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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission file number: 001-13498
 Assisted Living Concepts, Inc.
 (Exact name of registrant as specified in its charter)
 Nevada
    
    93-1148702(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)111 West Michigan StreetMilwaukee, Wisconsin
    
    53203(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (414) 908-8800
 NONE  (Former name, former address and former fiscal year, if changed since last report)
 o þ
  o o þ
 o þ




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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.
 INDEX
 PageNumberPart I. Financial InformationItem 1. Financial StatementsCombined Balance Sheets  as of September 30, 2006
(unaudited) and December 31, 2005
    
    
    2Combined Statements of Income  for the Three and
Nine Month periods Ended September 30, 2006 and 2005
(unaudited)
    
    
    3Combined Statement of Parents Investment for the
Nine Months Ended September 30, 2006
(unaudited)
    
    
    4Combined Statements of Cash Flows  For the Nine
Month Periods Ended September 30, 2006 and 2005
(unaudited)
    
    
    5Notes to Combined Financial
Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    40Item 4. Controls and
Procedures
    
    
    41Part II. Other InformationItem 1. Legal
Proceedings
    
    
    42Item 1A. Risk
Factors
    
    
    42Item 5.
Other Information
    
    
    42Item 6.
Exhibits
    
    
    43Signatures
    
    
    44Section 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
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Item 1. FINANCIAL STATEMENTS
 ASSISTED LIVING CONCEPTS, INC.
 
 COMBINED BALANCE SHEETS
 (in thousands)
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    11,454
    
    
    $
    6,439Accounts receivable, less
allowances of $757 and $872
respectively
    
    
    5,010
    
    
    
    4,351Supplies, prepaid expenses and
other current assets
    
    
    6,255
    
    
    
    4,904Deferred state income
taxes
    
    
    525
    
    
    
    392Due from shareholder and affiliatesDeferred federal income
taxes
    
    
    1,005
    
    
    
    350Other
    
    
    2,422
    
    
    
    76Total current
assets
    
    
    26,671
    
    
    
    16,512Property and equipment,
net
    
    
    372,831
    
    
    
    378,362Goodwill and other intangible assets,
net
    
    
    18,364
    
    
    
    19,953Other assets
    
    
    7,918
    
    
    
    5,870Total
Assets
    
    $
    425,784
    
    
    $
    420,697LIABILITIES AND PARENTS INVESTMENTCurrent Liabilities:Accounts
payable
    
    $
    4,346
    
    
    $
    5,027Accrued
liabilities
    
    
    22,243
    
    
    
    20,267Accrued state income
taxes
    
    
    889
    
    
    
    570Current maturities of long-term
debt
    
    
    3,069
    
    
    
    2,925Due to shareholder and affiliatesAccrued federal income
taxes
    
    
    6,227
    
    
    
    Current portion of self-insured
liabilities
    
    
    300
    
    
    
    300Total current
liabilities
    
    
    37,074
    
    
    
    29,089Accrual for self-insured
liabilities
    
    
    1,200
    
    
    
    1,027Long-term debt
    
    
    126,376
    
    
    
    128,601Deferred state income
taxes
    
    
    793
    
    
    
    814Other long-term
liabilities
    
    
    8,247
    
    
    
    7,181Due to shareholder and affiliatesDeferred federal income
taxes
    
    
    1,974
    
    
    
    3,324Interest-bearing
advances
    
    
    22,018
    
    
    
    47,218Total
Liabilities
    
    
    197,682
    
    
    
    217,254Parents
investment
    
    
    228,102
    
    
    
    203,443Total Liabilities and
Parents
Investment
    
    $
    425,784
    
    
    $
    420,697
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ASSISTED LIVING CONCEPTS, INC.
 
 COMBINED STATEMENTS OF
INCOME 

(unaudited)
 (in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUES
    
    $
    58,820
    
    
    $
    56,011
    
    
    $
    172,594
    
    
    $
    149,165EXPENSES:Operating
    
    
    39,599
    
    
    
    37,404
    
    
    
    115,355
    
    
    
    99,711General and
administrative
    
    
    2,915
    
    
    
    1,709
    
    
    
    7,856
    
    
    
    5,501Lease
costs
    
    
    3,564
    
    
    
    3,535
    
    
    
    10,589
    
    
    
    9,388Depreciation and
amortization
    
    
    4,235
    
    
    
    4,021
    
    
    
    12,527
    
    
    
    10,620Interest
expense,
net
    
    
    2,294
    
    
    
    3,353
    
    
    
    7,708
    
    
    
    9,480Transaction
costs
    
    
    1,435
    
    
    
    
    
    
    
    3,735
    
    
    
    Loss on
impairment of
long-lived
assets
    
    
    3,080
    
    
    
    
    
    
    
    3,080
    
    
    
    Total
Expenses
    
    
    57,122
    
    
    
    50,022
    
    
    
    160,850
    
    
    
    134,700INCOME FROM
CONTINUING
OPERATIONS BEFORE
INCOME
TAXES
    
    
    1,698
    
    
    
    5,989
    
    
    
    11,744
    
    
    
    14,465Income tax
expense
    
    
    1,177
    
    
    
    2,285
    
    
    
    5,808
    
    
    
    5,529NET INCOME
FROM CONTINUING
OPERATIONS
    
    
    521
    
    
    
    3,704
    
    
    
    5,936
    
    
    
    8,936Loss from
discontinued
operations before
income taxes
    
    
    (317
    )
    
    
    (165
    )
    
    
    (2,417
    )
    
    
    (447
    )Income tax benefit
on discontinued
operations
    
    
    (92
    )
    
    
    (64
    )
    
    
    (919
    )
    
    
    (171
    )NET LOSS FROM
DISCONTINUED
OPERATIONS
    
    
    (225
    )
    
    
    (101
    )
    
    
    (1,498
    )
    
    
    (276
    )NET
INCOME
    
    $
    296
    
    
    $
    3,603
    
    
    $
    4,438
    
    
    $
    8,660
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ASSISTED LIVING CONCEPTS, INC.
 
 COMBINED STATEMENT OF
PARENTS INVESTMENT 

(unaudited)
 (in thousands)
 BALANCE at DECEMBER 31, 2005
    
    $
    203,443Net income
    
    
    4,438Net cash transferred from parent
    
    
    16,127Net due from Parent for capital
contribution
    
    
    3,726Other intercompany
transactions
    
    
    368BALANCE at September 30,
2006
    
    $
    228,102
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ASSISTED LIVING CONCEPTS, INC.
 
 COMBINED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005OPERATING ACTIVITIES:Net income
    
    $
    4,438
    
    
    $
    8,660Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    12,587
    
    
    
    10,769Amortization of purchase accounting adjustments for:Leases and debt
    
    
    (636
    )
    
    
    (333
    )Below market resident leases
    
    
    (1,067
    )
    
    
    (1,836
    )Provision for bad debt
    
    
    64
    
    
    
    417Provision for self-insured liabilities
    
    
    400
    
    
    
    652Payments of self-insured liabilities
    
    
    (227
    )
    
    
    (553
    )Loss on impairment of long-lived assets
    
    
    5,018
    
    
    
    Deferred income taxes
    
    
    (2,159
    )
    
    
    3,135Changes in assets and liabilities:Accounts receivable
    
    
    (723
    )
    
    
    (1,444
    )Supplies, prepaid expenses and other current assets
    
    
    (1,351
    )
    
    
    1,826Accounts payable
    
    
    (682
    )
    
    
    43Accrued liabilities
    
    
    3,791
    
    
    
    4,940Income taxes payable/receivable
    
    
    (214
    )
    
    
    (1,548
    )Current due to shareholder and affiliates
    
    
    7,889
    
    
    
    3,933Cash provided by operating activities
    
    
    27,128
    
    
    
    28,661INVESTING ACTIVITIES:Payment for acquisition of Assisted Living Concepts, Inc.
    
    
    
    
    
    
    (145,848
    )Cash
balances in Historic ALC as of acquisition date
    
    
    
    
    
    
    6,548Payments for new construction projects
    
    
    (1,607
    )
    
    
    (12,394
    )Payments for purchases of property and equipment
    
    
    (10,476
    )
    
    
    (4,501
    )Changes in other non-current assets
    
    
    (356
    )
    
    
    (2,449
    )Cash used in investing activities
    
    
    (12,439
    )
    
    
    (158,644
    )FINANCING ACTIVITIES:Capital contributions (distributions) from (to) parent
    
    
    (1,173
    )
    
    
    7,021Capital contributions from Extendicare to ALC
    
    
    17,300
    
    
    
    80,000Proceeds from debt to finance Historic ALC acquisition
    
    
    
    
    
    
    60,000Interest bearing advances from parent to payoff debt
    
    
    
    
    
    
    34,016Repayment of interest bearing advances to parent
    
    
    (25,200
    )
    
    
    Payments of long-term debt
    
    
    (1,768
    )
    
    
    (41,088
    )Other long-term liabilities
    
    
    1,167
    
    
    
    902Cash (used in) provided by financing
activities
    
    
    (9,674
    )
    
    
    140,851Increase in cash and cash equivalents
    
    
    5,015
    
    
    
    10,868Cash and cash equivalents, beginning of period
    
    
    6,439
    
    
    
    119Cash and cash equivalents, end of period
    
    $
    11,454
    
    
    $
    10,987
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ASSISTED LIVING CONCEPTS, INC.
COMBINED STATEMENTS OF CASH FLOWS  (Continued)
(unaudited)
(in thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005Supplemental schedule of cash flow information:Cash paid during the period for:Interest
    
    $
    8,134
    
    
    $
    9,332Income tax payments, net of refunds
    
    $
    486
    
    
    $
    4,860Supplemental schedule of non-cash investing and financing activities:Extendicare acquired all of the capital stock of Assisted Living
Concepts, Inc. in connection with the acquisition, liabilities
were assumed as follows:Fair value of assets acquired
    
    $
    
    
    
    $
    315,200Cash paid
    
    
    
    
    
    
    (144,199
    )Liabilities assumed
    
    $
    
    
    
    $
    171,001Capital lease obligations incurred to purchase properties
    
    $
    
    
    
    $
    12,848
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ASSISTED LIVING CONCEPTS, INC.
 
 NOTES TO COMBINED FINANCIAL STATEMENTS
 September 30, 2006
 1. BASIS OF PRESENTATION
      2. ALC SEPARATION TRANSACTION
 (a) Strategic Initiatives
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
 (b) ALC Separation Transaction
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
 (c) Transactions and Agreements Completed Prior to Separation Transaction
  Separation Agreement
   Tax Allocation Agreement
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
 Transitional Services
  Transfer of EHSI Assisted Living Operations and Properties to ALC
   Transfer of Cash, Share Investments and Notes Prior to ALC Separation
  (d) Transitional Service Agreements with Extendicare
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
 (e) Refinancing of EHSI Notes
  3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 (a) Principles of Presentation
  (b) Cash and Cash Equivalents
  (c) Accounts Receivable
    (d) Property and Equipment
  Buildings
    
    30 to 40 yearsBuilding improvements
    
    5 to 20 yearsBuilding expenditures
pertaining to
conditional asset
retirement obligations
    
    The shorter of the useful life of the asset or
35 years
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
 Furniture and equipment
    
    3 to 10 yearsLeasehold improvements
    
    The shorter of the useful life of the asset or
a term that includes required lease periods and
renewals that are deemed to be reasonably
assured at the date the leasehold improvements
are purchased
   (e) Leases
   (f) Goodwill and Other Intangible Assets
   (g) Long-lived Assets
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
  (h) Parents Investment
    (i) Revenue Recognition
  (j) Interest
  (k) Asset Retirement Obligations
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
    (l) Income Taxes
  (m) Accounting for Acquisitions
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
   (n) New Accounting Pronouncements
  (o) Reclassifications
  4. ACQUISITION OF ASSISTED LIVING CONCEPTS, INC.
   Nine Months EndedSeptember 30,2005(In thousands)Total revenues
    
    $
    164,267Income from continuing operations before income
taxes
    
    $
    14,194Net income
    
    $
    8,491
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
 5. LONG-TERM DEBT
  Interest
    
    
    September 30,
    
    
    December 31,Rate(1)
    
    
    2006
    
    
    2005(Unaudited)6.24% Red Mortgage Capital Note due
2014
    
    
    6.51
    %
    
    $
    36,027
    
    
    $
    36,533DMG Mortgage notes payable, interest rates ranging from
7.58% to 8.65%, due 2008
    
    
    6.01
    %
    
    
    26,403
    
    
    
    27,263Capital lease obligations, interest rates ranging from
2.84% to 13.54%, maturing through 2009
    
    
    7.32
    %
    
    
    11,931
    
    
    
    12,222Oregon Trust Deed Notes, interest rates ranging from
0.25% to 10.90%, maturing from 2020 through 2026
    
    
    6.72
    %
    
    
    9,308
    
    
    
    9,483HUD Insured Mortgages, interest rates ranging from
7.40% to 7.55%, due 2036
    
    
    6.89
    %
    
    
    7,617
    
    
    
    7,673Term Loan due 2010 under EHSI Credit Facility,
at variable interest rates
    
    
    6.02
    %
    
    
    38,159
    
    
    
    38,352Long-term debt before current
maturities
    
    
    
    
    
    
    129,445
    
    
    
    131,526Less current maturities
    
    
    
    
    
    
    3,069
    
    
    
    2,925Total long-term debt
    
    
    
    
    
    $
    126,376
    
    
    $
    128,601
 
 (1)
    
    Effective interest rate as of September 30, 2006. 6.24% Red Mortgage Capital Note due 2014
  DMG Mortgage Notes Payable due 2008
  Capital Lease Obligations
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
 Oregon Trust Deed Notes
   HUD Insured Mortgages due 2036
  Term Loan due 2010 under EHSI Credit Facility
   EHSI Long-term Debt
  EHSI 6% Advance to ALC
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Interest
expense
    
    $
    2,484
    
    
    $
    3,457
    
    
    $
    8,131
    
    
    $
    9,647Interest
income
    
    
    (190
    )
    
    
    (104
    )
    
    
    (423
    )
    
    
    (167
    )Interest
expense,
net
    
    $
    2,294
    
    
    $
    3,353
    
    
    $
    7,708
    
    
    $
    9,480
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
  6. BALANCES DUE TO AND TRANSACTIONS WITH SHAREHOLDER AND AFFILIATES
 Balances Due to Shareholder and Affiliates
  EHSI 6% Advance to ALC
  Non-interest Bearing Balances Relating to Federal Income Taxes
  September 30,
    
    December 31,2006
    
    2005(In thousands)receivable (payable)Current assets:Deferred federal
income
taxes
    
    $
    1,005
    
    
    $
    350Current liabilities:Federal income
taxes
    
    $
    (6,227
    )
    
    $
    Long-term liabilities:Deferred federal
income
taxes
    
    $
    (1,974
    )
    
    $
    (3,324
    )
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
 Transactions with Shareholders and Affiliates
  Insurance
   Computer, Accounting and Administrative Services
  7. COMMITMENTS AND CONTINGENCIES
 Revenue Bonds
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
  Capital Expenditures
  Insurance and Self-insured Liabilities
  Litigation
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
 8. DISCONTINUED OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    
    
    
    $
    730
    
    
    $
    540
    
    
    $
    2,221Expenses:Operating
    
    
    102
    
    
    
    680
    
    
    
    833
    
    
    
    2,154Lease costs
    
    
    1
    
    
    
    100
    
    
    
    119
    
    
    
    298Depreciation and amortization
    
    
    
    
    
    
    48
    
    
    
    60
    
    
    
    148Interest expense (income)
    
    
    7
    
    
    
    67
    
    
    
    7
    
    
    
    68Loss on impairment of long-lived assets
    
    
    207
    
    
    
    
    
    
    
    1,938
    
    
    
    317
    
    
    
    895
    
    
    
    2,957
    
    
    
    2,668Loss from discontinued operations before income taxes
    
    
    (317
    )
    
    
    (165
    )
    
    
    (2,417
    )
    
    
    (447
    )Income tax benefit
    
    
    (92
    )
    
    
    (64
    )
    
    
    (919
    )
    
    
    (171
    )Net loss from discontinued operations
    
    $
    (225
    )
    
    $
    (101
    )
    
    $
    (1,498
    )
    
    $
    (276
    )
  (a) Closure and Disposition of Assisted Living Residence in Texas
  (b) Closure of Assisted Living Residence in Washington
  (c) Closure of Assisted Living Residence in Oregon
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS  Continued
September 30, 2006
 9. SUBSEQUENT EVENTS
 (a) ALC Separation Transaction
  (b) Refinancing of EHSI Notes (unaudited)
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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements. Forward-looking statements are subject to risks, uncertainties and
assumptions which could cause actual results to differ materially from those projected, including
those described in Item 5  Other Information  Forward-Looking Statements and Cautionary Factors
in Part II of this report.
 The following discussion should be read in conjunction with our Combined Financial Statements
and the related notes to the Combined Financial Statements in Item 1 of this report.
 Executive Overview
     
    
    increasing the overall size of our portfolio through both acquisitions and building additional
capacity to existing residences;
    
    increasing our occupancy rate and the percentage of revenue derived from private pay sources; and
    
    capitalizing on the efficiencies that larger organizations can achieve in the highly fragmented
senior living residence industry.
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
    
    Basis of Presentation of Historical Combined Financial
Statements.This section provides an overview of our
historical assisted living operations and the basis of
presentation for our historical combined financial
statements.
    
    Business Overview.This section provides a general
financial description of our business. More specifically,
this section describes the sources and composition of our
revenues and operating expenses. In addition, the section
outlines the key performance indicators that we use to
monitor and manage our business and anticipate future
trends.
    
    Combined Results of Operations.This section provides an
analysis of our results of operations for the three and
nine months ended September 30, 2006 compared to the three
and nine months ended September 30, 2005.
    
    Liquidity and Capital Resources.This section provides a
discussion of our liquidity and capital resources as of
September 30, 2006, and our future cash needs.
    
    Critical Accounting Policies.This section discusses
accounting policies important to an analysis of our
combined financial statements and an understanding of our
discussion of our combined results of operation. Our
critical accounting policies are those that require
significant judgment and estimates on the part of
management in their application.
 Basis of Presentation of Historical Combined Financial Statements
    
    
    On January 31, 2005, EHSI acquired all of the outstanding
capital stock of Historic ALC, which had a portfolio of 177
assisted living residences (6,838 units) in 14 states at
the time, 122 of which were owned and 55 of which were
leased.
    
    During 2005, EHSI completed construction projects that
resulted in increased capacity at five assisted living
residences (96 units), opened a newly constructed assisted
living residence in Wisconsin (60 units) and closed one
assisted living residence in Washington (12 units). In
addition, EHSI completed construction on two new assisted
living residences (90 units) in Ohio and Indiana that were
opened and operated by ALC. As a result, as of December 31,
2005, EHSI operated 32 residences and ALC operated 179
residences, for a combined operation of 211 residences
(8,673 units) in 17 states.
 - 24 -




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##### Table of Contents




    
    Between January 1, 2006 and March 31, 2006, EHSI closed an
assisted living residence (60 units) in Texas and commenced
actions to dispose of the property. It also closed an
assisted living residence in Oregon (45 units) and
discontinued operations at an assisted living residence (63
units) in Washington for which the underlying lease had
expired. EHSI also completed construction projects that
increased capacity (37 units) at two assisted living
residences. As a result, as of March 31, 2006, EHSI
operated 29 residences and ALC operated 179 residences, for
a combined operation of 208 residences (8,530 units) in 17
states.
    
    Since March 31, 2006, we have completed the transfer of all
residences from EHSI to ALC, including those that required
local planning commission approval to subdivide the
underlying properties between the assisted living
residences and skilled nursing facilities that make up
those properties. The aggregate purchase price for the
residences that have been transferred was approximately
$68.7 million (exclusive of amounts previously paid in
respect of the operations and personal property related to
EHSIs assisted living residences).
     Business Overview
 Revenues
  - 25 -




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##### Table of Contents



Percentage of Total Assisted Living Revenues
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Private
    
    
    78.9
    %
    
    
    77.9
    %
    
    
    79.0
    %
    
    
    78.4
    %Medicaid
    
    
    21.1
    
    
    
    22.1
    
    
    
    21.0
    
    
    
    21.6Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Operating Expenses
  Operating Margins
  General and Administrative Costs
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##### Table of Contents




    
    board of director fees;
    
    Sarbanes-Oxley compliance;
    
    corporate secretary;
    
    stock registration and listing fees;
    
    annual audit fees;
    
    other general and administrative costs anticipated for reporting and
compliance;
    
    quarterly and annual filings;
    
    stock transfer fees and other public relations; and
    
    directors and officers liability insurance.
    Key Performance Indicators
  Census
  Average Daily Census
  Occupancy Percentage or Occupancy Rate
  Private Pay Mix
  - 27 -




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##### Table of Contents



Average Revenue Rate by Payor Source
  EBITDA and EBITDAR
    Review of Key Performance Indicators
   ADC
 All Continuing Residences
  - 28 -




---



##### Table of Contents



Average Daily Census
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    % Total
    
    2005
    
    % Total
    
    2006
    
    % Total
    
    2005
    
    % TotalPrivate Pay
    
    
    5,167
    
    
    
    71.5
    %
    
    
    5,178
    
    
    
    70.4
    %
    
    
    5,122
    
    
    
    71.2
    %
    
    
    5,221
    
    
    
    71.0
    %Medicaid
    
    
    2,059
    
    
    
    28.5
    
    
    
    2,173
    
    
    
    29.6
    
    
    
    2,072
    
    
    
    28.8
    
    
    
    2,135
    
    
    
    29.0Total
    
    
    7,226
    
    
    
    100.0
    %
    
    
    7,351
    
    
    
    100.0
    %
    
    
    7,194
    
    
    
    100.0
    %
    
    
    7,356
    
    
    
    100.0
    %
  Same Facility Basis
  Average Daily Census
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    % Total
    
    2005
    
    % Total
    
    2006
    
    % Total
    
    2005
    
    % TotalPrivate Pay
    
    
    5,084
    
    
    
    71.2
    %
    
    
    5,172
    
    
    
    70.4
    %
    
    
    5,056
    
    
    
    70.9
    %
    
    
    5,219
    
    
    
    71.0
    %Medicaid
    
    
    2,059
    
    
    
    28.8
    
    
    
    2,173
    
    
    
    29.6
    
    
    
    2,072
    
    
    
    29.1
    
    
    
    2,135
    
    
    
    29.0Total
    
    
    7,143
    
    
    
    100.0
    %
    
    
    7,345
    
    
    
    100.0
    %
    
    
    7,128
    
    
    
    100.0
    %
    
    
    7,354
    
    
    
    100.0
    %
   Occupancy Percentage
  - 29 -




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##### Table of Contents



All Continuing Residences
  Occupancy Percentage
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Mature
    
    
    85.7
    %
    
    
    88.3
    %
    
    
    85.6
    %
    
    
    88.6
    %Developmental
    
    
    69.9
    
    
    
    61.2
    
    
    
    64.8
    
    
    
    70.7Total Residences
    
    
    84.8
    %
    
    
    87.2
    %
    
    
    84.5
    %
    
    
    87.9
    %
   Same Facility Basis
  Occupancy Percentage
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Mature
    
    
    85.7
    %
    
    
    88.3
    %
    
    
    85.6
    %
    
    
    88.6
    %Developmental
    
    
    76.9
    
    
    
    76.9
    
    
    
    75.4
    
    
    
    80.7Total Residences
    
    
    85.3
    %
    
    
    87.9
    %
    
    
    85.2
    %
    
    
    88.3
    %
  - 30 -




---



##### Table of Contents



Average Revenue Rate by Payor Source
 All Continuing Residences
  Average Daily Revenue
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    % Change
    
    2006
    
    2005
    
    % ChangePrivate Pay
    
    
    97.01
    
    
    
    90.20
    
    
    
    7.6
    %
    
    
    96.65
    
    
    
    88.65
    
    
    
    9.0
    %Medicaid
    
    
    65.37
    
    
    
    61.88
    
    
    
    5.6
    
    
    
    64.14
    
    
    
    61.99
    
    
    
    3.5Total
    
    
    88.00
    
    
    
    81.83
    
    
    
    7.5
    %
    
    
    87.29
    
    
    
    81.02
    
    
    
    7.7
    %
  Number of Residences Under Operation
  As of
    
    As ofSeptember 30,
    
    December 31,2006
    
    2005Owned (Note 1)
    
    
    151
    
    
    
    155Under capital lease
    
    
    5
    
    
    
    5Under operating leases
    
    
    50
    
    
    
    51Total under operation
    
    
    206
    
    
    
    211Percent of residences:Owned
    
    
    73.3
    %
    
    
    73.4
    %Under capital leases
    
    
    2.4
    %
    
    
    2.4
    %Under operating leases
    
    
    24.3
    %
    
    
    24.2
    %100.0
    %
    
    
    100.0
    %
 
 (1)
    
    Includes the 29 assisted living properties that EHSI owned as of
March 31, 2006. All of the 29 assisted living residences have
been transferred from EHSI to ALC since March 31, 2006. - 31 -




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##### Table of Contents



EBITDA and EBITDAR
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    296
    
    
    $
    3,603
    
    
    $
    4,438
    
    
    $
    8,660Loss from discontinued operations, net of
tax benefit
    
    
    225
    
    
    
    101
    
    
    
    1,498
    
    
    
    276Provision for income taxes
    
    
    1,177
    
    
    
    2,285
    
    
    
    5,808
    
    
    
    5,529Income from continuing operations
before income taxes
    
    
    1,698
    
    
    
    5,989
    
    
    
    11,744
    
    
    
    14,465Add:Depreciation and amortization
    
    
    4,235
    
    
    
    4,021
    
    
    
    12,527
    
    
    
    10,620Interest expense, net
    
    
    2,294
    
    
    
    3,353
    
    
    
    7,708
    
    
    
    9,480Transaction costs
    
    
    1,435
    
    
    
    
    
    
    
    3,735
    
    
    
    Loss on impairment of long-lived assets
    
    
    3,080
    
    
    
    
    
    
    
    3,080
    
    
    
    EBITDA
    
    
    12,742
    
    
    
    13,363
    
    
    
    38,794
    
    
    
    34,565Add: Lease expense
    
    
    3,564
    
    
    
    3,535
    
    
    
    10,589
    
    
    
    9,388EBITDAR
    
    $
    16,306
    
    
    $
    16,898
    
    
    $
    49,383
    
    
    $
    43,953
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    58,820
    
    
    $
    56,011
    
    
    $
    172,594
    
    
    $
    149,165EBITDA
    
    $
    12,742
    
    
    $
    13,363
    
    
    $
    38,794
    
    
    $
    34,565EBITDAR
    
    $
    16,306
    
    
    $
    16,898
    
    
    $
    49,383
    
    
    $
    43,953EBITDA as percent of total revenue
    
    
    21.7
    %
    
    
    23.9
    %
    
    
    22.5
    %
    
    
    23.2
    %EBITDAR as percent of total revenue
    
    
    27.7
    %
    
    
    30.2
    %
    
    
    28.6
    %
    
    
    29.5
    %
   - 32 -




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##### Table of Contents



Combined Results from Operations
 Three Months Ended September 30, 2006 Compared with the Three Months Ended
September 30, 2005
  Three Months EndedSeptember 30,2006
    
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %Operating costs
    
    
    67.3
    
    
    
    66.8General and administrative costs
    
    
    5.0
    
    
    
    3.0Lease, depreciation and amortization
    
    
    13.3
    
    
    
    13.5Interest expense, net
    
    
    3.9
    
    
    
    6.0Transaction costs
    
    
    2.4
    
    
    
    Loss on impairment of long-lived assets
    
    
    5.2
    
    
    
    Income from continuing operations
    
    
    2.9
    
    
    
    10.7Income tax expense
    
    
    2.0
    
    
    
    4.1Net income from continuing operations after income taxes
    
    
    0.9
    
    
    
    6.6Loss from discontinued operations before income taxes
    
    
    (0.5
    )
    
    
    (0.3
    )Income tax benefit on discontinued operations
    
    
    0.1
    
    
    
    0.1Net loss from discontinued operations
    
    
    (0.4
    )
    
    
    (0.2
    )Net income
    
    
    0.5
    %
    
    
    6.4
    %
 Revenues
  Operating Costs
  General and Administrative Costs
  Lease Costs, Depreciation and Amortization
  Interest Expense, Net
  - 33 -




---



##### Table of Contents



Transaction Costs
  Impairment of Long-Lived Asset
  Income from Continuing Operations before Income Taxes
  Income Taxes
  Net Income from Continuing Operations
  Loss from Discontinued Operations
  Net Income
  - 34 -




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##### Table of Contents



Nine Months Ended September 30, 2006 Compared with the Nine Months Ended September 30, 2005
  Nine Months EndedSeptember 30,2006
    
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %Operating costs
    
    
    66.8
    
    
    
    66.8General and administrative costs
    
    
    4.5
    
    
    
    3.7Lease, depreciation and amortization
    
    
    13.4
    
    
    
    13.4Interest expense, net
    
    
    4.5
    
    
    
    6.4Transaction costs
    
    
    2.2
    
    
    
    Loss on impairment of long-lived assets
    
    
    1.8
    
    
    
    Income from continuing operations
    
    
    6.8
    
    
    
    9.7Income tax expense
    
    
    3.4
    
    
    
    3.7Net income from continuing operations after income taxes
    
    
    3.4
    
    
    
    6.0Loss from discontinued operations before income taxes
    
    
    (1.4
    )
    
    
    (0.3
    )Income tax benefit on discontinued operations
    
    
    0.6
    
    
    
    0.1Net loss from discontinued operations
    
    
    (0.8
    )
    
    
    (0.2
    )Net income
    
    
    2.6
    %
    
    
    5.8
    %
 Revenues
  Operating Costs
  General and Administrative Costs
  Lease Costs, Depreciation and Amortization
  - 35 -




---



##### Table of Contents



Interest Expense, Net
  Transaction Costs
  Impairment of Long-Lived Asset
  Income from Continuing Operations before Income Taxes
  Income Taxes
  Net Income from Continuing Operations
  Loss from Discontinued Operations
  Net Income
  - 36 -




---



##### Table of Contents



Liquidity and Capital Resources
 Sources and Uses of Cash
  Nine Months EndedSeptember 30,2006
    
    2005(in thousands)Cash provided by operating activities
    
    $
    27,128
    
    
    $
    28,661Cash used in investing activities
    
    
    (12,439
    )
    
    
    (158,644
    )Cash (used in) provided by financing activities
    
    
    (9,674
    )
    
    
    140,851Increase in cash and cash equivalents
    
    
    5,015
    
    
    
    10,868
        - 37 -




---



##### Table of Contents



Principal Repayment Schedule
  Letters of Credit
  Off Balance Sheet Arrangements
  Cash Management
  Future Liquidity and Capital Resources
  Capital Commitments
  Accrual for Self-Insured Liabilities
  $100 Million Credit Facility
  - 38 -




---



##### Table of Contents



Contractual Obligations
  Critical Accounting Policies
  - 39 -




---



##### Table of Contents



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Qualitative Disclosures
   Quantitative Disclosures
  - 40 -




---



##### Table of Contents



Item 4. CONTROLS AND PROCEDURES
      - 41 -




---



##### Table of Contents



Part 2. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS.
  
 Item 1A. RISK FACTORS.
  Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  Item 3. DEFAULTS UPON SENIOR SECURITIES.
  Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 Item 5. OTHER INFORMATION.
  Forward-Looking Statements and Cautionary Factors
     - 42 -




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##### Table of Contents



Item 6. EXHIBITS.
 ExhibitNumber
    
    Description2.1
    
    Arrangement Agreement (incorporated by reference to Exhibit 2.1 to
current report of Assisted Living Concepts, Inc. on Form 8-K dated
November 10, 2006, File No. 001-13498)2.2
    
    Separation Agreement (incorporated by reference to Exhibit 2.2 to
current report of Assisted Living Concepts, Inc. on Form 8-K dated
November 10, 2006, File No. 001-13498)3.1
    
    Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to current report of Assisted Living
Concepts, Inc. on Form 8-K dated November 10, 2006, File No.
001-13498)3.2
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 to current report of Assisted Living Concepts, Inc. on Form
8-K dated November 10, 2006, File No. 001-13498)10.1
    
    Separation Agreement (incorporated by reference to Exhibit
10.1 to current report of Assisted Living Concepts, Inc. on Form
8-K dated November 10, 2006, File No. 001-13498)10.2
    
    Tax Allocation Agreement (incorporated by reference to Exhibit
10.2 to current report of Assisted Living Concepts, Inc. on Form
8-K dated November 10, 2006, File No. 001-13498)10.3
    
    Agreement for Reimbursement Services (incorporated by reference to
Exhibit 10.3 to current report of Assisted Living Concepts, Inc.
on Form 8-K dated November 10, 2006, File No. 001-13498)10.4
    
    2006 Omnibus Incentive Compensation Plan (incorporated by
reference to Exhibit 10.4 to current report of Assisted Living
Concepts, Inc. on Form 8-K dated November 10, 2006, File No.
001-13498)10.5
    
    Employment Agreement  John Buono (incorporated by reference to
Exhibit 10.5 to current report of Assisted Living Concepts, Inc.
on Form 8-K dated November 10, 2006, File No. 001-13498)10.6
    
    Employment Agreement  Eric Fonstad (incorporated by reference to
Exhibit 10.6 to current report of Assisted Living Concepts, Inc.
on Form 8-K dated November 10, 2006, File No. 001-13498)10.7
    
    Credit Agreement dated as of November 10, 2006 (incorporated by
reference to Exhibit 10.7 to current report of Assisted Living
Concepts, Inc. on Form 8-K dated November 10, 2006, File No.
001-13498)31.1
    
    Certification of Chief Executive Officer pursuant to Exchange Act
Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Exchange Act
Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 - 43 -




---



##### Table of Contents



SIGNATURE
  ASSISTED LIVING CONCEPTS, INC.By:
    
    /s/ John BuonoJohn BuonoSenior Vice President and Chief Financial Officer(Principal Financial Officer and Duly Authorized Officer)By:
    
    /s/ Laurie A. BeboLaurie A. BeboChief Executive Officer(Principal Executive Officer and Duly Authorized Officer)
  - 44 -