123         |        |               |        | 3,359  |       
|                                                                                        | Amortization of debt issuance costs                                                                                            |                                                     |        | 1,412         |        |               |        | 52     |       
|                                                                                        | Amortization of fair value adjustment to building rentals                                                                      |                                                     |        |              |        |               |        | (306   | )     
|                                                                                        | Amortization of fair market adjustment to long-term debt                                                                       |                                                     |        |              |        |               |        | 213    |       
|                                                                                        | Amortization of discount on long-term debt                                                                                     |                                                     |        |              |        |               |        | 211    |       
|                                                                                        | Straight line adjustment to building rentals                                                                                   |                                                     |        | 32            |        |               |        | 188    |       
|                                                                                        | Interest paid-in-kind                                                                                                          |                                                     |        |              |        |               |        | 610    |       
|                                                                                        | Provision for doubtful accounts                                                                                                |                                                     |        | (21           | )      |               |        | 132    |       
|                                                                                        | Gain on disposal of assets                                                                                                     |                                                     |        | 88            |        |               |        |       |       
|                                                                                        | Loss on discontinued operations                                                                                                |                                                     |        |              |        |               |        | 443    |       
|Changes in working capital items:                                                       |                                                                                                                                |                                                     |        |               |        |               |        |       
|                                                                                        | Accounts receivable                                                                                                            |                                                     |        | 262           |        |               |        | (136   | )     
|                                                                                        | Prepaid expenses                                                                                                               |                                                     |        | 1,228         |        |               |        | (1,202 | )     
|                                                                                        | Other current assets                                                                                                           |                                                     |        | (444          | )      |               |        | 172    |       
|                                                                                        | Other assets                                                                                                                   |                                                     |        | (718          | )      |               |        | (299   | )     
|                                                                                        | Accounts payable                                                                                                               |                                                     |        | (1,183        | )      |               |        | (218   | )     
|                                                                                        | Accrued expenses                                                                                                               |                                                     |        | (1,211        | )      |               |        | 1,443  |       
|                                                                                        | Other current liabilities                                                                                                      |                                                     |        | (3,753        | )      |               |        | 294    |       
|                                                                                        | Other liabilities                                                                                                              |                                                     |        | (340          | )      |               |        |       |       
|                                                                                        |                                                                                                                                |                                                     |        |               |        |               |        |       
|                                                                                        |                                                                                                                                | Net cash (used in) provided by operating activities |        |               | (8,334 | )             |        |        | 876    |  
|                                                                                        |                                                                                                                                |                                                     |        |               |        |               |        |       
|Investing Activities:                                                                   |                                                                                                                                |                                                     |        |               |        |               |        |       
|Increase in restricted cash                                                             |                                                                                                                                |                                                     | (2,008 | )             |        |               | (2,680 | )     
|Purchases of property and equipment                                                     |                                                                                                                                |                                                     | (938   | )             |        |               | (1,333 | )     
|                                                                                        |                                                                                                                                |                                                     |        |               |        |               |        |       
|                                                                                        |                                                                                                                                | Net cash used in investing activities               |        |               | (2,946 | )             |        |        | (4,013 | )
|                                                                                        |                                                                                                                                |                                                     |        |               |        |               |        |       
|Financing Activities:                                                                   |                                                                                                                                |                                                     |        |               |        |               |        |       
|Proceeds from long-term debt                                                            |                                                                                                                                |                                                     | 14,777 |               |        |               | 3,400  |       
|Payments on long-term debt and capital lease obligation                                 |                                                                                                                                |                                                     | (573   | )             |        |               | (725   | )     
|Payments on bridge loan payable                                                         |                                                                                                                                |                                                     | (4,000 | )             |        |               |       |       
|Debt issuance costs                                                                     |                                                                                                                                |                                                     | (3,134 | )             |        |               | (79    | )     
|                                                                                        |                                                                                                                                |                                                     |        |               |        |               |        |       
|                                                                                        |                                                                                                                                | Net cash provided by financing activities           |        |               | 7,070  |               |        |        | 2,596  |  
|                                                                                        |                                                                                                                                |                                                     |        |               |        |               |        |       
|Net decrease in cash and cash equivalents                                               |                                                                                                                                |                                                     | (4,210 | )             |        |               | (541   | )     
|Cash and cash equivalents, beginning of period                                          |                                                                                                                                |                                                     | 9,889  |               |        |               | 6,077  |       
|                                                                                        |                                                                                                                                |                                                     |        |               |        |               |        |       
|Cash and cash equivalents, end of period                                                |                                                                                                                                | $                                                   | 5,679  |               |        | $             | 5,536  |       
|                                                                                        |                                                                                                                                |                                                     |        |               |        |               |        |       
|Supplemental disclosure of cash flow information:                                       |                                                                                                                                |                                                     |        |               |        |               |        |       
|                                                                                        | Cash payments for interest                                                                                                     |                                                     | $      | 7,819         |        |               | $      | 5,422  |       
|                                                                                        | Reclassification of other current and other liabilities to
current and non-current long-term debt and capital lease
obligation |                                                     | $      | 550           |        |               | $      |       |       
|                                                                                        | Reclassification of property and equipment to assets held for sale                                                             |                                                     | $      |              |        |               | $      | 5,811  |       
|                                                                                        | Reclassification of other current assets to assets held for sale                                                               |                                                     | $      |              |        |               | $      | 189    |       

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

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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. The Company

Assisted Living Concepts, Inc., a Nevada Corporation, (the Company)
owns, leases and operates assisted living residences which provide housing to
older persons who need help with the activities of daily living such as bathing
and dressing. The Company provides personal care and support services and makes
available routine health care services, as permitted by applicable law,
designed to meet the needs of its residents.

2. Reorganization

On October 1, 2001, Assisted Living Concepts, Inc. (the Company), and
its wholly owned subsidiary, Carriage House Assisted Living, Inc. (Carriage
House, and together with the Company, the Debtors) each filed a voluntary
petition under Chapter 11 of Title 11 of the United States Code (the
Bankruptcy Code) in the United States Bankruptcy Court for the District of
Delaware in Wilmington (the Court), case nos. 01-10674 and 01-10670,
respectively, which are being jointly administered. The Court gave final
approval to the first amended joint plan of reorganization (the Plan) on
December 28, 2001.

On January 1, 2002 (the Effective Date) the Plan became effective. The
Plan authorized the issuance as of the Effective Date (subject to the Reserve
described below) 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, and (c) 6,500,000 shares of new common stock, par
value $0.01 (the New Common Stock) of the reorganized Company, of which 4%
was issued to shareholders of the Predecessor Company.

At the Effective Date, the new Board of Directors of the reorganized
Company consisted of seven members as follows: W. Andrew Adams (Chairman),
Leonard Tannenbaum, Andre Dimitriadis, Matthew Patrick, Mark Holliday, Richard
Ladd and Wm. James Nicol, then the President and Chief Executive Officer of the
Company. In February 2002, Steven L. Vick replaced Mr. Nicol as President,
Chief Executive Officer and Director.

The Company held back from the initial issuance of New Common Stock and
New Notes on the Effective Date, $440,178 of New Senior Secured Notes, $166,775
of New Junior Secured Notes and 68,241 shares of New Common Stock
(collectively, the Reserve) to be issued to holders of general unsecured
claims at a later date. The total amount of, and the identities of all of the
holders of, the general unsecured claims were not known as of the Effective
Date, either because they were disputed or they were not made by their holders
prior to December 19, 2001, the cutoff date for calculating the Reserve (the
Cutoff Date). Once the total amount and the identities of the holders of
those claims are determined, the shares of New Common Stock and the New Notes
held in the Reserve will be distributed pro rata among the holders of those
claims (the date of this distribution, the Subsequent Distribution Date).

If the Reserve is insufficient to cover the general unsecured claims
allowed after the Cutoff Date, the Company and its subsidiaries will have no
further liability with respect to those general unsecured claims and the
holders of those claims will receive proportionately lower distributions of
shares of New Common Stock and New Notes than the holders of general unsecured
claims allowed prior to the Cutoff Date. If the Reserve exceeds the
distributions necessary to cover the general unsecured claims allowed after the
Cutoff Date, the additional securities remaining in the Reserve will be
distributed among all holders of the general unsecured claims so as to ensure
that each holder of a general unsecured claim receives, in the aggregate, its
pro rata share of the New Common Stock and the New Notes. In this case, the
holders of the general unsecured claims allowed prior to the Cutoff Date will
receive distributions of securities both on the Effective Date and on the
Subsequent Distribution Date.

3. 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 re-occurring) necessary for a fair
presentation of the

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results of operations for the three and six months ended June 30, 2001 and
2002, 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
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/A for the fiscal year ended December 31, 2001 filed with the
Securities and Exchange Commission. The results of operations for the six
months ended June 30, 2002 are not necessarily indicative of the results for a
full year.

The results of operations for the three and six months ended June 30, 2001
and 2002 reflect the continuing operations of 178 residences. Results of
operations for the six residences available for sale are included in Loss from
Discontinued Operations in the accompanying financial statements. (See Note
12).

4. Fresh Start Reporting and Factors Affecting Comparability of Financial
Information

Upon emergence from Chapter 11 proceedings, the Company 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, the Company
adopted the provisions of fresh-start reporting effective December 31, 2001.
Consequently, the condensed consolidated balance sheet and related information
at and subsequent to December 31, 2001 is labeled Successor Company, and
reflects the Plan and the principles of fresh-start reporting. Periods
presented prior to December 31, 2001 have been designated Predecessor
Company.

In adopting the requirements of fresh-start reporting as of December 31,
2001, the Company was required to value its assets and liabilities at fair
value and eliminate its accumulated deficit as of December 31, 2001. A $32.8
million reorganization value was determined by the Company with the assistance
of financial advisors in reliance upon various valuation methods, including
discounted projected cash flow analysis and other applicable ratios and
economic industry information relevant to the operation of the Company and
through negotiations with various creditor parties in interest.

As a consequence of the implementation of fresh-start reporting effective
December 31, 2001 the financial information presented in the condensed
consolidated statement of operations for the three and six months ended June
30, 2001 and the corresponding statements of cash flows for the six months
ended June 30, 2001 are generally not comparable to the financial results for
the three and six months ended June 30, 2002. Any financial information herein
labeled Predecessor Company refers to periods prior to the adoption of
fresh-start reporting, while those labeled Successor Company refer to periods
following the Companys reorganization.

The lack of comparability in the accompanying condensed consolidated
financial statements relates primarily to the Companys capital costs (building
rentals, interest, depreciation and amortization), as well as debt
restructuring and reorganization costs.

5. New Accounting Pronouncement

In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards (SFAS) No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No.144 addresses significant
issues relating to the implementation of SFAS No.121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and develops a single accounting method under which long-lived assets that are
to be disposed of by sale are measured at the lower of book value or fair value
less cost to sell. Additionally, SFAS No.144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from
the ongoing operations of the entity in a disposal transaction. The Company
adopted SFAS No.144 effective January 1, 2002. During the three months ended
June 30, 2002, the Company met criteria identified in SFAS No. 144, resulting
in the write down of certain assets held for sale to their fair value less
costs to sell. Additionally, in accordance with SFAS No. 144, the operating
results of the six residences held for sale are included in loss from
discontinued operations on the accompanying financial statements for the three
and six months ended June 30, 2001 and 2002.

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6. Cash and Cash Equivalents

The Companys cash and cash equivalents consist of the following (in
thousands):

|                 |                                 |   |              |       |          |   |       |       | 
|---------------- | ------------------------------- | - | ------------ | ----- | -------- | - | ----- | ----- | 
|                 |                                 |   | December 31, |       | June 30,
|                 |                                 |   | 2001         |       | 2002    
|                 |                                 |   |              |       |         
|Cash             |                                 | $ | 5,022        |       |          | $ | 2,969 |      
|Cash equivalents |                                 |   | 1,055        |       |          |   | 2,567 |      
|                 |                                 |   |              |       |          |   |       |      
|                 | Total cash and cash equivalents |   | $            | 6,077 |          |   | $     | 5,536 | 
|                 |                                 |   |              |       |          |   |       |      

7. Long-Term Restricted Cash

Long-term restricted cash consists of the following (in thousands):

|                                                      |                                         |                                 |     |              |       |          |     |       |       | 
|----------------------------------------------------- | --------------------------------------- | ------------------------------- | --- | ------------ | ----- | -------- | --- | ----- | ----- | 
|                                                      |                                         |                                 |     | December 31, |       | June 30,
|                                                      |                                         |                                 |     | 2001         |       | 2002    
|                                                      |                                         |                                 |     |              |       |         
|Cash held for loan agreements with U.S                |                                         |                                 |     |              |       |          |     |      
|                                                      | Bank National Association (U.S. Bank) |                                 | $   | 4,338        |       |          | $   | 4,313 |      
|Cash held in accordance with lease agreements         |                                         |                                 | 970 |              |       |          | 968 |      
|State regulated restricted resident security deposits |                                         |                                 | 41  |              |       |          | 41  |      
|                                                      |                                         |                                 |     |              |       |          |     |      
|                                                      |                                         | Total long-term restricted cash |     | $            | 5,349 |          |     | $     | 5,322 | 
|                                                      |                                         |                                 |     |              |       |          |     |      

8. Property And Equipment

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

|                              |                              |   |              |         |          |   |         |         | 
|----------------------------- | ---------------------------- | - | ------------ | ------- | -------- | - | ------- | ------- | 
|                              |                              |   | December 31, |         | June 30,
|                              |                              |   | 2001         |         | 2002    
|                              |                              |   |              |         |         
|Land                          |                              | $ | 22,177       |         |          |   | 21,147  |        
|Buildings and improvements    |                              |   | 166,443      |         |          |   | 161,899 |        
|Equipment                     |                              |   | 3,937        |         |          |   | 5,147   |        
|Furniture                     |                              |   | 3,991        |         |          |   | 3,786   |        
|                              |                              |   |              |         |          |   |         |        
|                              | Total property and equipment |   |              | 196,548 |          |   |         | 191,979 | 
|Less accumulated depreciation |                              |   |             |         |          |   | 3,268   |        
|                              |                              |   |              |         |          |   |         |        
|Property and equipment, net   |                              | $ | 196,548      |         |          | $ | 188,711 |        
|                              |                              |   |              |         |          |   |         |        

Land, buildings and certain furniture and equipment relating to 129 owned
residences serve as collateral for long-term debt.

Property and equipment for six residences with a net book value of $5.6
million has been included in assets held for sale on the accompanying balance
sheet. The Company has entered into an agreement to sell five of the residences
and the remaining residence is presently listed for sale. These residences are
six of the 57 residences which secure the New Notes. Any proceeds received on
the sale of these residences must be used to reduce the New Senior Notes. (See
Note 9).

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9. Long-Term Debt

As of December 31, 2001 and June 30, 2002, long-term debt consists of the
following (in thousands):

|                                                                                                                        |  |                   |         |               |  |          |         |           |  |   |         |  |  |   |         | 
|----------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ------------- |  | -------- | ------- | --------- |  | - | ------- |  |  | - | ------- | 
|                                                                                                                        |  | December 31, 2001 |         | June 30, 2002
|                                                                                                                        |  |                   |         |              
|                                                                                                                        |  | Carrying          |         | Principal     |  | Carrying |         | Principal
|                                                                                                                        |  | Amount            |         | Amount        |  | Amount   |         | Amount   
|                                                                                                                        |  |                   |         |               |  |          |         |          
|Trust Deed Notes, payable to the
State of Oregon Housing and
Community Services Department
(OHCS) due 2028              |  | $                 | 9,849   |               |  | $        | 9,741   |           |  | $ | 9,769   |  |  | $ | 9,663   | 
|Variable Rate Multifamily Revenue
Bonds, payable to the Washington
State Housing Finance Commission
Department due 2017 |  |                   | 7,521   |               |  |          | 7,605   |           |  |   | 7,524   |  |  |   | 7,605   | 
|Variable Rate Demand Revenue
Bonds, Series 1997, payable to
the Idaho Housing and Finance
Association due 2017          |  |                   | 6,542   |               |  |          | 6,615   |           |  |   | 6,545   |  |  |   | 6,615   | 
|Variable Rate Demand Revenue
Bonds, Series A-1 and A-2 payable
to the State of Ohio Housing
Finance Agency due 2018     |  |                   | 11,888  |               |  |          | 12,020  |           |  |   | 11,892  |  |  |   | 12,020  | 
|Housing and Urban Development
Insured Mortgages due 2036                                                                |  |                   | 7,374   |               |  |          | 7,457   |           |  |   | 7,352   |  |  |   | 7,434   | 
|New Senior Secured Notes due 2009                                                                                       |  |                   | 40,250  |               |  |          | 40,250  |           |  |   | 40,250  |  |  |   | 40,250  | 
|New Junior Secured Notes due 2012                                                                                       |  |                   | 12,628  |               |  |          | 12,628  |           |  |   | 13,449  |  |  |   | 13,449  | 
|Mortgages payable due 2008                                                                                              |  |                   | 28,513  |               |  |          | 28,463  |           |  |   | 28,260  |  |  |   | 28,210  | 
|G.E. Capital (Previously Heller Healthcare Finance, Inc.) Credit
Facility due 2005                                      |  |                   | 39,222  |               |  |          | 40,458  |           |  |   | 42,635  |  |  |   | 43,666  | 
|Capital lease obligations due 2002                                                                                      |  |                   | 296     |               |  |          | 301     |           |  |   | 92      |  |  |   | 96      | 
|                                                                                                                        |  |                   |         |               |  |          |         |           |  |   |         |  |  |   |         | 
|Total long-term debt                                                                                                    |  |                   | 164,083 |               |  | $        | 165,538 |           |  |   | 167,768 |  |  | $ | 169,008 | 
|                                                                                                                        |  |                   |         |               |  |          |         |           |  |   |         |  |  |   |         | 
|Less current portion                                                                                                    |  |                   | 2,622   |               |  |          |         |           |  |   | 7,696   |  |  |   |         | 
|                                                                                                                        |  |                   |         |               |  |          |         |           |  |   |         |  |  |   |         | 
|Long-term debt                                                                                                          |  | $                 | 161,461 |               |  |          |         |           |  | $ | 160,072 |  |  |   |         | 
|                                                                                                                        |  |                   |         |               |  |          |         |           |  |   |         |  |  |   |         | 

On January 1, 2002 the Companys Plan of Reorganization became effective.
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 at an effective interest rate of 13.0%.
The New Notes are secured by 57 properties. (See Notes 2 and 8).

Of the face amount of $55.5 million outstanding of the New Notes at
December 31, 2001 and June 30, 2002, $16.4 million is payable to related
parties. (See Note 10).

The Companys Washington, Idaho and Ohio Revenue Bonds are secured by a
combination of cash, residences and letters of credit. The letters of credit
have been issued by U.S. Bank and the underlying credit agreements between U.S.
Bank and the Company contain restrictive covenants that include compliance with
certain financial ratios. The Company was in compliance with such covenants at
June 30, 2002.

As of June 30, 2002, $4.5 million of the New Senior Secured Notes have been
classified in current portion of long-term debt due to the pending sale of five
properties which secure the New Notes. Any proceeds received on the sale of
the properties which secure the New Notes must be used to reduce such debt.
(See Note 8).

In May 2002, the Company amended its existing agreement with U.S. Bank,
establishing new covenants, with which the Company was in compliance as of June
30, 2002. 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. Certain of the Companys leases and
loan agreements contain covenants and cross-default provisions such that a
default on one of those agreements could cause the Company to be in default on
one or more other agreements, which would have a material adverse effect on the
Company.

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10. Related Party Transactions

LTC Properties, Inc. and CLC Healthcare, Inc.

Andre Dimitriadis, who has been a member of the Companys Board of
Directors and the Chair of its Audit Committee since January 2002, is the
President, Chief Executive Officer and Chairman of the Board of LTC Properties,
Inc. (LTC) and is the Chief Executive Officer and Chairman of the Board of
CLC Healthcare, Inc. (previously LTC Healthcare, Inc.). Mr. Dimitriadis owned
$655,000 of the Companys New Notes, LTC owned $11.0 million of the Companys
New Notes and CLC Healthcare, Inc. (CLC) owned 22.4% of the Companys common
stock and $1.9 million of the Companys New Notes at June 30, 2002.

The Company has incurred interest expense on its publicly traded New Notes
held by the above parties in the amount of $318,000, and $637,000,
respectively, for the three and six months ended June 30, 2002. Of this
interest, $475,000 is payable in cash at June 30, 2002. The remaining interest
is payable-in-kind and increases each partys ownership of the New Notes
proportionately.

The Company currently leases 37 properties (1,426 units) from LTC. The
Company incurred lease expense of $4.6 million and $4.2 million for the six
months ended June 30, 2001 and 2002, respectively, pursuant to these leases.

National Health Investors, Inc.

W. Andrew Adams, who has been a member of the Companys Board of Directors
and its Chair since January 2002, is the President, Chief Executive Officer and
Chairman of the Board of Directors of National Health Investors, Inc. (NHI).
NHI owned 557,214 shares of the Companys common stock and $2.5 million of the
Companys New Notes at June 30, 2002.

The Company has incurred interest expense on its publicly traded New
Notes held by NHI in the amount of $58,000 and $117,000 for the three and six
months ended June 30, 2002, respectively. Of this interest, $90,000 is payable
in cash at June 30, 2002. The remaining interest is payable-in-kind and
increases NHIs ownership of the New Notes.

Leonard Tannenbaum

Leonard Tannenbaum is a current member of the Companys Board of
Directors. Mr. Tannenbaum owned $323,875 of the Companys New Notes at June 30,
2002.

The Company has incurred interest expense on its publicly traded New Notes
held by Mr. Tannenbaum in the amount of $8,000 and $15,000 for the three and
six months ended June 30, 2002, respectively. Of this interest, $12,000 is
payable in cash at June 30, 2002. The remaining interest is payable-in-kind and
increases Mr. Tannenbaums ownership of the New Notes.

11. Income Taxes

The Company has provided no benefit for income taxes as the Company
recorded a full valuation allowance on its deferred tax asset. The Company
believes it is more likely than not that some portion or all of the deferred
tax assets will not be realized.

12. Discontinued Operations

The Company presently has six residences held for sale. In accordance
with SFAS No. 144, the results of operations for these six residences and the
loss incurred on the write down of certain of these assets to their fair value
less costs to sell have been included in loss from discontinued operations on
the accompanying financial statements for the three and six months ended June
30, 2001 and 2002.

In June, 2002 the Company entered into an agreement to sell five of these
residences (four located in Florida and one located in Georgia). The
transaction, which is expected to be completed in September, 2002, will result
in a loss of approximately $443,000. Net property and equipment has been
written down to its net realizable value and is included in assets held for
sale on the accompanying June 30, 2002 balance sheet. These residences serve
as collateral for the New Notes; therefore, net proceeds from the sale must be
used to reduce the outstanding principal amount of the New Senior Notes. The
portion of the New Senior Notes which is expected to be reduced is included in
the current portion of long-term debt on the accompanying June 30, 2002 balance
sheet.

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In March, 2002 the Company closed one Indiana residence. This residence is
presently listed for sale and the net property and equipment has been included
in assets held for sale on the accompanying June 30, 2002 balance sheet.
This residence serves as collateral for the New Notes; therefore, net proceeds
from a sale of this residence must be used to reduce the outstanding principal
amount of the New Senior Notes. The Company expects to sell this facility
within the next twelve months.

13. Contingencies

From time to time we are involved in judicial and administrative
proceedings incidental to our business. Although occasional adverse decisions
(or settlements) may occur, the Company is not party to any legal proceedings,
which, in the opinion of management, would have a material adverse affect on
the Companys financial position, results of operations or liquidity. The
Company has developed a reserve for general and professional liability risks,
based on historical data, for losses up to its insured retention levels.

14. Subsidiary Guarantee of New Notes

The New Notes, issued by the Company, are publicly traded and the
repayment of these notes is guaranteed by two wholly-owned subsidiaries of the
Company: ALC Indiana, Inc. and Home and Community Care, Inc. (HCI). HCI and
Carriage House Assisted Living, Inc. (Carriage House), a wholly owned
subsidiary of the Company, are also co-obligors of the New Notes. 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 condensed
consolidated financial statements are fully interdependent and integrated with
the Company and each other.

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Successor Company
Consolidating Balance Sheet
June 30, 2002

---

|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|------------------------------------------------------------------- |  | --------- | ------- | ----------------- |  | ------------------------- | ------ | --- |  | ------------ | ----- | ----------- |  | ----- | ----- | - |  | ----------------- | ------ | ------------- |  | ------------ | ------- | - |  | - | ------- | -
|                                                                    |  |           |         |                   |  | Wholly-Owned Subsidiaries |        |     |  |              |       |             |  |      
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |      
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  | Non-Participating |        | Consolidating |  | Consolidated
|                                                                    |  | ALC, Inc. |         | ALC Indiana, Inc. |  | Carriage House            |        | HCI |  | Subsidiaries |       | Adjustments |  | Total
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |      
|Current Assets:                                                     |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Cash and cash equivalents                                           |  | $         | 5,536   |                   |  | $                         |       |     |  | $            |      |             |  | $     |      |   |  | $                 |       |               |  | $            |        |   |  | $ | 5,536   |  
|Cash restricted for resident security deposits                      |  |           | 2,422   |                   |  |                           |       |     |  |              |      |             |  |       |      |   |  |                   |       |               |  |              |        |   |  |   | 2,422   |  
|Accounts receivable, net                                            |  |           | 2,099   |                   |  |                           |       |     |  |              |      |             |  |       | 4     |   |  |                   | 229    |               |  |              |        |   |  |   | 2,332   |  
|Prepaid expenses                                                    |  |           | 2,185   |                   |  |                           |       |     |  |              |      |             |  |       |      |   |  |                   |       |               |  |              |        |   |  |   | 2,185   |  
|Cash restricted for workers compensation claims                    |  |           | 5,525   |                   |  |                           |       |     |  |              |      |             |  |       |      |   |  |                   |       |               |  |              |        |   |  |   | 5,525   |  
|Assets held for sale                                                |  |           | 3,219   |                   |  |                           |       |     |  |              |      |             |  |       | 2,338 |   |  |                   |       |               |  |              |         |   |  |   | 5,557   |  
|Other current assets                                                |  |           | 1,604   |                   |  |                           |       |     |  |              |      |             |  |       | 21    |   |  |                   | 2,065  |               |  |              |        |   |  |   | 3,690   |  
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Total current assets                                                |  |           | 22,590  |                   |  |                           |       |     |  |              |      |             |  |       | 2,363 |   |  |                   | 2,294  |               |  |              |        |   |  |   | 27,247  |  
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Restricted cash                                                     |  |           | 5,322   |                   |  |                           |       |     |  |              |      |             |  |       |      |   |  |                   |       |               |  |              |        |   |  |   | 5,322   |  
|Receivable from subsidiaries/parent                                 |  |           | 783     |                   |  |                           | 4,415  |     |  |              |      |             |  |       | 441   |   |  |                   | 1,981  |               |  |              | (7,620  | ) |  |   |        |  
|Property and equipment, net                                         |  |           | 88,107  |                   |  |                           | 12,741 |     |  |              | 3,566 |             |  |       | 4,225 |   |  |                   | 80,072 |               |  |              |        |   |  |   | 188,711 |  
|Investment in subsidiaries                                          |  |           | 30,684  |                   |  |                           |       |     |  |              |      |             |  |       |      |   |  |                   |       |               |  |              | (30,684 | ) |  |   |        |  
|Other assets, net                                                   |  |           | 1,602   |                   |  |                           |       |     |  |              |      |             |  |       |      |   |  |                   | 401    |               |  |              |        |   |  |   | 2,003   |  
|Deferred tax asset                                                  |  |           | (217    | )                 |  |                           | 217    |     |  |              |      |             |  |       |      |   |  |                   |       |               |  |              |        |   |  |   |        |  
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Total assets                                                        |  | $         | 148,871 |                   |  | $                         | 17,373 |     |  | $            | 3,566 |             |  | $     | 7,029 |   |  | $                 | 84,748 |               |  | $            | (38,304 | ) |  | $ | 223,283 |  
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Current liabilities:                                                |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Accounts payable                                                    |  | $         | 909     |                   |  | $                         |       |     |  | $            |      |             |  | $     | 2     |   |  | $                 | 321    |               |  | $            |        |   |  | $ | 1,232   |  
|Accrued real estate taxes                                           |  |           | 2,306   |                   |  |                           | 286    |     |  |              | 248   |             |  |       | 110   |   |  |                   | 987    |               |  |              |        |   |  |   | 3,937   |  
|Other accrued expenses                                              |  |           | 14,222  |                   |  |                           |       |     |  |              |      |             |  |       | 11    |   |  |                   | 186    |               |  |              |        |   |  |   | 14,419  |  
|Resident security deposits                                          |  |           | 2,106   |                   |  |                           |       |     |  |              |      |             |  |       | 21    |   |  |                   | 253    |               |  |              |        |   |  |   | 2,380   |  
|Other current liabilities                                           |  |           | 1,095   |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   | 1,095   |  
|Current portion of unfavorable lease adjustment                     |  |           | 547     |                   |  |                           |       |     |  |              | 87    |             |  |       |      |   |  |                   | 13     |               |  |              |        |   |  |   | 647     |  
|Current portion of long-term debt and capital lease obligation      |  |           | 5,776   |                   |  |                           |       |     |  |              |      |             |  |       |      |   |  |                   | 1,920  |               |  |              |        |   |  |   | 7,696   |  
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Total current liabilities                                           |  |           | 26,961  |                   |  |                           | 286    |     |  |              | 335   |             |  |       | 144   |   |  |                   | 3,680  |               |  |              |        |   |  |   | 31,406  |  
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Other liabilities                                                   |  |           | 259     |                   |  |                           |       |     |  |              | 18    |             |  |       |      |   |  |                   |       |               |  |              |        |   |  |   | 277     |  
|Unfavorable lease adjustment                                        |  |           | 2,349   |                   |  |                           |       |     |  |              | 388   |             |  |       |      |   |  |                   | 72     |               |  |              |        |   |  |   | 2,809   |  
|Long-term debt and capital lease obligation, net of current portion |  |           | 83,746  |                   |  |                           |       |     |  |              |      |             |  |       |      |   |  |                   | 76,326 |               |  |              |        |   |  |   | 160,072 |  
|Payable to subsidiaries/parent                                      |  |           | 6,837   |                   |  |                           |       |     |  |              | 783   |             |  |       |      |   |  |                   |       |               |  |              | (7,620  | ) |  |   |        |  
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Total liabilities                                                   |  |           | 120,152 |                   |  |                           | 286    |     |  |              | 1,524 |             |  |       | 144   |   |  |                   | 80,078 |               |  |              | (7,620  | ) |  |   | 194,564 |  
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Shareholders equity:                                               |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Common stock                                                        |  |           | 65      |                   |  |                           |       |     |  |              |      |             |  |       |      |   |  |                   |       |               |  |              |        |   |  |   | 65      |  
|Additional paid-in capital                                          |  |           | 32,734  |                   |  |                           | 16,342 |     |  |              | 2,548 |             |  |       | 7,365 |   |  |                   | 5,667  |               |  |              | (31,922 | ) |  |   | 32,734  |  
|Accumulated deficit                                                 |  |           | (4,080  | )                 |  |                           | 745    |     |  |              | (506  | )           |  |       | (480  | ) |  |                   | (997   | )             |  |              | 1,238   |   |  |   | (4,080  | )
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Total shareholders equity                                          |  |           | 28,719  |                   |  |                           | 17,087 |     |  |              | 2,042 |             |  |       | 6,885 |   |  |                   | 4,670  |               |  |              | (30,684 | ) |  |   | 28,719  |  
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  
|Total liabilities and shareholders equity                          |  | $         | 148,871 |                   |  | $                         | 17,373 |     |  | $            | 3,566 |             |  | $     | 7,029 |   |  | $                 | 84,748 |               |  | $            | (38,304 | ) |  | $ | 223,283 |  
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |   |  |                   |        |               |  |              |         |   |  |   |         |  

12



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##### Table of Contents



Successor Company
Consolidating Balance Sheet
December 31, 2001

---

|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|------------------------------------------------------------------- |  | --------- | ------- | ----------------- |  | ------------------------- | ------ | --- |  | ------------ | ----- | ----------- |  | ----- | ----- |  |  | ----------------- | ------ | ------------- |  | ------------ | ------- | - |  | - | ------- | 
|                                                                    |  |           |         |                   |  | Wholly-Owned Subsidiaries |        |     |  |              |       |             |  |      
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |      
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  | Non-Participating |        | Consolidating |  | Consolidated
|                                                                    |  | ALC, Inc. |         | ALC Indiana, Inc. |  | Carriage House            |        | HCI |  | Subsidiaries |       | Adjustments |  | Total
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |      
|Current Assets:                                                     |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Cash and cash equivalents                                           |  | $         | 6,077   |                   |  | $                         |       |     |  | $            |      |             |  | $     |      |  |  | $                 |       |               |  | $            |        |   |  | $ | 6,077   | 
|Cash restricted for resident security deposits                      |  |           | 2,415   |                   |  |                           |       |     |  |              |      |             |  |       |      |  |  |                   |       |               |  |              |        |   |  |   | 2,415   | 
|Accounts receivable, net                                            |  |           | 2,086   |                   |  |                           |       |     |  |              |      |             |  |       | 15    |  |  |                   | 227    |               |  |              |        |   |  |   | 2,328   | 
|Prepaid expenses                                                    |  |           | 940     |                   |  |                           |       |     |  |              |      |             |  |       |      |  |  |                   | 43     |               |  |              |        |   |  |   | 983     | 
|Cash restricted for workers compensation claims                    |  |           | 2,825   |                   |  |                           |       |     |  |              |      |             |  |       |      |  |  |                   |       |               |  |              |        |   |  |   | 2,825   | 
|Other current assets                                                |  |           | 2,209   |                   |  |                           |       |     |  |              |      |             |  |       | 24    |  |  |                   | 1,629  |               |  |              |        |   |  |   | 3,862   | 
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Total current assets                                                |  |           | 16,552  |                   |  |                           |       |     |  |              |      |             |  |       | 39    |  |  |                   | 1,899  |               |  |              |        |   |  |   | 18,490  | 
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Restricted cash                                                     |  |           | 5,349   |                   |  |                           |       |     |  |              |      |             |  |       |      |  |  |                   |       |               |  |              |        |   |  |   | 5,349   | 
|Receivable from subsidiaries/parent                                 |  |           | 3,432   |                   |  |                           | 3,553  |     |  |              |      |             |  |       | 846   |  |  |                   |       |               |  |              | (7,831  | ) |  |   |        | 
|Property and equipment, net                                         |  |           | 95,509  |                   |  |                           | 12,917 |     |  |              | 3,576 |             |  |       | 6,610 |  |  |                   | 77,936 |               |  |              |        |   |  |   | 196,548 | 
|Investment in subsidiaries                                          |  |           | 32,095  |                   |  |                           |       |     |  |              |      |             |  |       |      |  |  |                   |       |               |  |              | (32,095 | ) |  |   |        | 
|Other assets, net                                                   |  |           | 1,511   |                   |  |                           |       |     |  |              |      |             |  |       |      |  |  |                   | 355    |               |  |              |        |   |  |   | 1,866   | 
|Deferred tax asset                                                  |  |           | (217    | )                 |  |                           | 217    |     |  |              |      |             |  |       |      |  |  |                   |       |               |  |              |        |   |  |   |        | 
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Total assets                                                        |  | $         | 154,231 |                   |  | $                         | 16,687 |     |  | $            | 3,576 |             |  | $     | 7,495 |  |  | $                 | 80,190 |               |  | $            | (39,926 | ) |  | $ | 222,253 | 
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|LIABILITIES AND SHAREHOLDERS EQUITY                                |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Current liabilities:                                                |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Accounts payable                                                    |  |           | 933     |                   |  |                           |       |     |  |              |      |             |  |       | 5     |  |  |                   | 512    |               |  |              |        |   |  |   | 1,450   | 
|Accrued real estate taxes                                           |  |           | 2,451   |                   |  |                           | 315    |     |  |              | 240   |             |  |       | 90    |  |  |                   | 1,427  |               |  |              |        |   |  |   | 4,523   | 
|Other accrued expenses                                              |  |           | 11,989  |                   |  |                           | 30     |     |  |              |      |             |  |       | 17    |  |  |                   | 354    |               |  |              |        |   |  |   | 12,390  | 
|Tenant security deposits                                            |  |           | 2,120   |                   |  |                           |       |     |  |              |      |             |  |       | 18    |  |  |                   | 333    |               |  |              |        |   |  |   | 2,471   | 
|Other current liabilities                                           |  |           | 652     |                   |  |                           |       |     |  |              |      |             |  |       |      |  |  |                   |       |               |  |              |        |   |  |   | 652     | 
|Current portion of unfavorable lease adjustment                     |  |           | 589     |                   |  |                           |       |     |  |              | 92    |             |  |       |      |  |  |                   |       |               |  |              |        |   |  |   | 681     | 
|Current portion of long-term debt and capital lease obligation      |  |           | 2,079   |                   |  |                           |       |     |  |              |      |             |  |       |      |  |  |                   | 543    |               |  |              |        |   |  |   | 2,622   | 
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Total current liabilities                                           |  |           | 20,813  |                   |  |                           | 345    |     |  |              | 332   |             |  |       | 130   |  |  |                   | 3,169  |               |  |              |        |   |  |   | 24,789  | 
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Other liabilities                                                   |  |           | 11      |                   |  |                           |       |     |  |              |      |             |  |       |      |  |  |                   | 78     |               |  |              |        |   |  |   | 89      | 
|Unfavorable lease adjustment                                        |  |           | 2,686   |                   |  |                           |       |     |  |              | 429   |             |  |       |      |  |  |                   |       |               |  |              |        |   |  |   | 3,115   | 
|Long-term debt and capital lease obligation, net of current portion |  |           | 90,859  |                   |  |                           |       |     |  |              |      |             |  |       |      |  |  |                   | 70,602 |               |  |              |        |   |  |   | 161,461 | 
|Payable to subsidiaries/parent                                      |  |           | 6,890   |                   |  |                           |       |     |  |              | 267   |             |  |       |      |  |  |                   | 674    |               |  |              | (7,831  | ) |  |   |        | 
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Total liabilities                                                   |  |           | 121,259 |                   |  |                           | 345    |     |  |              | 1,028 |             |  |       | 130   |  |  |                   | 74,523 |               |  |              | (7,831  | ) |  |   | 189,454 | 
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Shareholders equity:                                               |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Common stock                                                        |  |           | 65      |                   |  |                           | 16,342 |     |  |              |      |             |  |       |      |  |  |                   |       |               |  |              | (16,342 | ) |  |   | 65      | 
|Additional paid-in capital                                          |  |           | 32,907  |                   |  |                           |       |     |  |              | 2,548 |             |  |       | 7,365 |  |  |                   | 5,667  |               |  |              | (15,753 | ) |  |   | 32,734  | 
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Total shareholders equity                                          |  |           | 32,972  |                   |  |                           | 16,342 |     |  |              | 2,548 |             |  |       | 7,365 |  |  |                   | 5,667  |               |  |              | (32,095 | ) |  |   | 32,799  | 
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 
|Total liabilities and shareholders equity                          |  | $         | 154,231 |                   |  | $                         | 16,687 |     |  | $            | 3,576 |             |  | $     | 7,495 |  |  | $                 | 80,190 |               |  | $            | (39,926 | ) |  | $ | 222,253 | 
|                                                                    |  |           |         |                   |  |                           |        |     |  |              |       |             |  |       |       |  |  |                   |        |               |  |              |         |   |  |   |         | 

13



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##### Table of Contents



Predecessor Company
Consolidating Statement of Operations
Six months ended June 30, 2002

---

|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |        |        |  
|-------------------------------------------------------------- | ------------------------------------ | ----------------------------------- | ------ | --------- | ------ | ----------------- | ----- | ------------------------- | --- | --- | ---- | ------------ | --- | ----------- | --- | ----- | --- | - | ------ | ----------------- | ------ | ------------- | ------ | ------------ | ------ | - | ------ | ------ | ------ | -
|                                                               |                                      |                                     |        |           |        |                   |       | Wholly-Owned Subsidiaries |     |     |      |              |     |             |     |      
|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |      
|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        | Non-Participating |        | Consolidating |        | Consolidated
|                                                               |                                      |                                     |        | ALC, Inc. |        | ALC Indiana, Inc. |       | Carriage House            |     | HCI |      | Subsidiaries |     | Adjustments |     | Total
|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |      
|Revenue                                                        |                                      | $                                   | 66,711 |           |        | $                 |      |                           |     | $   |     |              |     | $           | 618 |       |     | $ | 7,695  |                   |        | $             |       |              |        | $ | 75,024 |       
|Management fee income                                          |                                      |                                     | 151    |           |        |                   |      |                           |     |     |     |              |     |             | 30  |       |     |   |       |                   |        |               | (181   | )            |        |   |       |       
|Lease income                                                   |                                      |                                     |       |           |        |                   | 1,080 |                           |     |     |     |              |     |             |    |       |     |   | 1,485  |                   |        |               | (2,565 | )            |        |   |       |       
|Operating expenses:                                            |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|                                                               | Residence operating expenses         |                                     |        | 45,202    |        |                   |       | 136                       |     |     |      | 125          |     |             |     | 542   |     |   |        | 5,841             |        |               |        |             |        |   |        | 51,846 |       
|                                                               | Corporate general and administrative |                                     |        | 9,895     |        |                   |       |                          |     |     |      |             |     |             |     |      |     |   |        |                  |        |               |        |             |        |   |        | 9,895  |       
|                                                               | Building rentals                     |                                     |        | 1,398     |        |                   |       |                          |     |     |      | 467          |     |             |     |      |     |   |        |                  |        |               |        |             |        |   |        | 1,865  |       
|                                                               | Building rentals to related party    |                                     |        | 4,240     |        |                   |       |                          |     |     |      |             |     |             |     |      |     |   |        |                  |        |               |        |             |        |   |        | 4,240  |       
|                                                               | Depreciation and amortization        |                                     |        | 1,611     |        |                   |       | 199                       |     |     |      | 64           |     |             |     | 103   |     |   |        | 1,291             |        |               |        |             |        |   |        | 3,268  |       
|                                                               | Management fee expense               |                                     |        |          |        |                   |       |                          |     |     |      | 150          |     |             |     |      |     |   |        | 31                |        |               |        | (181         | )      |   |        |       |       
|                                                               | Lease expense                        |                                     |        | 2,565     |        |                   |       |                          |     |     |      |             |     |             |     |      |     |   |        |                  |        |               |        | (2,565       | )      |   |        |       |       
|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|                                                               |                                      | Total operating expenses            |        |           | 64,911 |                   |       |                           | 335 |     |      |              | 806 |             |     |       | 645 |   |        |                   | 7,163  |               |        |              | (2,746 | ) |        |        | 71,114 |  
|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|Operating income (loss)                                        |                                      |                                     | 1,951  |           |        |                   | 745   |                           |     |     | (806 | )            |     |             | 3   |       |     |   | 2,017  |                   |        |               |       |              |        |   | 3,910  |       
|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|Other income (expense):                                        |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|                                                               |                                      | Interest expense                    |        |           | (3,212 | )                 |       |                           |    |     |      |              |    |             |     |       |    |   |        |                   | (3,076 | )             |        |              |       |   |        |        | (6,288 | )
|                                                               |                                      | Interest expense to related parties |        |           | (769   | )                 |       |                           |    |     |      |              |    |             |     |       |    |   |        |                   |       |               |        |              |       |   |        |        | (769   | )
|                                                               |                                      | Interest income                     |        |           | 106    |                   |       |                           |    |     |      |              |    |             |     |       |    |   |        |                   |       |               |        |              |       |   |        |        | 106    |  
|                                                               |                                      | Other income, net                   |        |           | 21     |                   |       |                           |    |     |      |              |    |             |     |       |    |   |        |                   |       |               |        |              |       |   |        |        | 21     |  
|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|                                                               |                                      | Total other expense, net            |        |           | (3,854 | )                 |       |                           |    |     |      |              |    |             |     |       |    |   |        |                   | (3,076 | )             |        |              |       |   |        |        | (6,930 | )
|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|Income
(loss) before debt restructure and reorganization costs |                                      |                                     | (1,903 | )         |        |                   | 745   |                           |     |     | (806 | )            |     |             | 3   |       |     |   | (1,059 | )                 |        |               |       |              |        |   | (3,020 | )     
|Debt restructure and reorganization costs                      |                                      |                                     | 666    |           |        |                   |      |                           |     |     |     |              |     |             |    |       |     |   |       |                   |        |               |       |              |        |   | 666    |       
|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|Income (loss) from continuing operations                       |                                      |                                     | (2,569 | )         |        |                   | 745   |                           |     |     | (806 | )            |     |             | 3   |       |     |   | (1,059 | )                 |        |               |       |              |        |   | (3,686 | )     
|Loss from discontinued operations                              |                                      |                                     | (394   | )         |        |                   |      |                           |     |     |     |              |     |             |    |       |     |   |       |                   |        |               |       |              |        |   | (394   | )     
|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|Net income (loss)                                              |                                      | $                                   | (2,963 | )         |        | $                 | 745   |                           |     | $   | (806 | )            |     | $           | 3   |       |     | $ | (1,059 | )                 |        | $             |       |              |        | $ | (4,080 | )     
|                                                               |                                      |                                     |        |           |        |                   |       |                           |     |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       

Predecessor Company
Consolidating Statement of Cash Flows
Six months ended June 30, 2002

---

|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |       |        |  
|------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------------- | ------ | --------- | ------ | ----------------- | ---- | ------------------------- | --- | --- | ---- | ------------ | --- | ----- | ---- | --- | - | - | ------ | ----------------- | ------ | ------------ | ------ | ----- | ------ | -
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      | Wholly-Owned Subsidiaries |     |     |      |             
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |             
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        | Non-Participating |        | Consolidated
|                                                                                                  |                                                           |                                                     |        | ALC, Inc. |        | ALC Indiana, Inc. |      | Carriage House            |     | HCI |      | Subsidiaries |     | Total
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |      
|Operating Activities:                                                                             |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|Net income (loss)                                                                                 |                                                           | $                                                   | (2,963 | )         |        | $                 | 745  |                           |     | $   | (806 | )            |     | $     | 3    |     |   | $ | (1,059 | )                 |        | $            | (4,080 | )    
|Adjustment to reconcile net income (loss) to net cash (used in)
provided by operating activities: |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|                                                                                                  | Depreciation and amortization                             |                                                     |        | 1,702     |        |                   |      | 199                       |     |     |      | 64           |     |       |      | 103 |   |   |        | 1,291             |        |              |        | 3,359 |       
|                                                                                                  | Amortization of debt issuance costs                       |                                                     |        | 52        |        |                   |      |                          |     |     |      |             |     |       |      |    |   |   |        |                  |        |              |        | 52    |       
|                                                                                                  | Amortization of fair value adjustment to building rentals |                                                     |        | (267      | )      |                   |      |                          |     |     |      | (46          | )   |       |      |    |   |   |        | 7                 |        |              |        | (306  | )     
|                                                                                                  | Amortization of fair market adjustment to long-term debt  |                                                     |        | 213       |        |                   |      |                          |     |     |      |             |     |       |      |    |   |   |        |                  |        |              |        | 213   |       
|                                                                                                  | Amortization of discount on long-term debt                |                                                     |        | 211       |        |                   |      |                          |     |     |      |             |     |       |      |    |   |   |        |                  |        |              |        | 211   |       
|                                                                                                  | Straight line adjustment to building rentals              |                                                     |        | 188       |        |                   |      |                          |     |     |      |             |     |       |      |    |   |   |        |                  |        |              |        | 188   |       
|                                                                                                  | Interest paid-in-kind                                     |                                                     |        | 610       |        |                   |      |                          |     |     |      |             |     |       |      |    |   |   |        |                  |        |              |        | 610   |       
|                                                                                                  | Provision for doubtful accounts                           |                                                     |        | 132       |        |                   |      |                          |     |     |      |             |     |       |      |    |   |   |        |                  |        |              |        | 132   |       
|                                                                                                  | Loss on discontinued operations                           |                                                     |        | 20        |        |                   |      |                           |     |     |      |              |     |       |      | 423 |   |   |        |                   |        |              |        | 443   |       
|Changes in working capital items:                                                                 |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|Receivable from subsidiaries/parent                                                               |                                                           |                                                     | 1,922  |           |        |                   | (862 | )                         |     |     | 516  |              |     |       | 405  |     |   |   | (1,981 | )                 |        |              |       |      
|Accounts receivable                                                                               |                                                           |                                                     | (145   | )         |        |                   |     |                           |     |     |     |              |     |       | 11   |     |   |   | (2     | )                 |        |              | (136   | )    
|Prepaid expenses                                                                                  |                                                           |                                                     | (1,245 | )         |        |                   |     |                           |     |     |     |              |     |       |     |     |   |   | 43     |                   |        |              | (1,202 | )    
|Other current assets                                                                              |                                                           |                                                     | 605    |           |        |                   |     |                           |     |     |     |              |     |       | 3    |     |   |   | (436   | )                 |        |              | 172    |      
|Other assets                                                                                      |                                                           |                                                     | (253   | )         |        |                   |     |                           |     |     |     |              |     |       |     |     |   |   | (46    | )                 |        |              | (299   | )    
|Accounts payable                                                                                  |                                                           |                                                     | (24    | )         |        |                   |     |                           |     |     |     |              |     |       | (3   | )   |   |   | (191   | )                 |        |              | (218   | )    
|Payable to subsidiaries/parent                                                                    |                                                           |                                                     | 600    |           |        |                   |     |                           |     |     | 300  |              |     |       | (962 | )   |   |   | 62     |                   |        |              |       |      
|Accrued expenses                                                                                  |                                                           |                                                     | 2,088  |           |        |                   | (59  | )                         |     |     | 8    |              |     |       | 14   |     |   |   | (608   | )                 |        |              | 1,443  |      
|Other current liabilities                                                                         |                                                           |                                                     | 371    |           |        |                   |     |                           |     |     |     |              |     |       | 3    |     |   |   | (80    | )                 |        |              | 294    |      
|Other liabilities                                                                                 |                                                           |                                                     | 656    |           |        |                   |     |                           |     |     | 18   |              |     |       |     |     |   |   | (674   | )                 |        |              |       |      
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|                                                                                                  |                                                           | Net cash provided by (used in) operating activities |        | $         | 4,473  |                   |      | $                         | 23  |     |      | $            | 54  |       |      | $   |  |   |        | $                 | (3,674 | )            |        | $     | 876    |  
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|Investing Activities:                                                                             |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|Increase in restricted cash                                                                       |                                                           |                                                     | (2,680 | )         |        |                   |     |                           |     |     |     |              |     |       |     |     |   |   |       |                   |        |              | (2,680 | )    
|Purchases of property and equipment                                                               |                                                           |                                                     | 2,171  |           |        |                   | (23  | )                         |     |     | (54  | )            |     |       |     |     |   |   | (3,427 | )                 |        |              | (1,333 | )    
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|                                                                                                  |                                                           | Net cash used in investing activities               |        |           | (509   | )                 |      |                           | (23 | )   |      |              | (54 | )     |      |     |  |   |        |                   | (3,427 | )            |        |       | (4,013 | )
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|Financing Activities:                                                                             |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|Proceeds from long-term debt                                                                      |                                                           |                                                     | (3,701 | )         |        |                   |     |                           |     |     |     |              |     |       |     |     |   |   | 7,101  |                   |        |              | 3,400  |      
|Payments on long-term debt and capital lease obligation                                           |                                                           |                                                     | (725   | )         |        |                   |     |                           |     |     |     |              |     |       |     |     |   |   |       |                   |        |              | (725   | )    
|Debt issuance costs                                                                               |                                                           |                                                     | (79    | )         |        |                   |     |                           |     |     |     |              |     |       |     |     |   |   |       |                   |        |              | (79    | )    
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|                                                                                                  |                                                           | Net cash provided by (used in) financing activities |        |           | (4,505 | )                 |      |                           |    |     |      |              |    |       |      |     |  |   |        |                   | 7,101  |              |        |       | 2,596  |  
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|Net decrease in cash and cash equivalents                                                         |                                                           |                                                     | (541   | )         |        |                   |     |                           |     |     |     |              |     |       |     |     |   |   |       |                   |        |              | (541   | )    
|Cash and cash equivalents, beginning of period                                                    |                                                           |                                                     | 6,077  |           |        |                   |     |                           |     |     |     |              |     |       |     |     |   |   |       |                   |        |              | 6,077  |      
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      
|Cash and cash equivalents, end of period                                                          |                                                           | $                                                   | 5,536  |           |        | $                 |     |                           |     | $   |     |              |     | $     |     |     |   | $ |       |                   |        | $            | 5,536  |      
|                                                                                                  |                                                           |                                                     |        |           |        |                   |      |                           |     |     |      |              |     |       |      |     |   |   |        |                   |        |              |        |      

14



---



##### Table of Contents



Predecessor Company
Consolidating Statement of Operations
Six months ended June 30, 2001

---

|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |        |        |  
|-------------------------------------------------------------- | ------------------------------------ | ------------------------ | ------ | --------- | ------ | ----------------- | ----- | ------------------------- | ----- | --- | ---- | ------------ | --- | ----------- | --- | ----- | --- | - | ------ | ----------------- | ------ | ------------- | ------ | ------------ | ------ | - | ------ | ------ | ------ | -
|                                                               |                                      |                          |        |           |        |                   |       | Wholly-Owned Subsidiaries |       |     |      |              |     |             |     |      
|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |      
|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        | Non-Participating |        | Consolidating |        | Consolidated
|                                                               |                                      |                          |        | ALC, Inc. |        | ALC Indiana, Inc. |       | Carriage House            |       | HCI |      | Subsidiaries |     | Adjustments |     | Total
|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |      
|Revenue                                                        |                                      | $                        | 61,718 |           |        | $                 | 3,350 |                           |       | $   |     |              |     | $           | 595 |       |     | $ | 6,874  |                   |        | $             |       |              |        | $ | 72,537 |       
|Management fee income                                          |                                      |                          | 5      |           |        |                   | 169   |                           |       |     |     |              |     |             | 29  |       |     |   |       |                   |        |               | (203   | )            |        |   |       |       
|Lease income                                                   |                                      |                          |       |           |        |                   |      |                           |       |     |     |              |     |             |    |       |     |   | 1,229  |                   |        |               | (1,229 | )            |        |   |       |       
|Operating expenses:                                            |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|                                                               | Residence operating expenses         |                          |        | 40,938    |        |                   |       | 2,061                     |       |     |      | 46           |     |             |     | 470   |     |   |        | 5,385             |        |               |        |             |        |   |        | 48,900 |       
|                                                               | Corporate general and administrative |                          |        | 8,708     |        |                   |       |                          |       |     |      |             |     |             |     |      |     |   |        |                  |        |               |        |             |        |   |        | 8,708  |       
|                                                               | Building rentals                     |                          |        | 1,295     |        |                   |       |                          |       |     |      | 507          |     |             |     |      |     |   |        | 1,798             |        |               |        |             |        |   |        | 3,600  |       
|                                                               | Building rentals to related party    |                          |        | 4,592     |        |                   |       |                          |       |     |      |             |     |             |     |      |     |   |        |                  |        |               |        |             |        |   |        | 4,592  |       
|                                                               | Depreciation and amortization        |                          |        | 3,092     |        |                   |       | 310                       |       |     |      | 109          |     |             |     | 224   |     |   |        | 1,126             |        |               |        |             |        |   |        | 4,861  |       
|                                                               | Management fees                      |                          |        |          |        |                   |       |                          |       |     |      | 138          |     |             |     |      |     |   |        | 65                |        |               |        | (203         | )      |   |        |       |       
|                                                               | Lease expense                        |                          |        | 1,229     |        |                   |       |                          |       |     |      |             |     |             |     |      |     |   |        |                  |        |               |        | (1,229       | )      |   |        |       |       
|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|                                                               |                                      | Total operating expenses |        |           | 59,854 |                   |       |                           | 2,371 |     |      |              | 800 |             |     |       | 694 |   |        |                   | 8,374  |               |        |              | (1,432 | ) |        |        | 70,661 |  
|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|Operating income (loss)                                        |                                      |                          | 1,869  |           |        |                   | 1,148 |                           |       |     | (800 | )            |     |             | (70 | )     |     |   | (271   | )                 |        |               |       |              |        |   | 1,876  |       
|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|Other income (expense):                                        |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|                                                               | Interest expense                     |                          |        | (7,784    | )      |                   |       |                          |       |     |      |             |     |             |     |      |     |   |        | (1,523            | )      |               |        |             |        |   |        | (9,307 | )     
|                                                               | Interest income                      |                          |        | 287       |        |                   |       |                          |       |     |      |             |     |             |     |      |     |   |        |                  |        |               |        |             |        |   |        | 287    |       
|                                                               | Other expense, net                   |                          |        | (69       | )      |                   |       |                          |       |     |      |             |     |             |     |      |     |   |        |                  |        |               |        |             |        |   |        | (69    | )     
|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|                                                               |                                      | Total other expense, net |        |           | (7,566 | )                 |       |                           |      |     |      |              |    |             |     |       |    |   |        |                   | (1,523 | )             |        |              |       |   |        |        | (9,089 | )
|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|Income (loss) before debt restructure and reorganization costs |                                      |                          | (5,697 | )         |        |                   | 1,148 |                           |       |     | (800 | )            |     |             | (70 | )     |     |   | (1,794 | )                 |        |               |       |              |        |   | (7,213 | )     
|Debt restructure and reorganization costs                      |                                      |                          | 1,366  |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   | 1,366  |       
|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|Income (loss) from continuing operations                       |                                      |                          | (7,063 | )         |        |                   | 1,148 |                           |       |     | (800 | )            |     |             | (70 | )     |     |   | (1,794 | )                 |        |               |       |              |        |   | (8,579 | )     
|Loss from discontinued operations                              |                                      |                          | (230   | )         |        |                   |      |                           |       |     |     |              |     |             |    |       |     |   |       |                   |        |               |       |              |        |   | (230   | )     
|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       
|Net income (loss)                                              |                                      | $                        | (7,293 | )         |        | $                 | 1,148 |                           |       | $   | (800 | )            |     | $           | (70 | )     |     | $ | (1,794 | )                 |        | $             |       |              |        | $ | (8,809 | )     
|                                                               |                                      |                          |        |           |        |                   |       |                           |       |     |      |              |     |             |     |       |     |   |        |                   |        |               |        |              |        |   |        |       

Predecessor Company
Consolidating Statement of Cash Flows
Six months ended June 30, 2001

---

|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |        |        |  
|----------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------------- | ------ | --------- | ------ | ----------------- | ----- | ------------------------- | -- | --- | ---- | ------------ | --- | ----- | --- | --- | --- | - | ------ | ----------------- | ------ | ------------ | ------ | ------ | ------ | -
|                                                                                    |                                              |                                                     |        |           |        |                   |       | Wholly-Owned Subsidiaries |    |     |      |             
|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |             
|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        | Non-Participating |        | Consolidated
|                                                                                    |                                              |                                                     |        | ALC, Inc. |        | ALC Indiana, Inc. |       | Carriage House            |    | HCI |      | Subsidiaries |     | Total
|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |      
|Operating Activities:                                                               |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|Net income (loss)                                                                   |                                              | $                                                   | (7,293 | )         |        | $                 | 1,148 |                           |    | $   | (800 | )            |     | $     | (70 | )   |     | $ | (1,794 | )                 |        | $            | (8,809 | )     
|Adjustment to reconcile net income (loss) to net cash used in
operating activities: |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|                                                                                    | Depreciation and amortization                |                                                     |        | 3,354     |        |                   |       | 310                       |    |     |      | 109          |     |       |     | 224 |     |   |        | 1,126             |        |              |        | 5,123  |       
|                                                                                    | Income tax expense                           |                                                     |        | 126       |        |                   |       | (126                      | )  |     |      |             |     |       |     |    |     |   |        |                  |        |              |        |       |       
|                                                                                    | Amortization of debt issuance costs          |                                                     |        | 1,412     |        |                   |       |                          |    |     |      |             |     |       |     |    |     |   |        |                  |        |              |        | 1,412  |       
|                                                                                    | Straight line adjustment to building rentals |                                                     |        | 32        |        |                   |       |                          |    |     |      |             |     |       |     |    |     |   |        |                  |        |              |        | 32     |       
|                                                                                    | Provision for doubtful accounts              |                                                     |        | (21       | )      |                   |       |                          |    |     |      |             |     |       |     |    |     |   |        |                  |        |              |        | (21    | )     
|                                                                                    | Gain on disposal of assets                   |                                                     |        | 88        |        |                   |       |                          |    |     |      |             |     |       |     |    |     |   |        |                  |        |              |        | 88     |       
|Changes in working capital items:                                                   |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|                                                                                    | Receivable from subsidiaries/parent          |                                                     |        | 5,355     |        |                   |       | (915                      | )  |     |      |             |     |       |     | (32 | )   |   |        | (4,408            | )      |              |        |       |       
|                                                                                    | Accounts receivable                          |                                                     |        | 134       |        |                   |       | (14                       | )  |     |      |             |     |       |     | (33 | )   |   |        | 175               |        |              |        | 262    |       
|                                                                                    | Prepaid expenses                             |                                                     |        | 1,159     |        |                   |       | 1                         |    |     |      |             |     |       |     | 1   |     |   |        | 67                |        |              |        | 1,228  |       
|                                                                                    | Other current assets                         |                                                     |        | (712      | )      |                   |       | (11                       | )  |     |      |             |     |       |     | 3   |     |   |        | 276               |        |              |        | (444   | )     
|                                                                                    | Other assets                                 |                                                     |        | (792      | )      |                   |       |                          |    |     |      |             |     |       |     |    |     |   |        | 74                |        |              |        | (718   | )     
|                                                                                    | Accounts payable                             |                                                     |        | (1,454    | )      |                   |       | (12                       | )  |     |      |             |     |       |     | 5   |     |   |        | 278               |        |              |        | (1,183 | )     
|                                                                                    | Payable to subsidiaries/parent               |                                                     |        | 3,137     |        |                   |       | (338                      | )  |     |      | 777          |     |       |     | (46 | )   |   |        | (3,530            | )      |              |        |       |       
|                                                                                    | Accrued expenses                             |                                                     |        | (402      | )      |                   |       | (37                       | )  |     |      | (69          | )   |       |     | (21 | )   |   |        | (682              | )      |              |        | (1,211 | )     
|                                                                                    | Other current liabilities                    |                                                     |        | (3,488    | )      |                   |       |                          |    |     |      |             |     |       |     | (1  | )   |   |        | (264              | )      |              |        | (3,753 | )     
|                                                                                    | Other liabilities                            |                                                     |        | (249      | )      |                   |       |                          |    |     |      | (2           | )   |       |     |    |     |   |        | (89               | )      |              |        | (340   | )     
|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|                                                                                    |                                              | Net cash provided by (used in) operating activities |        | $         | 386    |                   |       | $                         | 6  |     |      | $            | 15  |       |     | $   | 30  |   |        | $                 | (8,771 | )            |        | $      | (8,334 | )
|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|Investing Activities:                                                               |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|Increase in restricted cash                                                         |                                              |                                                     | (2,008 | )         |        |                   |      |                           |    |     |     |              |     |       |    |     |     |   |       |                   |        |              | (2,008 | )     
|Purchases of property and equipment                                                 |                                              |                                                     | (764   | )         |        |                   | (6    | )                         |    |     | (15  | )            |     |       | (30 | )   |     |   | (123   | )                 |        |              | (938   | )     
|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|                                                                                    |                                              | Net cash used in investing activities               |        |           | (2,772 | )                 |       |                           | (6 | )   |      |              | (15 | )     |     |     | (30 | ) |        |                   | (123   | )            |        |        | (2,946 | )
|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|Financing Activities:                                                               |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|Proceeds from long-term debt                                                        |                                              |                                                     | 5,883  |           |        |                   |      |                           |    |     |     |              |     |       |    |     |     |   | 8,894  |                   |        |              | 14,777 |       
|Payments on long-term debt and capital lease obligation                             |                                              |                                                     | (573   | )         |        |                   |      |                           |    |     |     |              |     |       |    |     |     |   |       |                   |        |              | (573   | )     
|Payments on bridge loan                                                             |                                              |                                                     | (4,000 | )         |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              | (4,000 | )     
|Debt issuance costs                                                                 |                                              |                                                     | (3,134 | )         |        |                   |      |                           |    |     |     |              |     |       |    |     |     |   |       |                   |        |              | (3,134 | )     
|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|                                                                                    |                                              | Net cash provided by (used in) financing activities |        |           | (1,824 | )                 |       |                           |   |     |      |              |    |       |     |     |    |   |        |                   | 8,894  |              |        |        | 7,070  |  
|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|Net decrease in cash and cash equivalents                                           |                                              |                                                     | (4,210 | )         |        |                   |      |                           |    |     |     |              |     |       |    |     |     |   |       |                   |        |              | (4,210 | )     
|Cash and cash equivalents, beginning of period                                      |                                              |                                                     | 9,889  |           |        |                   |      |                           |    |     |     |              |     |       |    |     |     |   |       |                   |        |              | 9,889  |       
|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       
|Cash and cash equivalents, end of period                                            |                                              | $                                                   | 5,679  |           |        | $                 |      |                           |    | $   |     |              |     | $     |    |     |     | $ |       |                   |        | $            | 5,679  |       
|                                                                                    |                                              |                                                     |        |           |        |                   |       |                           |    |     |      |              |     |       |     |     |     |   |        |                   |        |              |        |       

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

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

General

We operate, own and lease free-standing assisted living residences in 16
states. These residences are primarily located in small middle-market rural and
suburban communities with a population typically ranging from 10,000 to 40,000.
We provide personal care and support services, and make available routine
nursing services (as permitted by applicable law) designed to meet the personal
and health care needs of our residents.

As of June 30, 2002, we operated 183 residences (7,081 units), of which we
owned 128 residences (5,010 units) and leased 55 residences (2,105 units).
Five residences (195 available units) are in the process of being sold. One
residence (39 units) was closed in March 2002.

We derive our revenue primarily from resident fees for room, board and care.
Resident fees typically are paid monthly in advance by residents and their
families, and monthly in arrears by 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 revenue when services are provided. Our operating expenses
include residence operating expenses, such as staff payroll, food, property
taxes, utilities, insurance and other direct residence operating expenses;
corporate general and administrative expenses consisting of regional management
and corporate support functions such as legal, accounting and other
administrative expenses; building rentals; and depreciation and amortization.

We anticipate that the majority of our revenue 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 or cash flows, particularly if states operating these programs
continue to limit, or more aggressively seek limits on, reimbursement rates.
See Risk Factors  We Depend on Reimbursement by Third-Party Payors.

Certain Transactions and Events

Reorganization

On October 1, 2001, Assisted Living Concepts, Inc. (the Company), and
its wholly owned subsidiary, Carriage House Assisted Living, Inc. voluntarily
filed for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code, as amended (the Bankruptcy Code). The bankruptcy court gave
final approval to the first amended joint plan of reorganization (the Plan)
on December 28, 2001, and the plan became effective on January 1, 2002 (the
Effective Date).

Under the Plan, on the Effective Date, the Company issued general
unsecured creditors their pro rata shares, subject to the reserve described
below (the Reserve), of the following securities:



| |  | $40.25 million principal amount of 10% senior secured notes, due January 1, 2009 (the Senior Secured Notes);
|- |  | --------------------------------------------------------------------------------------------------------------
| 
| |  | $15.25 million principal amount of junior secured notes, due January 1, 2012 (the Junior Secured Notes); and
| 
| |  | 6.24 million shares of new common stock (representing 96% of the new common stock).                           

The Senior Secured Notes and the Junior Secured Notes (collectively the
New Notes) are secured by 57 of our properties.

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The remaining 4% of the new common stock, subject to the Reserve, was
issued on the Effective Date to the Companys shareholders immediately prior to
the Effective Date.

Under the Plan, 1.1% of the senior notes, junior notes and new common
stock that would otherwise have been issued on the Effective Date were held
back as a reserve (the Reserve) to cover general unsecured claims that had
not been either made or settled by the December 19, 2001 cutoff date
established under the Plan. The reserved securities will be issued once all
these outstanding general unsecured claims have been settled. If the Reserve is
insufficient to cover these outstanding general unsecured claims, we will have
no further liability with respect to these claims. If the Reserve exceeds the
amount of these outstanding general unsecured claims, the excess securities in
the Reserve will be distributed pro rata among the holders of all general
unsecured claims, including those settled prior to the cutoff date.

On the Effective Date, a new Board of Directors of the reorganized Company
consisting of seven members was established as follows: W. Andrew Adams
(Chairman), Andre Dimitriadis, Mark Holliday, Richard Ladd, Matthew Patrick,
Leonard Tannenbaum, and Wm. James Nicol, then the President and Chief Executive
Officer of the Company. Subsequent to the Effective Date, Steven L. Vick
replaced Mr. Nicol as President, Chief Executive Officer and Director.

We adopted fresh-start reporting, as of December 31, 2001, 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). Under fresh-starting reporting, a new entity has
been deemed created for financial reporting purposes.

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. Consequently,
the condensed consolidated balance sheet and related information at December
31, 2001 is labeled Successor Company, and reflects the Plan and the
principles of fresh-start reporting. Periods presented prior to December 31,
2001 have been designated Predecessor Company. For purposes of this Item 2,
references to operating results and cash flows for periods ended prior to
December 31, 2001 refer to the operating results and cash flows of the
Predecessor Company, and references to working capital and other balance sheet
data, liquidity and prospective information regarding future periods refer to
the Successor Company.

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. With the
assistance of financial advisors who relied upon various valuation methods
including discounted projected cash flows and other applicable ratios and
economic industry information relevant to our operations, and through
negotiations with the various creditor parties in interest, we determined our
reorganization value to be $32.8 million.

The adjustments to reflect the adoption of fresh-start reporting,
including adjustments to record property and equipment at their fair values,
have been reflected in the condensed consolidated balance sheet as of December
31, 2001. In addition, the Successor Companys balance sheet was further
adjusted to eliminate existing liabilities subject to compromise, associated
deferred financing costs and deferred gains, goodwill, and the historical
condensed consolidated shareholders equity.

Factors Affecting Comparability of Financial Information

As a consequence of the implementation of fresh-start reporting effective
December 31, 2001 (see Note 3 to the condensed consolidated financial
statements included elsewhere herein), the financial information presented in
the condensed consolidated statement of operations for the three and six months
ended June 30, 2001 and the corresponding statements of cash flows for the six
months ended June 30, 2001 are generally not comparable to the financial
results for the three and six months ended June 30, 2002.

The lack of comparability in the accompanying condensed consolidated
financial statements is most apparent in the Companys capital costs (building
rentals, interest, depreciation and amortization), as well as with debt
restructuring and reorganization costs.

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Management Changes

In February 2002, Steven L. Vick replaced Wm. James Nicol as President and
Chief Executive Officer. In May 2002, Matthew Patrick replaced Drew Q. Miller
as Senior Vice President, Chief Financial Officer and Treasurer. Mr. Vick and
Mr. Patrick also serve as Directors of the Company.

In June 2002, the Company eliminated the position of Senior Vice President
and Chief Operating Officer which had been held by Nancy Gorshe and the
position of Senior Vice President, General Counsel, held by Sandra Campbell.
As a result of eliminating these positions, the Company entered into a
Separation Agreement and Mutual General Release with Ms. Gorshe and Ms.
Campbell under which, pursuant to their employment agreements, Ms. Gorshe and
Ms. Campbell will receive severance payments totaling $420,000 which will be
paid in bi-weekly installments over the next twelve months.

Overhead Reduction Plan

In June 2002, the Company implemented an overhead reduction plan within
its corporate office. The plan has been under development by new management for
three months, and is expected to result in savings of over $1.3 million per
annum (excluding severance costs) from personnel reductions. Severance costs
associated with the implementation of this plan are approximately $600,000 and
include severance costs of $420,000 for Ms. Gorshe and Ms. Campbell, as
discussed above.

Sale of Existing Residences

In June 2002 the Company entered into an agreement to sell four Florida
residences and one Georgia residence. The transaction, which is expected to be
completed in September, 2002, will result in a loss of approximately $443,000.
Net property and equipment million has been written down to its net realizable
value and has been included in assets held for sale on the accompanying
balance sheet. These residences serve as collateral for the New Notes;
therefore, net proceeds from the sale must be used to reduce the outstanding
principal amount of the New Senior Notes. The Company has included the
outstanding principal amount of the New Senior Notes expected to be paid upon
the closure of this sale in current portion of long-term debt on the
accompanying balance sheet.

In March 2002 the Company closed one Indiana residence. This residence is
presently listed for sale and the net property and equipment has been included
in assets held for sale on the accompanying balance sheet. This residence
serves as collateral for the New Notes; therefore, net proceeds from a sale of
this residence must be used to reduce the outstanding principal amount of the
New Senior Notes.

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, 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.

We believe the following critical accounting policies require significant
judgment and estimates used in the preparation of our condensed consolidated
financial statements:

Fresh-Start Reporting.Upon the Effective Date of our Plan of
reorganization we adopted fresh-start reporting in accordance with SOP 90-7.
For financial reporting purposes, we were required to value our assets and
liabilities at their current fair value. With assistance of financial advisors
in reliance upon various valuation methods, including discounted projected cash
flow analysis and other applicable ratios and economic industry information
relevant to our operations and through negotiations with various creditor
parties in interest, we determined a reorganization value of $32.8 million. The
reorganization value was allocated to our assets and liabilities based upon
their fair value.

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The determination of fair value of assets and liabilities required
significant estimates and judgments made by management, particularly as it
related to the fair market value of our debt, operating leases and property and
equipment. The fair value of our debt at December 31, 2001 was determined based
upon the then current effective interest rates for similar debt instruments.
The fair value of our leases and property and equipment were based on the then
current market rentals and building values. Results may differ under different
assumptions or conditions.

Income Taxes.Historically, we have not recorded a provision for income
taxes as we had generated a loss for both financial reporting and tax purposes.
We have recorded a 100% valuation allowance for our net deferred tax assets as
we believe it is more likely than not that the benefit will not be realized.
Pursuant to SOP 90-7, the income tax benefit, if any, of any future realization
of the remaining NOL carryforwards and other deductible temporary differences
existing as of the Effective Date of the Plan of Reorganization will be applied
as a reduction to additional paid-in capital.

Results of Operations for the Three Months Ended June 30, 2001 and 2002

The following table sets 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 for
our 178 residences included in continuing operations. Results of operations for
the six residences available for sale are included in Loss from Discontinued
Operations. The portion of revenue received from state Medicaid agencies are
labeled as Medicaid state paid portion while the portion of our revenue that
a Medicaid-eligible resident must pay out of his or her own resources is
labeled Medicaid resident paid portion.

|                                                      |                                                        |                                |                          |       |                    |       |           |       |      |       |  
|----------------------------------------------------- | ------------------------------------------------------ | ------------------------------ | ------------------------ | ----- | ------------------ | ----- | --------- | ----- | ---- | ----- | -
|                                                      |                                                        |                                |                          |       | Three Months Ended
|                                                      |                                                        |                                |                          |       | June 30,          
|                                                      |                                                        |                                |                          |       |                   
|                                                      |                                                        |                                |                          |       | Predecessor        |       | Successor
|                                                      |                                                        |                                |                          |       | Company            |       | Company  
|                                                      |                                                        |                                |                          |       |                    |       |          
|                                                      |                                                        |                                |                          |       | 2001               |       | 2002     
|                                                      |                                                        |                                |                          |       |                    |       |          
|Revenue                                               |                                                        |                                | 100.0                    | %     |                    |       | 100.0     | %    
|Operating expenses:                                   |                                                        |                                |                          |       |                    |       |           |      
|                                                      | Residence operating expenses                           |                                |                          | 66.1  |                    |       |           | 69.3  |     
|                                                      | Corporate general and administrative                   |                                |                          | 12.2  |                    |       |           | 14.7  |     
|                                                      | Building rentals                                       |                                |                          | 11.2  |                    |       |           | 8.1   |     
|                                                      | Depreciation and amortization                          |                                |                          | 6.7   |                    |       |           | 4.4   |     
|                                                      |                                                        |                                |                          |       |                    |       |           |      
|                                                      |                                                        |                                | Total operating expenses |       |                    | 96.2  |           |       |      | 96.5  |  
|                                                      |                                                        |                                |                          |       |                    |       |           |      
|Operating income                                      |                                                        |                                | 3.8                      |       |                    |       | 3.5       |      
|                                                      |                                                        |                                |                          |       |                    |       |           |      
|Other income (expense):                               |                                                        |                                |                          |       |                    |       |           |      
|                                                      | Interest expense                                       |                                |                          | (13.4 | )                  |       |           | (9.1  | )   
|                                                      | Interest income                                        |                                |                          | 0.4   |                    |       |           | 0.1   |     
|                                                      | Other income, net                                      |                                |                          | (0.3  | )                  |       |           | 0.1   |     
|                                                      |                                                        |                                |                          |       |                    |       |           |      
|                                                      |                                                        |                                | Total other expense      |       |                    | (13.3 | )         |       |      | (8.9  | )
|                                                      |                                                        |                                |                          |       |                    |       |           |      
|Loss before debt restructure and reorganization costs |                                                        |                                | (9.5                     | )     |                    |       | (5.4      | )    
|Debt restructure and reorganization costs             |                                                        |                                | 2.9                      |       |                    |       | 0.6       |      
|                                                      |                                                        |                                |                          |       |                    |       |           |      
|Loss from continuing operation                        |                                                        |                                | (12.4                    | )     |                    |       | (6.0      | )    
|Loss from discontinued operations                     |                                                        |                                | (0.2                     | )     |                    |       | (0.9      | )    
|                                                      |                                                        |                                |                          |       |                    |       |           |      
|Net loss                                              |                                                        |                                | (12.6                    | )%    |                    |       | (6.9      | )%   
|                                                      |                                                        |                                |                          |       |                    |       |           |      
|Other Data:                                           |                                                        |                                |                          |       |                    |       |           |      
|                                                      | Residences operated (end of period)                    |                                |                          | 178   |                    |       |           | 178   |     
|                                                      | Units operated (end of period)                         |                                |                          | 6,881 |                    |       |           | 6,886 |     
|                                                      | Average occupancy rate (based on occupied units)       |                                |                          | 85.0  | %                  |       |           | 84.3  | %   
|                                                      | End of period occupancy rate (based on occupied units) |                                |                          | 85.0  | %                  |       |           | 84.6  | %   
|                                                      | Average monthly rental rate                            |                                | $                        | 2,065 |                    |       | $         | 2,156 |     
|                                                      | Sources of revenue:                                    |                                |                          |       |                    |       |           |       |     
|                                                      |                                                        | Medicaid state paid portion    |                          |       | 12.7               | %     |           |       | 12.6 | %    
|                                                      |                                                        | Medicaid resident paid portion |                          |       | 6.6                | %     |           |       | 7.3  | %    
|                                                      |                                                        | Private resident paid portion  |                          |       | 80.7               | %     |           |       | 80.1 | %    
|                                                      |                                                        |                                |                          |       |                    |       |           |      
|                                                      |                                                        |                                | Total                    |       |                    | 100.0 | %         |       |      | 100.0 | %
|                                                      |                                                        |                                |                          |       |                    |       |           |      

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The following table sets forth, for the periods presented, the results of
operations for the three months ended June 30, 2001 compared to June 30, 2002
(in millions, except percentages):

|                                                      |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |   |        |        |       |   
|----------------------------------------------------- | ------------------------------------ | ------------------------ | ---- | --------------------------- | ---- | --------- | ---- | ------------------- | ---- | - | ---- | ---- | ---- | - | ------ | ------ | ----- | --
|                                                      |                                      |                          |      | Consolidated               
|                                                      |                                      |                          |      | Three Months Ended June 30,
|                                                      |                                      |                          |      |                            
|                                                      |                                      |                          |      | Predecessor                 |      | Successor |      |                     |      |   |      |      |      |  
|                                                      |                                      |                          |      | Company                     |      | Company   |      |                     |      |   |      |      |      |  
|                                                      |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |  
|                                                      |                                      |                          |      | 2001                        |      | 2002      |      | Increase/(Decrease)
|                                                      |                                      |                          |      |                             |      |           |      |                    
|Revenue                                               |                                      | $                        | 36.5 |                             |      | $         | 37.9 |                     |      | $ | 1.4  |      |      |   | 3.8    | %     
|Operating expenses:                                   |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |   |        |       
|                                                      | Residence operating expenses         |                          |      | 24.1                        |      |           |      | 26.3                |      |   |      | 2.2  |      |   |        | 9.1    |      
|                                                      | Corporate general and administrative |                          |      | 4.4                         |      |           |      | 5.6                 |      |   |      | 1.2  |      |   |        | 27.3   |      
|                                                      | Building rentals                     |                          |      | 4.1                         |      |           |      | 3.1                 |      |   |      | (1.0 | )    |   |        | (24.4  | )    
|                                                      | Depreciation and amortization        |                          |      | 2.5                         |      |           |      | 1.6                 |      |   |      | (0.9 | )    |   |        | (36.0  | )    
|                                                      |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |   |        |       
|                                                      |                                      | Total operating expenses |      |                             | 35.1 |           |      |                     | 36.6 |   |      |      | 1.5  |   |        |        | 4.3   |   
|                                                      |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |   |        |       
|Operating income                                      |                                      |                          | 1.4  |                             |      |           | 1.3  |                     |      |   | (0.1 | )    |      |   | (0.4   | )     
|                                                      |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |   |        |       
|Other income (expense):                               |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |   |        |       
|                                                      | Interest expense                     |                          |      | (4.9                        | )    |           |      | (3.5                | )    |   |      | (1.4 | )    |   |        | (28.6  | )    
|                                                      | Interest income                      |                          |      | 0.1                         |      |           |      | 0.1                 |      |   |      |     |      |   |        |       |      
|                                                      | Other income (expense), net          |                          |      | (0.1                        | )    |           |      |                    |      |   |      | (0.1 | )    |   |        | (100.0 | )    
|                                                      |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |   |        |       
|                                                      |                                      | Total other expense      |      |                             | (4.9 | )         |      |                     | (3.4 | ) |      |      | (1.5 | ) |        |        | (30.6 | ) 
|                                                      |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |   |        |       
|Loss before debt restructure and reorganization costs |                                      |                          | (3.5 | )                           |      |           | (2.1 | )                   |      |   | (1.4 | )    |      |   | (40.0  | )     
|Debt restructure and reorganization costs             |                                      |                          | 1.0  |                             |      |           | 0.2  |                     |      |   | (0.8 | )    |      |   | (80.0  | )     
|                                                      |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |   |        |       
|Loss from continuing operations                       |                                      |                          | (4.5 | )                           |      |           | (2.3 | )                   |      |   | (2.2 | )    |      |   | (48.9  | )     
|Loss from discontinued operations                     |                                      |                          | (0.1 | )                           |      |           | (0.3 | )                   |      |   | (0.2 | )    |      |   | (200.0 | )     
|                                                      |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |   |        |       
|                                                      |                                      | Net loss                 |      | $                           | (4.6 | )         |      | $                   | (2.6 | ) |      | $    | (2.0 | ) |        |        | (43.5 | )%
|                                                      |                                      |                          |      |                             |      |           |      |                     |      |   |      |      |      |   |        |       

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001:

We incurred a net loss of $2.6 million, or $0.40 per basic and diluted
common share, on revenue of $37.9 million for the three months ended June 30,
2002 (the June 2002 Quarter) as compared to a net loss of $4.6 million or
$0.27 per basic and diluted common share, on revenue of $36.5 million for the
three months ended June 30, 2001 (the June 2001 Quarter).

Revenue.Revenue was $37.9 million for the June 2002 Quarter as compared
to $36.5 million for the June 2001 Quarter, a net increase of $1.4 million. The
increase was attributable to an increase in the average monthly rental rate to
$2,156 for the June 2002 Quarter as compared to an average monthly rental rate
of $2,065 for June 2001 Quarter. The increase was offset by a decline in
average occupancy from 85.0% in the March 2001 Quarter to 84.3% in the June
2002 Quarter.

Residence Operating Expenses.Residence operating expenses were $26.3
million for the June 2002 Quarter as compared to $24.1 million for the June
2001 Quarter, a net increase of $2.2 million. The net increase of $2.2 million
was a result of an increase in wages and benefits of $1.1 million, an increase
in real estate taxes of $400,000, an increase in bad debt expense of $220,000,
an increase in repair and maintenance expense of $195,000 and an increase in
contractual nursing services of $100,000. These increases were offset by a
reduction in utility costs of $210,000.

Corporate General and Administrative.Corporate general and
administrative expenses were $5.6 million for the June 2002 Quarter as compared
to $4.4 million for the June 2001 Quarter, a net increase of $1.2 million. The
increase was due to an increase of $1.1 million in payroll and related
expenses, of which approximately $600,000 is severance related, and an increase
of $300,000 in travel expenses, including $250,000 of expenses related to a
national meeting of the Companys administrators. These increases were offset
by a decrease of $150,000 in consulting fees and a decrease of $110,000 in
communication expenses.

Building Rentals.Building rentals were $3.1 million for the June 2002
Quarter as compared to $4.1 million for the June 2001 Quarter, a decrease of
$1.0 million. Of the $1.0 million decrease, $893,000 was the result of the
repurchase of 16 previously leased properties in October 2001, $220,000 is the
result of rental concessions received from one lessor as a result of the
bankruptcy process and $65,000 is a result of the termination of one operating
lease on December 1, 2001. These decreases were offset by an increase of
$67,000 as a result of leasing two previously mortgaged facilities.

Depreciation and Amortization.Depreciation and amortization expense was
$1.7 million in the June 2002 Quarter as compared to $2.4 million in the June
2001 Quarter. The decrease is primarily due to a reduction of the carrying
value of property and equipment, which were adjusted to their estimated fair
value as of December 31, 2001 as a result of fresh-start reporting.

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Interest Expense.Interest expense was $3.5 million for the June 2002
Quarter compared to $4.9 million for the June 2001 Quarter, a decrease of $1.4
million. The decrease is due to the overall reduction of indebtedness following
the Companys Plan of reorganization, which became effective on January 1,
2002. Interest expense also includes $305,000 of non-cash interest expense
which is payable in kind on the New Junior Notes.

Interest Income.Interest income was $52,000 for the June 2002 Quarter
compared to $138,000 for the June 2001 Quarter, a decrease of $86,000. This
decrease is the result of decreased balances in cash and cash equivalents and
lower interest rates.

Debt Restructure and Reorganization Costs.Debt restructure and
reorganization costs were $219,000 for the June 2002 Quarter as compared to
$1.1 million for the June 2001 Quarter. These are professional fees, including
legal and investment advisory fees, related to the Companys Plan of
reorganization which became effective January 1, 2002. We will continue to
incur costs related to the reorganization until all general and unsecured
claims are settled which is expected to occur within the next six months.

Loss From Discontinued Operations.The Company currently has one
residence listed for sale and has entered into an agreement to sell five
residences. The sale is subject to certain due diligence inquiries and closing
conditions and is expected to close in September 2002. The loss on discontinued
operations for these residences was $357,000 for the June 2002 Quarter as
compared to $73,000 for the June 2001 Quarter. Loss for the June 2002 Quarter
includes operating income of $86,000, net of the $443,000 loss recognized as a
result of reducing the carrying value of the related assets (included in
assets held for sale on the accompanying balance sheet) to their estimated
net realizable value.

Income Taxes.We have provided no benefit for income taxes as we have
recorded a full valuation allowance on our deferred tax assets. Management
believes it is currently more likely than not that the deferred tax assets will
not be realized.

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##### Table of Contents



Results of Operations for the Six Months Ended June 30, 2001 and 2002

The following table sets 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 for
our 178 residences included in continuing operations. The six residences
available for sale are included in Loss from Discontinued Operations. The
portion of revenue received from state Medicaid agencies are labeled as
Medicaid state paid portion while the portion of our revenue that a
Medicaid-eligible resident must pay out of his or her own resources is labeled
Medicaid resident paid portion.

|                                                      |                                                        |                                |                          |       |                  |       |           |       |      |       |  
|----------------------------------------------------- | ------------------------------------------------------ | ------------------------------ | ------------------------ | ----- | ---------------- | ----- | --------- | ----- | ---- | ----- | -
|                                                      |                                                        |                                |                          |       | Six Months Ended
|                                                      |                                                        |                                |                          |       | June 30,        
|                                                      |                                                        |                                |                          |       |                 
|                                                      |                                                        |                                |                          |       | Predecessor      |       | Successor
|                                                      |                                                        |                                |                          |       | Company          |       | Company  
|                                                      |                                                        |                                |                          |       |                  |       |          
|                                                      |                                                        |                                |                          |       | 2001             |       | 2002     
|                                                      |                                                        |                                |                          |       |                  |       |          
|Revenue                                               |                                                        |                                | 100.0                    | %     |                  |       | 100.0     | %    
|Operating expenses:                                   |                                                        |                                |                          |       |                  |       |           |      
|                                                      | Residence operating expenses                           |                                |                          | 67.4  |                  |       |           | 69.1  |     
|                                                      | Corporate general and administrative                   |                                |                          | 11.9  |                  |       |           | 13.1  |     
|                                                      | Building rentals                                       |                                |                          | 11.3  |                  |       |           | 8.1   |     
|                                                      | Depreciation and amortization                          |                                |                          | 6.7   |                  |       |           | 4.4   |     
|                                                      |                                                        |                                |                          |       |                  |       |           |      
|                                                      |                                                        |                                | Total operating expenses |       |                  | 97.3  |           |       |      | 94.7  |  
|                                                      |                                                        |                                |                          |       |                  |       |           |      
|Operating income                                      |                                                        |                                | 2.7                      |       |                  |       | 5.3       |      
|                                                      |                                                        |                                |                          |       |                  |       |           |      
|Other income (expense):                               |                                                        |                                |                          |       |                  |       |           |      
|                                                      | Interest expense                                       |                                |                          | (12.9 | )                |       |           | (9.4  | )   
|                                                      | Interest income                                        |                                |                          | 0.4   |                  |       |           | 0.1   |     
|                                                      | Other income, net                                      |                                |                          | (0.1  | )                |       |           |      |     
|                                                      |                                                        |                                |                          |       |                  |       |           |      
|                                                      |                                                        |                                | Total other expense      |       |                  | (12.6 | )         |       |      | (9.3  | )
|                                                      |                                                        |                                |                          |       |                  |       |           |      
|Loss before debt restructure and reorganization costs |                                                        |                                | (9.9                     | )     |                  |       | (4.0      | )    
|Debt restructure and reorganization costs             |                                                        |                                | 1.8                      |       |                  |       | 0.9       |      
|                                                      |                                                        |                                |                          |       |                  |       |           |      
|Loss from continuing operations                       |                                                        |                                | (11.7                    | )     |                  |       | (4.9      | )    
|Loss from discontinued operations                     |                                                        |                                | (0.5                     | )     |                  |       | (0.5      | )    
|                                                      |                                                        |                                |                          |       |                  |       |           |      
|Net loss                                              |                                                        |                                | (12.2                    | )%    |                  |       | (5.4      | )%   
|                                                      |                                                        |                                |                          |       |                  |       |           |      
|Other Data:                                           |                                                        |                                |                          |       |                  |       |           |      
|                                                      | Residences operated (end of period)                    |                                |                          | 178   |                  |       |           | 178   |     
|                                                      | Units operated (end of period)                         |                                |                          | 6,881 |                  |       |           | 6,886 |     
|                                                      | Average occupancy rate (based on occupied units)       |                                |                          | 84.9  | %                |       |           | 84.0  | %   
|                                                      | End of period occupancy rate (based on occupied units) |                                |                          | 85.0  | %                |       |           | 84.6  | %   
|                                                      | Average monthly rental rate                            |                                | $                        | 2,049 |                  |       | $         | 2,138 |     
|                                                      | Sources of revenue:                                    |                                |                          |       |                  |       |           |       |     
|                                                      |                                                        | Medicaid state paid portion    |                          |       | 12.4             | %     |           |       | 12.6 | %    
|                                                      |                                                        | Medicaid resident paid portion |                          |       | 6.9              | %     |           |       | 7.1  | %    
|                                                      |                                                        | Private resident paid portion  |                          |       | 80.7             | %     |           |       | 80.4 | %    
|                                                      |                                                        |                                |                          |       |                  |       |           |      
|                                                      |                                                        |                                | Total                    |       |                  | 100.0 | %         |       |      | 100.0 | %
|                                                      |                                                        |                                |                          |       |                  |       |           |      

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The following table sets forth, for the periods presented, the results of
operations for the six months ended June 30, 2001 compared to June 30, 2002 (in
millions, except percentages):

|                                                      |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |       |      |  
|----------------------------------------------------- | ------------------------------------ | ------------------------ | ------------ | ------------------------- | ---- | --------- | ---- | ------------------- | ---- | - | ---- | ---- | --- |  | ----- | ----- | ---- | -
|                                                      |                                      |                          | Consolidated
|                                                      |                                      |                          |              | Six Months Ended June 30,
|                                                      |                                      |                          |              |                           |     
|                                                      |                                      |                          |              | Predecessor               |      | Successor |      |                     |      |   |      |      |     | 
|                                                      |                                      |                          |              | Company                   |      | Company   |      |                     |      |   |      |      |     | 
|                                                      |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     | 
|                                                      |                                      |                          |              | 2001                      |      | 2002      |      | Increase/(Decrease)
|                                                      |                                      |                          |              |                           |      |           |      |                    
|Revenue                                               |                                      | $                        | 72.5         |                           |      | $         | 75.0 |                     |      | $ | 2.5  |      |     |  | 3.4   | %    
|Operating expenses:                                   |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |      
|                                                      | Residence operating expenses         |                          |              | 48.9                      |      |           |      | 51.8                |      |   |      | 2.9  |     |  |       | 5.9   |     
|                                                      | Corporate general and administrative |                          |              | 8.7                       |      |           |      | 9.8                 |      |   |      | 1.1  |     |  |       | 12.6  |     
|                                                      | Building rentals                     |                          |              | 8.2                       |      |           |      | 6.1                 |      |   |      | (2.1 | )   |  |       | (25.6 | )   
|                                                      | Depreciation and amortization        |                          |              | 4.8                       |      |           |      | 3.3                 |      |   |      | (1.5 | )   |  |       | (31.3 | )   
|                                                      |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |      
|                                                      |                                      | Total operating expenses |              |                           | 70.6 |           |      |                     | 71.0 |   |      |      | 0.4 |  |       |       | (0.6 | )
|                                                      |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |      
|Operating income                                      |                                      |                          | 1.9          |                           |      |           | 4.0  |                     |      |   | 2.1  |      |     |  | 110.5 |      
|                                                      |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |      
|Other income (expense):                               |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |      
|                                                      | Interest expense                     |                          |              | (9.3                      | )    |           |      | (7.0                | )    |   |      | 2.3  |     |  |       | 24.7  |     
|                                                      | Interest income                      |                          |              | 0.3                       |      |           |      | 0.1                 |      |   |      | (0.2 | )   |  |       | (66.7 | )   
|                                                      | Other income (expense), net          |                          |              | (0.1                      | )    |           |      |                    |      |   |      | 0.1  |     |  |       | 100.0 |     
|                                                      |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |      
|                                                      |                                      | Total other expense      |              |                           | (9.1 | )         |      |                     | (6.9 | ) |      |      | 2.2 |  |       |       | 24.2 |  
|                                                      |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |      
|Loss before debt restructure and reorganization costs |                                      |                          | (7.2         | )                         |      |           | (2.9 | )                   |      |   | 4.3  |      |     |  | 59.7  |      
|Debt restructure and reorganization costs             |                                      |                          | 1.3          |                           |      |           | 0.7  |                     |      |   | (0.6 | )    |     |  | (46.2 | )    
|                                                      |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |      
|Loss from continuing operations                       |                                      |                          | (8.5         | )                         |      |           | (3.6 | )                   |      |   | 4.9  |      |     |  | 57.6  |      
|                                                      |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |      
|Loss from discontinued operations                     |                                      |                          | (0.3         | )                         |      |           | (0.5 | )                   |      |   | (0.2 | )    |     |  | (66.7 | )    
|                                                      |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |      
|                                                      |                                      | Net loss                 |              | $                         | (8.8 | )         |      | $                   | (4.1 | ) |      | $    | 4.7 |  |       |       | 53.4 | %
|                                                      |                                      |                          |              |                           |      |           |      |                     |      |   |      |      |     |  |       |      

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001:

We incurred a net loss of $4.1 million, or $0.63 per basic and diluted
common share, on revenue of $75.0 million for the six months ended June 30,
2002 (the June 2002 YTD Period) as compared to a net loss of $8.8 million or
$0.51 per basic and diluted common share, on revenue of $72.5 million for the
six months ended June 30, 2001 (the June 2001 YTD Period).

Revenue.Revenue was $75.0 million for the June 2002 YTD Period as
compared to $72.5 million for the June 2001 YTD Period, a net increase of $2.5
million. The increase was attributable to an increase in the average monthly
rental rate to $2,138 for the June 2002 YTD Period as compared to an average
monthly rental rate of $2,049 for June 2001 YTD Period. The increase was offset
by a decline in average occupancy from 84.9% in the June 2001 YTD Period to
84.0% in the June 2002 YTD Period.

Residence Operating Expenses.Residence operating expenses were $51.8
million for the June 2002 YTD Period as compared to $48.9 million for the June
2001 YTD Period, a net increase of $2.9 million. The net increase is a result
of an increase of $2.0 million in payroll costs related to increases in wages
and benefits, an increase of $800,000 in professional and property liability
insurance premiums, an increase of $150,000 in contractual nursing services, an
increase of $150,000 in property taxes, an increase of $150,000 in bad debt
expense and an increase of $100,000 in repair and maintenance expense. These
increases were offset by a decrease of $500,000 in utility costs.

Corporate General and Administrative.Corporate general and
administrative expenses were $9.8 million for the June 2002 YTD Period as
compared to the June 2001 YTD Period at $8.7 million, an increase of 1.1
million. The increase was a result of increases in payroll and related
expenses of $1.6 million, including approximately $800,000 of severance related
costs and an increase of $350,000 in travel expenses, including $250,000 of
expenses related to a national meeting of the Companys administrators held in
May 2002. These increases were offset by a decrease in legal and professional
fees of $500,000, a decrease in communication expenses of $150,000 and a
decrease in consulting fees of $150,000.

Building Rentals.Building rentals were $6.1 million for the June 2002
YTD Period as compared to $8.2 million for the June 2001 YTD Period, a decrease
of $2.1 million. Of the $2.1 million decrease in building rentals, $1.9 million
is a result of the repurchase of 16 previously leased properties in October
2001, $352,000 is the result of rental concessions received from one lessor as
a result of the bankruptcy process and $130,000 is a result of the termination
of one operating lease on December 1, 2001. These decreases in building rentals
were offset by an increase of $134,000 as a result of leasing two previously
mortgaged facilities.

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Depreciation and Amortization.Depreciation and amortization expense was
$3.3 million in the June 2002 YTD Period as compared to $4.8 million in the
June 2001 YTD Period. The decrease is primarily due to a reduction of the
carrying value of property and equipment, which were adjusted to their
estimated fair value as of December 31, 2001 as a result of fresh-start
reporting.

Interest Expense.Interest expense was $7.1 million for the June 2002 YTD
Period compared to $9.3 million for the June 2001 YTD Period, a decrease of
$2.2 million. The decrease is due to the overall reduction of indebtedness
following the Companys Plan of reorganization which became effective on
January 1, 2002. Interest expense also includes $610,000 of non-cash interest
expense which is payable in kind on the New Junior Notes.

Interest Income.Interest income was $106,000 for the June 2002 YTD
Period compared to $288,000 for the June 2001 YTD Period, a decrease of
$182,000. This decrease is the result of decreased balances in cash and cash
equivalents and lower interest rates.

Debt Restructure and Reorganization Costs.Debt restructure and
reorganization costs were $666,000 for the June 2002 YTD Period as compared to
$1.4 million for the June 2001 YTD Period. These are professional fees,
including legal and investment advisory fees, related to the Companys Plan of
reorganization which became effective January 1, 2002. We will continue to
incur costs related to the reorganization until all general and unsecured
claims are settled which is expected to occur within the next six months.

Loss From Discontinued Operations.The Company currently has one
residence listed for sale and has entered into an agreement to sale five
residences. The sale is subject to certain due diligence inquiries and closing
conditions and is expected to close in September 2002. The loss on discontinued
operations for these residences was $394,000 for the June 2002 YTD Period as
compared to $230,000 for the June 2001 YTD Period. Loss for the June 2002 YTD
Period includes operating income of $51,000, net of the $443,000 loss
recognized as a result of reducing the carrying value of the related assets
(included in assets held for sale on the accompanying balance sheet) to their
estimated net realizable value.

Income Taxes.We have provided no benefit for income taxes as we have
recorded a full valuation allowance on our deferred tax assets. Management
believes it is currently more likely than not that the deferred tax assets will
not be realized.

Liquidity and Capital Resources

At June 30, 2002, we had a working capital deficit of $4.2 million and
unrestricted cash and cash equivalents of $5.5 million. Net cash provided by
operating activities was $876,000 during the six months ended June 30, 2002.

Net cash used in investing activities was $4.0 million during the six
months ended June 30, 2002. The primary use was an increase of $2.7 million in
restricted cash related to workers compensation deposits required by our
insurance carrier. Funds will be withdrawn from this account as workers
compensation claims are incurred and paid.

Net cash provided by financing activities was $2.6 million during the six
months ended June 30, 2002. Proceeds of $3.4 million were received on a draw of
our $44.0 million line of credit with G.E. Capital. Principal payments on
long-term debt and a capital lease obligation were $725,000 for the six months
ended June 30, 2002. The outstanding balance on our G.E. Capital line of credit
was $43.7 million at June 30, 2002.

As of June 30, 2002, approximately $26.2 million of our indebtedness was
secured by letters of credit issued by U.S. Bank, which in some cases, have
termination dates prior to the maturity of the underlying debt. As such letters
of credit expire, beginning in November 2003, we will need to obtain
replacement letters of credit, post cash collateral or refinance the underlying
debt. There can be no assurance that we will be able to procure replacement
letters of credit from the same or other lending institutions on terms that are
acceptable to us. In the event that we are unable to obtain a replacement
letter of credit or provide alternate collateral prior to the expiration of any
of these letters of credit, we would be in default on the underlying debt,
which would have a material adverse effect on our business and financial
position.

Our credit agreements with U.S. Bank contain restrictive 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
additional deposits have been required.

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In May 2002, we amended our existing agreement with U.S. Bank,
establishing new covenants, with which we were in compliance as of June 30,
2002. 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. Certain of our leases and loan
agreements contain covenants and cross-default provisions such that a default
on one of those agreements could cause us to be in default on one or more other
agreements, which would have a material adverse effect on the Company.

We have future minimum annual lease payments over the next five years of
$13.1 million, $13.1 million, $13.3 million, $12.8 million and $12.9 million,
respectively. At June 30, 2002, we had $169.0 million of long-term
indebtedness, of which annual principal payments due over the next five years
are $2.6 million, $2.7 million, $2.9 million, $43.7 million and $2.3 million,
respectively.

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.

Based upon our current level of operations, we believe that our current
cash on hand and cash flow from operations will be 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, that currently anticipated cost savings
and operating improvements will be realized on schedule, all 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.

New Accounting Pronouncement

In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement No.144, Accounting for the Impairment or Disposal of Long-Lived
Assets.Statement No.144 addresses significant issues relating to the
implementation of Statement No.121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of,and develops a single
accounting method under which long-lived assets that are to be disposed of by
sale are measured at the lower of book value or fair value less cost to sell.
Additionally, Statement No.144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. We adopted
Statement No.144 effective January 1, 2002. During the three months ended June
30, 2002, we met criteria identified in Statement No. 144, resulting in the
write down of certain assets held for sale to their fair value less costs to
sell. Additionally, in accordance with Statement No. 144, the operating results
of the six residences held for sale are included in loss from discontinued
operations in the accompanying financial statements for the three and six
months ended June 30, 2001 and 2002.

In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections. Statement No. 145 rescinds Statement No. 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Upon
adoption of Statement No., 145, companies will be required to apply the
criteria in APB Opinion No. 30, Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, in determining the
classification of gains and losses resulting from the extinguishment of debt.
Additionally, Statement No. 145 amends Statement No. 13 to require that certain
lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. Statement No. 145 will be effective for fiscal years beginning
after May 15, 2002 with early adoption of the provisions related to the
rescission of Statement No. 4 encouraged.

In July 2002, the FASB issued FASB Statement No. 146 (SFAS 146),
Accounting for Costs Associated with Exit or Disposal Activities,which changes
the way a company will report the expenses related to restructuring. SFAS 146
is required to be adopted for exit or disposal activities initiated after
December 31, 2002.

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Risk Factors

Set forth below are various risks that we believe are material. This
report on Form 10-Q, including the risks discussed below, contain statements
including, without limitation, statements containing the words will,
believes, anticipates, estimates, intends, expects, should, could
and words of similar import, that constitute forward looking statements and are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements may be affected
by risks and uncertainties, including without limitation (i) our ability to
control costs and improve operating margins, (ii) the possibility that we will
experience a decrease in occupancy in our residences, which would adversely
affect residence revenue and operating margins, (iii) our ability to operate
our residences in compliance with evolving regulatory requirements, and (iv)
the degree to which our future operating results and financial condition may be
affected by a reduction in Medicaid reimbursement rates. In light of such risks
and uncertainties, our actual results could differ materially from such
forward-looking statements. Readers are cautioned not to place undue reliance
on forward-looking statements, which speak only as of this date of this Form
10-Q. 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.

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

We are highly leveraged. We had total indebtedness, including short-term
portion, of $169.0 million and shareholders equity of $28.7 million as of June
30, 2002. We obtained some relief through the implementation of our Plan but
will continue to be highly leveraged (see Notes 2 and 9 of the condensed
consolidated financial statements included elsewhere herein). The degree to
which we are leveraged could have important consequences, including making it
difficult to satisfy our debt or lease obligations; increasing our
vulnerability to general adverse economic and industry conditions; limiting
our ability to obtain additional financing; requiring dedication of a
substantial portion of our cash flow from operations to the payment of
principal and interest on our debt and leases, thereby reducing the
availability of such cash flow to fund working capital, capital expenditures or
other general corporate purposes; limiting our flexibility in planning for, or
reacting to, changes in our business or industry; and placing us at a
competitive disadvantage to less leveraged competitors.

In May 2002, we amended our existing agreement with U.S. Bank,
establishing new covenants, with which we were in compliance as of June 30,
2002. 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. We cannot provide assurance that we
will comply in the future with the modified financial covenants included in the
agreement, or with the financial covenants set forth in our other debt
agreements and leases. If we fail to comply with one or more of the U.S. Bank
covenants or any other debt or lease covenants (after giving effect to any
applicable cure period), the lender or lessor may declare us in default of the
underlying obligation and exercise any available remedies, which may include in
the case of debt, declaring the entire amount of the debt immediately due and
payable; foreclosing on any residences or other collateral securing the
obligation; and in the case of a lease, terminating the lease and suing for
damages.

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

If an active trading market does not develop for our securities, holders may
not be able to resell those securities.

Our common stock currently trades on the over-the-counter bulletin board
(OTC.BB) under the symbol ASLC. At this time there can be no assurances
that our securities will ever be listed on any exchange, or that there will be
an active trading market for our common stock.

We are involved in a dispute with our corporate liability insurance carrier.

In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our condensed consolidated financial
statements for the years ended December 31, 1996 and 1997 and the first three
fiscal quarters of 1998. This agreement received final court approval on
November 30, 2000 and we were dismissed from the litigation with prejudice. On
September 28, 2001, we made our final installment of $1.0 million on our
promissory note for the class action litigation settlement. Although we were
dismissed from the litigation with prejudice, a dispute which arose with our
corporate liability insurance carriers remains unresolved. At the time we
settled the class action litigation, the Company and the insurance carriers
agreed to resolve this

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dispute through binding arbitration, and we filed a complaint for a
declaratory judgment that we are not liable to the carriers as claimed. The
carriers counter-claimed to recover an amount capped at $4.0 million.

After filing for bankruptcy on October 1, 2001, we made a motion for
dismissal of our complaint for declaratory relief in the arbitration based upon
having filed for bankruptcy protection. An objection was filed to our motion,
and one of our insurance carriers filed a proof of claim in the amount of $4.0
million in the bankruptcy proceeding. We dispute that claim. We offered (and
the offer currently remains outstanding) to settle the dispute for $75,000 to
be paid out as an Allowed Class 4 Claim in the bankruptcy process. See Note 3
to the condensed consolidated financial statements included elsewhere herein.

We are party to other legal proceedings.

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

Certain of our leases may be terminated as result of increase in concentrated
ownership in our common stock and upon occurrence of other events.

Certain of our leases with LTC Properties, Inc. (LTC) provide LTC with
the option to exercise certain remedies, including the termination of many of
our leases with LTC, upon a change of control under which at least 30%
ownership of our common stock is held by a party or combination of parties
directly or indirectly. LTC has the same option if the stockholders approve a
plan of liquidation or the stockholders approve of a merger or consolidation
that meets certain conditions.

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

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

We are subject to significant government regulation.

The operation of assisted living facilities and the provision of health
care services are subject to state and federal laws, and state and local
licensure, certification and inspection laws that regulate, among other
matters, the number of licensed residences and units per residence; the
provision of services; equipment; staffing, including professional licensing
and criminal background checks; operating policies and procedures; fire
prevention measures; environmental matters; resident characteristics; physical
design and compliance with building and safety codes; confidentiality of
medical information; safe working conditions; family leave; and disposal of
medical waste.

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

In the ordinary course of business, we receive and have received notices of
deficiencies for failure to comply with various regulatory requirements. We
review such notices and, in most cases, will agree with the regulator upon the
steps to be taken to bring the facility into compliance with regulatory
requirements. From time to time, we may dispute the matter and sometimes will
seek a hearing if we

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do not agree with the regulator. In some cases or upon repeat violations, the
regulator may take one or more adverse actions against a facility, such as the
imposition of fines  the Company paid $15,000 and $1,800, respectively, in the
aggregate for the year ended December 31, 2001 and the June 30, 2002 YTD
Period; temporary stop placement of admission of new residents, or imposition
of other conditions to admission of new residents to a facility; termination of
a facilitys Medicaid contract; conversion of a facilitys license to
provisional status; and suspension or revocation of a facilitys license, which
in 2001 included one residence in Washington against which the state has
commenced license revocation procedures. This matter was previously settled in
2002.

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

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

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

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

Although HIPAA was intended ultimately to reduce administrative expenses
and burdens faced within the health care industry, we believe the law could
initially bring about significant and, in some cases, costly changes. HHS has
released two rules to date mandating the use of new standards with respect to
certain health care transactions and health information. The first rule
requires the use of uniform standards for common health care transactions,
including health care claims information, plan eligibility, referral
certification and authorization, claims status, plan enrollment and
disenrollment, payment and remittance advice, plan premium payments and
coordination of benefits.

Second, HHS has released new standards relating to the privacy of
individually identifiable health information. These standards not only require
our operators compliance with rules governing the use and disclosure of
protected health information, but they also require entities to impose those
rules, by contract, on any business associate to whom such information is
disclosed. Rules governing the security of health information have been
proposed but have not yet been issued in final form.

HHS finalized the new transaction standards on August 17, 2000, and
covered entities will be required to comply with them by October 16, 2002.
Congress passed legislation in December 2001 that delays for one year (to
October 16, 2003) the compliance date, but only for entities that submit a
compliance plan to HHS by the original implementation deadline. The privacy
standards were issued on December 28, 2000, and, after certain delays, became
effective April 14, 2001, with a compliance date of April 14, 2003. The Bush
Administration and Congress are taking a careful look at the existing
regulations, but it is uncertain whether there will be additional changes to
the privacy standards or their compliance date. With respect to the security
regulation, once they are issued in final form, affected parties will have
approximately two years to be fully compliant. Sanctions for failing to comply
with HIPAA include criminal penalties and civil sanctions.

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

Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist that also may require us to modify existing residences to
allow disabled persons to access the residences. We believe that their
residences are either substantially in compliance with present requirements or
are exempt from them. However, if required changes cost more than

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anticipated, or must be made sooner than anticipated, we would incur
additional costs. Further legislation may impose additional burdens or
restrictions related to access by disabled persons, and the costs of compliance
could be substantial.

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

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

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

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

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

Many assisted living markets have been overbuilt.

Many assisted living markets have been overbuilt, including certain
markets in which we currently operate. In addition, the barriers to entry into
the assisted living industry are not substantial. The effects of overbuilding
include significantly longer fill up periods for our residences and our
subsidiaries residences; newly opened competitor facilities may attract
residents from some or all of our current facilities; there is pressure to
lower or not increase rates paid by residents in the our residences; there is
increased competition for workers in already tight labor markets; and our
profit margins are lower until vacant units in our residences are filled.

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

Due to market conditions facing one location in Indiana, we closed the
facility, effective March 15, 2002. This facility is presently listed for sale.

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

We compete with other providers of long-term care with respect to
attracting and retaining qualified personnel. A shortage of qualified personnel
may require us to enhance our wage and benefits packages in order to compete.
Some of the states in which we operate impose licensing requirements on
individuals serving as administrators at assisted living residences, and others
may adopt similar requirements. We also depend upon the available labor pool of
lower-wage employees. We cannot guarantee that our labor costs will not
increase, or that, if they do increase, they can be matched by corresponding
increases in revenue.

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

Our business depends significantly on our properties located in Texas,
Indiana, Oregon, Ohio and Washington. As of June 30, 2002, 21.9% of our
residences were located in Texas, 10.9% in Indiana, 9.8% in Oregon, 9.8% in
Ohio and 8.7% in Washington. An economic downturn, or changes in the laws
affecting our business, in these markets could have a material adverse effect
on our operating results.

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

Although revenue at a majority of our residences comes primarily from
private payors, we derive a substantial portion of our revenue from
reimbursements by third-party governmental payors, including state Medicaid
waiver programs. We expect that state Medicaid waiver programs will continue to
constitute a significant source of our revenue in the future, and it is
possible that the proportionate percentage of revenue received by us from
Medicaid waiver programs will increase. There are continuing efforts by
governmental payors and by non-governmental payors, such as commercial
insurance companies and health maintenance organizations, to contain or reduce
the costs of health care by lowering reimbursement rates, increasing case
management review of services and negotiating reduced contract pricing. Also,
there have been, and we expect that there will continue to be, additional
proposals to reduce the federal and some state budget deficits by limiting
Medicaid reimbursement in general. If any of these proposals are adopted at
either the federal or the state level, it could have a material adverse effect
on our business, financial condition, results of operations and prospects. The
state of Washington recently approved legislation which would limit future
increase in rental reimbursements and may actually reduce current reimbursement
rates.Additionally, the state of New Jersey currently has limited additional
beds for eligible Medicaid residences. This may limit our ability to move new
Medicaid residents into our New Jersey facilities or to retain residents who
reach Medicaid eligibility while living in our New Jersey facilities.

The following table sets forth the sources of our revenue for states where
we participate in Medicaid programs. The portion of revenue received from state
Medicaid agencies are labeled as Medicaid State Paid Portion while the
portion of our revenue that a Medicaid-eligible resident must pay out of his or
her own resources is labeled Medicaid Resident Paid Portion.

|           |  |                  |      |                  |  |          |      |         |  |          |      |          |  |  |      |   |  |  |      |   |  |  |      |  
|---------- |  | ---------------- | ---- | ---------------- |  | -------- | ---- | ------- |  | -------- | ---- | -------- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|           |  | Six Months Ended |      | Six Months Ended
|           |  | June 30, 2001    |      | June 30, 2002   
|           |  |                  |      |                 
|           |  | Medicaid         |      | Private          |  | Medicaid |      | Private
|           |  |                  |      |                  |  |          |      |        
|           |  | State            |      | Resident         |  | Resident |      | State   |  | Resident |      | Resident
|           |  | Paid             |      | Paid             |  | Paid     |      | Paid    |  | Paid     |      | Paid    
|           |  | Portion          |      | Portion          |  | Portion  |      | Portion |  | Portion  |      | Portion 
|           |  |                  |      |                  |  |          |      |         |  |          |      |         
|Oregon     |  |                  | 28.7 | %                |  |          | 16.6 | %       |  |          | 54.7 | %        |  |  | 25.5 | % |  |  | 14.8 | % |  |  | 59.7 | %
|Washington |  |                  | 30.0 | %                |  |          | 17.1 | %       |  |          | 52.9 | %        |  |  | 30.6 | % |  |  | 18.5 | % |  |  | 50.8 | %
|Idaho      |  |                  | 15.8 | %                |  |          | 10.7 | %       |  |          | 73.5 | %        |  |  | 14.0 | % |  |  | 11.3 | % |  |  | 74.7 | %
|Arizona    |  |                  | 14.6 | %                |  |          | 12.5 | %       |  |          | 72.9 | %        |  |  | 18.4 | % |  |  | 15.3 | % |  |  | 66.4 | %
|New Jersey |  |                  | 19.5 | %                |  |          | 6.3  | %       |  |          | 74.1 | %        |  |  | 25.5 | % |  |  | 4.6  | % |  |  | 69.9 | %
|Texas      |  |                  | 15.3 | %                |  |          | 7.9  | %       |  |          | 76.8 | %        |  |  | 15.6 | % |  |  | 8.5  | % |  |  | 75.9 | %
|Nebraska   |  |                  | 9.1  | %                |  |          | 5.5  | %       |  |          | 85.4 | %        |  |  | 10.1 | % |  |  | 5.8  | % |  |  | 84.1 | %

In addition, 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 a material adverse effect on our
financial position, results of operations or cash flows, particularly if the
states operating these programs continue to limit, or more aggressively seek
limits on, reimbursement rates.

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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, foreign exchange 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 $69.9 million
outstanding at June 30, 2002 with a weighted average interest rate of 5.6%, of
which $43.7 million has an interest rate floor of 8.0%. Assuming that our
balance of variable rate debt, excluding $43.7 million which has an interest
rate floor of 8.0%, remains constant at $26.2 million, each one-percent
increase in interest rates would result in an annual increase in interest
expense, and a corresponding decrease in cash flows, of $262,000. Conversely,
each one-percent decrease in interest rates would result in an annual decrease
in interest expense, and a corresponding increase in cash flows, of $262,000.
For our $43.7 million of variable rate debt which has a interest rate floor of
8.0%, each one-percent increase in interest rates in excess of 8.0% would
result in an annual increase in interest expense, and a corresponding decrease
in cash flows, of $437,000. Conversely, each one-percent decrease at interest
rates of 9.0% or greater would result in an annual decrease in interest
expense, and a corresponding increase in cash flows, of $437,000.

We are also exposed to market risks from fluctuations in interest rates
and the effects of those fluctuations on market values of our cash equivalents
and short-term investments. These investments generally consist of overnight
investments that are not significantly exposed to interest rate risk, except to
the extent that changes in interest rates will ultimately affect the amount of
interest income earned and cash flow from these investments.

We do not have any derivative financial instruments in place to manage
interest costs, but that does not mean we will not use them as a means to
manage interest rate risk in the future.

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

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PART II  OTHER INFORMATION




Item 1.Legal Proceedings

Insurance Coverage Dispute

In September, 2000, the Company reached an agreement to settle the class
action litigation relating to the restatement of its condensed consolidated
financial statements for the years ended December 31, 1996 and 1997 and the
first three fiscal quarters of 1998. This agreement received final court
approval on November 30, 2000 and the Company was dismissed from the litigation
with prejudice. On September 28, 2001, the Company made its final installment
of $1.0 million on its promissory note for the class action litigation
settlement. Although the Company was dismissed from the litigation with
prejudice, a dispute which arose with its corporate liability insurance
carriers remains unresolved. At the time the Company settled the class action
litigation, the Company and the insurance carriers agreed to resolve this
dispute through binding arbitration, and the Company filed a complaint for a
declaratory judgment that it was not liable to the carriers as claimed. The
carriers counter-claimed to recover an amount capped at $4.0 million.

After filing for bankruptcy on October 1, 2001, the Company made a motion
for dismissal of its complaint for declaratory relief in the arbitration based
upon having filed for bankruptcy protection. An objection was filed to its
motion, and one of its insurance carriers filed a proof of claim in the amount
of $4.0 million in the bankruptcy proceeding. The Company disputes that claim.
The Company offered (and the offer currently remains outstanding) to settle the
dispute for $75,000 to be paid out as a general unsecured claim in the
bankruptcy process. (See Note 2 to the condensed consolidated financial
statements included elsewhere herein).

In addition to the matter referred to in the immediately preceding
paragraphs, the Company is involved in various lawsuits and claims arising in
the normal course of business. In the aggregate, management does not believe
that the ultimate resolution of such other suits and claims would have a
material adverse effect on the Companys financial condition.




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

The Companys annual shareholder meeting was held on May 8, 2002. At this
meeting the shareholders elected the seven current directors and approved the
2002 Incentive Award Plan (Stock Option Plan). The Company has reserved
650,000 shares of common stock for issuance under the Stock Option Plan.




Item 6.Exhibits and Reports on Form 8-K

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

|        |  |                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                       
|Number  |  |                                                                                                                       
|        |  |                                                                                                                       
|12      |  | Ratio of Earnings to Fixed Charges                                                                                    
|99.1    |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|99.2    |  | 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 May 16, 2002 pursuant to Item 5 of Form
8-K announcing the appointment of Matthew G. Patrick as Chief Financial
Officer, Senior Vice President and Treasurer.

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SIGNATURES

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



| | ASSISTED LIVING CONCEPTS, INC.
Registrant
| | -----------------------------------------



| | By: |        | /s/ MATTHEW PATRICK                                         
| | --- | ------ | ------------------------------------------------------------
| |     |       
| |     | Name:  | Matthew Patrick                                             
| |     | Title: | Senior Vice President,
Chief Financial Officer and Treasurer



|August 8, 2002 | 
|-------------- | 



| | By: |        | /s/ M. CATHERINE MALONEY                   
| | --- | ------ | -------------------------------------------
| |     |       
| |     | Name:  | M. Catherine Maloney                       
| |     | Title: | Vice President and
Chief Accounting Officer



|August 8, 2002 | 
|-------------- | 

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EXHIBIT INDEX

|        |  |                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                       
|Number  |  |                                                                                                                       
|        |  |                                                                                                                       
|12      |  | Ratio of Earnings to Fixed Charges                                                                                    
|99.1    |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|99.2    |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

34