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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q  [X]
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934  For the quarterly period ended September 30, 2004 or  [  ]
    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 1-13498 Assisted Living Concepts, Inc. (Exact name of registrant as specified in its charter)
 Nevada
    
    93-1148702(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 1349 Empire Central, Suite 900
Dallas, TX 75247(Address of principal executive offices) (214) 424-4000(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.  The
registrant had 6,491,164 shares of common stock, $.01 par value,
outstanding at November 5, 2004.




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ASSISTED LIVING CONCEPTS, INC. FORM 10-Q
September 30, 2004 INDEX PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets, December 31, 2003 and September 30, 2004
    
    
    3Consolidated Statements of Income, Three and Nine Months Ended September 30, 2003 and 2004
    
    
    4Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2003 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    20PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    20Item 6.
    
    Exhibits
    
    
    20First Amendment to Rights AgreementCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements ASSISTED LIVING CONCEPTS, INC. 
 CONSOLIDATED BALANCE SHEETS
 (In Thousands, Except Share Amounts)
 December 31,
    
    September 30,2003
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,943
    
    
    $
    2,890Cash restricted for resident security deposits
    
    
    104
    
    
    
    104Accounts receivable, net of allowance for doubtful accounts of $706
at December 31, 2003 and $556 at September 30, 2004
    
    
    3,415
    
    
    
    2,956Escrow deposits
    
    
    3,269
    
    
    
    4,123Prepaid expenses
    
    
    1,187
    
    
    
    1,923Cash restricted for workers compensation claims
    
    
    4,014
    
    
    
    4,300Other current assets
    
    
    1,395
    
    
    
    914Total current assets
    
    
    15,327
    
    
    
    17,210Restricted cash
    
    
    1,012
    
    
    
    1,014Property and equipment, net
    
    
    182,972
    
    
    
    180,481Deferred income taxes
    
    
    606
    
    
    
    1,387Other assets, net
    
    
    4,297
    
    
    
    3,822Total assets
    
    $
    204,214
    
    
    $
    203,914LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,800
    
    
    $
    1,477Accrued real estate taxes
    
    
    3,720
    
    
    
    5,031Accrued interest expense
    
    
    96
    
    
    
    548Accrued payroll expense
    
    
    7,275
    
    
    
    6,214Other accrued expenses
    
    
    6,982
    
    
    
    7,803Income taxes payable
    
    
    1,267
    
    
    
    1,760Resident security deposits
    
    
    1,262
    
    
    
    859Other current liabilities
    
    
    989
    
    
    
    1,268Current portion of unfavorable lease adjustment
    
    
    490
    
    
    
    470Current portion of long-term debt
    
    
    3,175
    
    
    
    3,389Total current liabilities
    
    
    27,056
    
    
    
    28,819Other liabilities
    
    
    523
    
    
    
    578Unfavorable lease adjustment, net of current portion
    
    
    2,327
    
    
    
    1,979Long-term debt, net of current portion
    
    
    144,279
    
    
    
    134,788Total liabilities
    
    
    174,185
    
    
    
    166,164Commitments and contingenciesShareholders equity:Preferred stock, $.01 par value; 3,250,000 shares authorized;
none issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 20,000,000 shares authorized; 6,431,925
and 6,484,750 issued and outstanding at December 31, 2003 and
September 30, 2004, respectively (68,241 and 57,241 shares to be
issued upon settlement of pending claims)
    
    
    65
    
    
    
    65Additional paid-in capital
    
    
    34,221
    
    
    
    35,057Retained earnings (deficit)
    
    
    (4,257
    )
    
    
    2,628Total shareholders equity
    
    
    30,029
    
    
    
    37,750Total liabilities and shareholders equity
    
    $
    204,214
    
    
    $
    203,914
 The accompanying notes are an integral part of these consolidated financial statements. 3




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ASSISTED LIVING CONCEPTS, INC. 
 CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
 (unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Revenue
    
    $
    42,443
    
    
    $
    44,907
    
    
    $
    125,519
    
    
    $
    131,164Operating expenses:Residence operating expenses
    
    
    28,397
    
    
    
    29,301
    
    
    
    83,840
    
    
    
    86,240Corporate general and administrative
    
    
    4,546
    
    
    
    5,041
    
    
    
    13,648
    
    
    
    14,611Building rentals
    
    
    3,319
    
    
    
    3,182
    
    
    
    9,543
    
    
    
    9,531Depreciation and amortization
    
    
    1,736
    
    
    
    1,983
    
    
    
    5,113
    
    
    
    5,822Total operating expenses
    
    
    37,998
    
    
    
    39,507
    
    
    
    112,144
    
    
    
    116,204Operating income
    
    
    4,445
    
    
    
    5,400
    
    
    
    13,375
    
    
    
    14,960Other income (expense):Interest expense
    
    
    (3,375
    )
    
    
    (2,407
    )
    
    
    (10,233
    )
    
    
    (7,235
    )Interest income
    
    
    97
    
    
    
    18
    
    
    
    163
    
    
    
    53Other expense, net
    
    
    
    
    
    
    (4
    )
    
    
    (71
    )
    
    
    (17
    )Total other expense, net
    
    
    (3,278
    )
    
    
    (2,393
    )
    
    
    (10,141
    )
    
    
    (7,199
    )Income from continuing operations before income taxes
    
    
    1,167
    
    
    
    3,007
    
    
    
    3,234
    
    
    
    7,761Income tax expense
    
    
    191
    
    
    
    228
    
    
    
    958
    
    
    
    876Income from continuing operations
    
    
    976
    
    
    
    2,779
    
    
    
    2,276
    
    
    
    6,885Discontinued operations:Income from operations (including gain on sale
of assets)
    
    
    
    
    
    
    
    
    
    
    830
    
    
    
    Income tax expense
    
    
    
    
    
    
    
    
    
    
    336
    
    
    
    Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    494
    
    
    
    Net income
    
    $
    976
    
    
    $
    2,779
    
    
    $
    2,770
    
    
    $
    6,885Basic
earnings per share:Income from continuing operations
    
    $
    0.15
    
    
    $
    0.43
    
    
    $
    0.35
    
    
    $
    1.06Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.08
    
    
    
    Net income
    
    $
    0.15
    
    
    $
    0.43
    
    
    $
    0.43
    
    
    $
    1.06Diluted earnings per share:Income from continuing operations
    
    $
    0.14
    
    
    $
    0.41
    
    
    $
    0.34
    
    
    $
    1.01Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.08
    
    
    
    Net income
    
    $
    0.14
    
    
    $
    0.41
    
    
    $
    0.42
    
    
    $
    1.01
 The accompanying notes are an integral part of these consolidated financial statements. 4




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ASSISTED LIVING CONCEPTS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
 (unaudited)
 Nine Months Ended September 30,2003
    
    2004Operating Activities:Net income
    
    $
    2,770
    
    
    $
    6,885Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    5,113
    
    
    
    5,822Stock-based compensation expense
    
    
    163
    
    
    
    227Amortization of debt issuance costs
    
    
    83
    
    
    
    485Amortization of fair value adjustment to building rentals
    
    
    (176
    )
    
    
    (368
    )Amortization of fair market adjustment to long-term debt
    
    
    306
    
    
    
    8Amortization of discount on long-term debt
    
    
    424
    
    
    
    Straight line adjustment to building rentals
    
    
    90
    
    
    
    65Interest paid-in-kind
    
    
    1,003
    
    
    
    Provision for doubtful accounts and other reserves
    
    
    658
    
    
    
    132Gain on sale of assets
    
    
    (833
    )
    
    
    Deferred income taxes
    
    
    
    
    
    
    (336
    )Changes in assets and liabilities:Accounts receivable
    
    
    (1,726
    )
    
    
    328Deposit escrows
    
    
    (741
    )
    
    
    (854
    )Prepaid expenses and other current assets
    
    
    (39
    )
    
    
    (255
    )Other assets
    
    
    (216
    )
    
    
    (10
    )Accounts payable
    
    
    401
    
    
    
    (323
    )Accrued expenses
    
    
    (555
    )
    
    
    1,522Other liabilities
    
    
    607
    
    
    
    359Net cash provided by operating activities
    
    
    7,332
    
    
    
    13,687Investing Activities:Decrease (increase) in restricted cash
    
    
    4,991
    
    
    
    (288
    )Purchases of property and equipment
    
    
    (2,493
    )
    
    
    (3,332
    )Sales of properties and equipment
    
    
    2,569
    
    
    
    1Net cash provided by (used in) investing activities
    
    
    5,067
    
    
    
    (3,619
    )Financing Activities:Proceeds from long-term debt
    
    
    
    
    
    
    20,000Proceeds from exercise of stock options
    
    
    
    
    
    
    164Payments on long-term debt
    
    
    (8,660
    )
    
    
    (29,285
    )Net cash used in financing activities
    
    
    (8,660
    )
    
    
    (9,121
    )Net increase in cash and cash equivalents
    
    
    3,739
    
    
    
    947Cash and cash equivalents, beginning of period
    
    
    7,165
    
    
    
    1,943Cash and cash equivalents, end of period
    
    $
    10,904
    
    
    $
    2,890Supplemental disclosure of cash flow information:Cash payments for interest
    
    $
    9,880
    
    
    $
    6,291Cash payments for income taxes
    
    $
    50
    
    
    $
    753
 The accompanying notes are an integral part of these consolidated financial statements. 5




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ASSISTED LIVING CONCEPTS, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1. The Company Assisted Living Concepts, Inc., (the Company) operates owned and leased
free-standing assisted living residences, primarily located in middle-market,
rural and suburban communities with populations typically ranging from 10,000
to 40,000, which provide housing to elderly residents 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 nursing
services, as permitted by applicable law, designed to meet the needs of its
residents. On October 1, 2001, Assisted Living Concepts, Inc. and its
wholly owned subsidiary, Carriage House Assisted Living, Inc. voluntarily filed
for bankruptcy protection under Chapter 11 of the United States 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). 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 effective December 31, 2001. 2. Basis of Presentation The condensed consolidated financial statements included herein have been
prepared by the Company without audit and in the opinion of management include
all adjustments (all of which are normal and recurring) necessary for a fair
presentation of the results of operations for each of the three and nine months
ended September 30, 2003 and 2004, pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying condensed consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to the
prior period financial statements to conform to the current period
presentation. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations; however the Company believes
that the disclosures in the accompanying financial statements are adequate to
make the information presented not misleading. The accompanying condensed consolidated financial statements should be read in
conjunction with the Companys annual report on Form 10-K for the fiscal year
ended December 31, 2003 filed with the Securities and Exchange Commission. The
results of operations for the three and nine months ended September 30, 2004
are not necessarily indicative of the results for a full year. The results of operations for the three and nine months ended September 30,
2003 and 2004 reflect the continuing operations of 177 residences. Results of
operations for two residences sold in March 2003 are included in discontinued
operations in the accompanying financial statements. (See Note 5). 6




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3. Long-Term Debt As of December 31, 2003 and September 30, 2004, long-term debt consists of the
following (in thousands): December 31, 2003
    
    September 30, 2004Carrying
    
    Principal
    
    Carrying
    
    PrincipalAmount
    
    Amount
    
    Amount
    
    AmountTrust Deed Notes, payable to the State of Oregon
Housing and Community Services Department
(OHCS) (Oregon Notes) due 2028
    
    $
    9,508
    
    
    $
    9,412
    
    
    $
    9,368
    
    
    $
    9,276Variable Rate Multifamily Revenue Bonds, payable
to the Washington State Housing Finance Commission
Department (Washington Bonds) due 2017
    
    
    6,897
    
    
    
    6,970
    
    
    
    6,901
    
    
    
    6,970Variable Rate Demand Housing Revenue Bonds, Series
1997, payable to the Idaho Housing and Finance
Association (Idaho Bonds) due 2017
    
    
    5,996
    
    
    
    6,060
    
    
    
    5,700
    
    
    
    5,760Variable Rate Demand Housing Revenue Bonds, Series
A-1 and A-2 payable to the State of Ohio Housing
Finance Agency (Ohio bonds) due 2018
    
    
    9,989
    
    
    
    10,105
    
    
    
    9,500
    
    
    
    9,610Housing and Urban Development (HUD) Insured
Mortgages due 2036
    
    
    7,280
    
    
    
    7,358
    
    
    
    7,241
    
    
    
    7,318Mortgage loans due 2008
    
    
    27,384
    
    
    
    27,343
    
    
    
    26,929
    
    
    
    26,891Red Capital (Fannie Mae) due 2013
    
    
    38,400
    
    
    
    38,400
    
    
    
    37,965
    
    
    
    37,965G.E. Capital Term Loan due 2008
    
    
    35,000
    
    
    
    35,000
    
    
    
    34,573
    
    
    
    34,573G.E. Capital Credit Facility due 2008
    
    
    7,000
    
    
    
    7,000
    
    
    
    
    
    
    
    Total debt
    
    
    147,454
    
    
    $
    147,648
    
    
    
    138,177
    
    
    $
    138,363Less current portion
    
    
    3,175
    
    
    
    
    
    
    
    3,389Long-term debt
    
    $
    144,279
    
    
    
    
    
    
    $
    134,788
 The Oregon Notes are secured by buildings, land, furniture and fixtures of six
Oregon residences. The notes are payable in monthly installments including
interest at effective rates ranging from 7.4% to 9.0%. The Washington Bonds are secured by a $7.1 million letter of credit and
buildings, land, furniture and fixtures of five Washington residences and had
an interest rate of 1.6% at September 30, 2004. The letter of credit expires in
July 2005 and has an annual commitment fee of 2.0%. The Idaho Bonds are secured by a $5.9 million letter of credit and buildings,
land, furniture and fixtures of four Idaho residences and had an interest rate
of 1.6% at September 30, 2004. The letter of credit expires in July 2005 and
has an annual commitment fee of 2.0%. The Ohio Bonds are secured by a $9.8 million letter of credit and buildings,
land, furniture and fixtures of six Ohio residences and had an interest rate of
1.8% at September 30, 2004. The letter of credit expires in July 2005 and has
an annual commitment fee of 2.0%. The HUD insured mortgages include three separate loan agreements entered into
in 2001. The mortgages are each secured by a separate facility in Texas. These
loans mature between July 1, 2036 and August 1, 2036 and collectively require
monthly principal and interest payments of $50,000. The loans bear interest at
fixed rates ranging from 7.4% to 7.6%. At September 30, 2004, mortgage loans include three fixed rate loans secured by
seven Texas residences, three Oregon residences and three New Jersey
residences. These loans collectively require monthly principal and interest
payments of $230,000, with balloon payments of $11.8 million, $5.3 million and
$7.2 million due at maturity in May, August and September 2008, respectively.
These loans bear interest at fixed rates ranging from 7.6% to 8.7%. 7




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As of the Effective Date, the Successor Company revalued its long-term debt in
conjunction with the implementation of fresh-start reporting. At December 31,
2001, an adjustment of $3.1 million was recorded to reduce long-term debt to
its fair market value. Amortization of this adjustment is computed using the
straight-line method over the life of the corresponding debt. In December 2003, the Company refinanced Senior and Junior Secured Notes and a
secured loan provided by GE Capital (collectively Refinanced Debt), which had
a total principal amount of approximately $90.5 million at the refinancing
date. The Senior Notes were due to mature in January 2009 and accrued interest
at 10%. The Junior Notes were due to mature in January 2012, bearing interest
payable in additional Junior Notes at 8% per annum through 2004 and bearing
interest at 12% payable in cash beginning in 2005. The GE Capital loan had a
maturity of January 2005, and accrued interest at LIBOR plus 4.5% with a
minimum interest rate of 8%. Under the terms of the Junior and Senior
Indentures, the notes were legally defeased effective December 29, 2003. The Refinanced Debt was retired using proceeds from a new $38.4 million loan
from Red Mortgage Capital (FNMA Loan), as lender for Fannie Mae, a new $35
million term loan and a $15 million revolving loan, both from GE Capital (GE
Term Loan and GE Credit Facility, respectively). The FNMA Loan has a fixed interest rate of 6.24%, matures in 10 years, has a
25-year principal amortization and is secured by 24 residences, which serve as
collateral. Both the GE Term Loan and the GE Credit Facility mature in 5 years,
accrue interest at LIBOR plus 4.0%, which is calculated based on a 360 day year
and charged for the actual number of days elapsed, with an interest rate floor
of 5.75%, and are secured by a collective pool of 30 residences, which serve as
collateral. The GE Term Loan and the GE Credit Facility had an interest rate of
5.75% at September 30, 2004. The GE Term Loan requires monthly interest
payments and principal reductions based on a 25-year principal amortization
schedule, with a balloon payment at maturity. The GE Credit Facility has an
initial revolving borrowing period of 2 years, which may be extended annually
thereafter for three years upon mutual consent by GE Capital and the Company.
During the initial revolving borrowing period, the GE Credit Facility requires
monthly interest payments, no principal reductions, and accrues interest on the
unused loan availability at a rate of 0.75% per year, which is paid quarterly.
If the initial revolving borrowing period is not extended, then the GE Credit
Facility converts from a revolving loan to a term loan with the same terms as
the GE Term Loan. The GE Term Loan and the GE Credit Facility contain
financial covenants that require a certain level of financial performance for
the residences which serve as collateral for the loan and require the Company
to remain current on its other debt service obligations. Failure to comply
with these covenants could restrict loan amounts available to the Company under
the loan agreement and could constitute an event of default, which would allow
GE Capital to declare any amounts outstanding under the loan documents to be
due and payable. The loans from Red Mortgage Capital and GE Capital were
entered into by subsidiaries of the Company and are non-recourse to the
Company, subject to a limited guaranty by the Company. As of September 30, 2004, the following annual principal payments are required
(in thousands): October 1, 2004 through December 31, 2004
    
    $
    8432005
    
    
    3,4982006
    
    
    3,9152007
    
    
    4,1652008
    
    
    28,258Thereafter

    
    
    97,684Total
    
    $
    138,363
 The Company has a series of Reimbursement Agreements with U.S. Bank for Letters
of Credit that support certain of the Revenue Bonds Payable. The total amount
of these Letters of Credit, which secure $22.3 million of indebtedness and
accrued interest thereon, was approximately $22.8 million as of September 30,
2004. The Companys agreements with U.S. Bank contain certain financial
covenants. Failure to comply with these covenants could constitute an event of
default, which would allow U.S. Bank to declare any amounts outstanding under
the loan documents to be due and payable. The agreements also require the
Company to deposit $500,000 in cash collateral with U.S. Bank in the event
certain regulatory actions are commenced with respect to the properties
securing the Companys obligations to U.S. Bank. U.S. Bank is required to
release such deposits upon satisfactory resolution of the regulatory action. Approximately $22.3 million of the Companys indebtedness was secured by
letters of credit held by U.S. Bank as of September 30, 2004, which in some
cases have termination dates prior to the maturity of the underlying debt. As
such letters of credit expire in July 2005, the Company will need to extend the
current letters of credit, obtain replacement letters of credit, post cash
collateral or refinance the underlying debt. There can be no assurance that the
Company will be able to extend the current letters of credit or 8




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procure
replacement letters of credit from the same or other lending institutions on
terms that are acceptable to the Company or at all. In the event that the
Company is unable to obtain a replacement letter of credit or provide alternate
collateral prior to the expiration of any of these letters of credit, the
Company would be in default on the underlying debt. Such a default would allow
U.S. Bank to declare any amounts outstanding under the loan documents to be
immediately due and payable. In addition to the debt agreements with OHCS related to the six owned
residences in Oregon, the Company has entered into Lease Approval Agreements
with OHCS and the lessor of the Oregon Leases, which obligates the Company to
comply with the terms and conditions of the underlying trust deed relating to
the leased buildings. Under the terms of the OHCS debt agreements, the Company
is required to maintain a capital replacement escrow account to cover expected
capital expenditure requirements for the Oregon Leases and the six OHCS loans.
As a further condition of the OHCS debt agreements, the Company is required to
comply with the terms of certain regulatory agreements which provide, among
other things, that in order to preserve the federal income tax exempt status of
the bonds, the Company is required to lease at least 20% of the units of the
projects to low or moderate income persons as defined in Section 142(d) of the
Internal Revenue Code. There are additional requirements as to the age and
physical condition of the residents with which the Company must also comply.
Non-compliance with these restrictions may result in an event of default and
cause acceleration of the scheduled repayment. 4. Income Taxes The Company anticipates taxable income for financial reporting purposes for the
year ending December 31, 2004, and accordingly, has provided for federal and
state income taxes for the nine months ended September 30, 2004. The Company
has recorded such income tax expense at the rate of 11.3% for the nine months
ended September 30, 2004. The provision for income taxes differs from the applicable U.S. statutory
federal rate as a result of the following items: Statutory federal income tax rate
    
    
    34.0
    %State income taxes, net of federal benefit
    
    
    5.4
    %Non-deductible expenses
    
    
    0.8
    %Reduction of
valuation allowance for successor company
    
    
    (28.9
    )%Effective tax rate
    
    
    11.3
    %
 As of
December 31, 2003, the Company had approximately $13.9 million of net
operating loss (NOL) carry-forwards, which will expire between 2009 and 2022.
The NOL carry-forwards are subject to certain provisions of the Internal
Revenue Code which restrict their utilization. In addition, any net unrealized
built-in losses resulting from the excess of tax basis over the carrying value
of the Companys assets (primarily property and equipment) as of the Effective
Date, which are recognized within five years, are also subject to these
provisions. Section 382 of the Internal Revenue Code imposes limitations on
the utilization of the NOL carry-forwards and built-in losses after certain
changes of ownership of a loss company. The Company is deemed to be a loss
company for these purposes. Under these provisions, the Companys ability to
utilize these NOL carry-forwards and built-in losses in the future will
generally be subject to an annual limitation of approximately $1.6 million (the
Annual Limitation). There can be no assurance that the Company will be able
to utilize NOL carry-forwards or built-in losses and therefore, the Company
established a 100 percent valuation allowance to offset the remaining deferred
tax asset. Pursuant to SOP 90-7, the income tax benefit, if any, of the realization of NOL
carry-forwards and other deductible temporary differences existing as of the
Effective Date is recorded as an adjustment to additional paid-in capital. For the year ended December 31, 2003, the Annual Limitation was utilized on all
available pre-change NOL carry-forwards, except for approximately $36,000. At
December 31, 2003, the Company had recorded a $42.8 million valuation allowance
against a net deferred tax asset of $43.4 million. For the full fiscal year
ending December 31, 2004, the Company anticipates utilizing the 2004 Annual
Limitation as well as the unused 2003 Annual Limitation. 5. Discontinued Operations During March 2003, the Company sold one residence in Ohio and one residence in
Indiana. The total sales price for these residences was $2.6 million, and the
Company recognized a gain from these sales of $899,000. In accordance with
SFAS No. 144, the results of operations and the gain and losses from sales have
been included in Income from discontinued operations in the accompanying
financial statements for the nine months ended September 30, 2003. 9




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##### Table of Contents



6. Stock-based Compensation Effective January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and
recognizes compensation expense according to the prospective transition method
under SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure. Under this method, the Company expenses the fair value of all new
stock options granted after January 1, 2003. The Company uses
the Black-Scholes option-pricing model for estimating the fair value
of options granted. Previously, the Company accounted
for stock-based compensation plans under the recognition and measurement
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees
(APB No. 25) and related interpretations. No stock-based employee compensation
expense for stock options was reflected in Net Income previous to January 1,
2003, as all stock options granted under those plans had an exercise price
equal to the fair market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings
per share had the Company applied the fair value accounting method to all of
the Companys stock option grants. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Net income, as reported
    
    $
    976
    
    
    $
    2,779
    
    
    $
    2,770
    
    
    $
    6,885Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects
    
    
    46
    
    
    
    61
    
    
    
    108
    
    
    
    150Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards granted, net of related tax effects
    
    
    (53
    )
    
    
    (76
    )
    
    
    (129
    )
    
    
    (191
    )Pro forma net income
    
    $
    969
    
    
    $
    2,764
    
    
    $
    2,749
    
    
    $
    6,844Net income per share:Basic - as reported
    
    $
    0.15
    
    
    $
    0.43
    
    
    $
    0.43
    
    
    $
    1.06Basic - pro forma
    
    $
    0.15
    
    
    $
    0.42
    
    
    $
    0.42
    
    
    $
    1.05Diluted - as reported
    
    $
    0.14
    
    
    $
    0.41
    
    
    $
    0.42
    
    
    $
    1.01Diluted - pro forma
    
    $
    0.14
    
    
    $
    0.40
    
    
    $
    0.41
    
    
    $
    1.00
 7. Income Per Share The weighted average common shares used for basic net income per common share
were 6,500,000 for the three and nine months ended September 30, 2003 and
6,539,000 and 6,513,000 for the three and nine months ended September 30, 2004.
The effect of dilutive stock options using the treasury stock method added
263,000 and 131,000 shares for the three and nine months ended September 30,
2003 and 313,000 and 332,000 shares for the three and nine months ended
September 30, 2004. For the three and nine months ended September 30, 2004,
29,000 and 12,000 stock options were excluded from the computation of diluted
earnings per share as their inclusion would be anti-dilutive. 8. Other Accrued Expenses At December 31, 2003 and September 30, 2004, other accrued expenses include
reserves for workers compensation claims of approximately $3.2 million and
$3.5 million, respectively and reserves for professional liability claims
payable of approximately $2.1 million. 9. Liquidity The Company had working capital deficits of $11,729,000 and $11,609,000 at
December 31, 2003 and September 30, 2004, respectively. The Company has certain contingencies and reserves, including litigation
reserves, recorded as current liabilities at September 30, 2004 that management
believes it will not be required to liquidate within the next twelve months.
However, in the event that all current liabilities become due within twelve
months, the Company may be required to obtain debt financing and/or sell
securities on unfavorable terms. There can be no assurance that such action may
not be necessary to ensure appropriate liquidity for the 10




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##### Table of Contents



operations of the
Company. As of September 30, 2004, the Company had $15.0 million in credit
availability under the GE Credit Facility. 10. Related Party
Transactions Andre
Dimitriadis, who resigned from the Companys Board of Directors
September 10, 2004, is the President, Chief Executive Officer and
Chairman of the Board of LTC Properties, Inc. (LTC). The
Company currently leases 37 properties from LTC. The Company incurred
lease expense of $2.2 million and $6.5 million for the three and nine
months ended September 30, 2003 and 2004, respectively, pursuant to
these leases. 11. Subsequent Events On October 1, 2004, the Board of Directors of the Company adopted a Shareholder
Rights Plan (the Rights Agreement) and declared a dividend of one right for each share of common stock
outstanding on September 30, 2004 and to become outstanding thereafter. Each
right entitles the holder of the right to purchase one one-thousandth share of
the Companys Series A Junior Participating Preferred Stock for $60 per share
if the right becomes exercisable. The rights become exercisable only if a
person or group acquires 20% or more of the common stock of the Company then
outstanding or commences a tender offer or exchange offer that, if consummated,
would result in the person or group acquiring 20% or more of the Companys
common stock then outstanding. If a person or group acquires 20% of the
Companys outstanding common stock, right holders (other than the
shareholder(s) who acquired 20% of the Companys common stock) become entitled
to purchase an amount of common stock of the Company (or Common Stock
Equivalents as defined in the Shareholder Rights Plan, or, in certain
circumstances, common stock of the acquirer) having a value equal to two times
the exercise price of $60. The rights currently trade with the Companys common
stock. The rights may be redeemed by the Board, for one cent per right, at any
time before a person or entity acquires 20% or more of the common stock of the
Company then outstanding. The rights expire in October 2014. The Companys articles of incorporation authorize up to 3,250,000 shares of
preferred stock, of which 400,000 shares have been reserved for possible
issuance under the Shareholder Rights Plan. As of September 30, 2004, no
preferred shares have been issued. On November 4, 2004, the Company entered into a Plan of Merger and Acquisition
Agreement (the Merger Agreement) with Extendicare Health Services, Inc., a
Delaware corporation (Extendicare), and Alpha
Acquisition, Inc., a Nevada corporation (Merger Sub) and a wholly-owned subsidiary of Extendicare,
pursuant to which Extendicare will acquire Assisted Living Concepts, Inc.
(ALC). On the terms and subject to the conditions of the Merger Agreement,
Merger Sub will be merged with and into ALC, with ALC as the surviving
corporation (the Merger), and each share of Common Stock of ALC, $.01 par
value (the ALC Common Stock) issued and outstanding at the effective time of
the Merger (the Effective Time), and other than the shares for which ALC
shareholders have properly demanded dissenters rights, will be converted into
the right to receive $18.50 in cash. The completion of the Merger is subject to
the approval by the holders of a majority of the voting power of the Common
Stock of ALC. The Merger Agreement is subject to the satisfaction of other
conditions customary to transactions of this type, including the expiration of
the waiting period under the Hart-Scott-Rodino Act and any required
governmental approvals. In connection with the Merger Agreement, the Rights Agreement, effective as of
October 1, 2004, between ALC and American Stock Transfer &
Trust Company, as Rights
Agent, was amended as of November 4, 2004. The Rights Agreement amendment
provides that Extendicare and its affiliates shall not become Acquiring
Persons and thus avoids triggering the rights set forth in the Rights Agreement
as a result of the execution or delivery of, or consummation of the
transactions contemplated by, the Merger Agreement or any amendments thereto. 
 Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations This report on Form 10-Q (or otherwise made by the Company or on the Companys
behalf from time to time in other reports, filings with the Securities and
Exchange Commission, news releases, conferences, World Wide Web posting or
otherwise), may be deemed to constitute forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements include statements about the Companys
estimates, expectations, beliefs, intentions or strategies for the future, and
the assumptions underlying these forward-looking statements. The Company uses
the words will, believes, anticipates, estimates, intends, expects,
should, could, and words of similar import, to identify these
forward-looking statements. These forward-looking statements may be affected by
risks and uncertainties, including without limitation (i) our ability to
control costs and improve operating margins, (ii) our ability to increase
occupancy, (iii) our ability to increase our revenue at a pace which exceeds
expense inflation, (iv) our ability to operate our residences in compliance
with evolving regulatory requirements, (v) the degree to which our future
operating results and financial condition may be affected by a reduction in
Medicaid reimbursement rates, (vi) our ability to extend or renegotiate our
current debt agreements, and (vii) the risk factors discussed in our Form 10-K
for the period ending December 31, 2003. In light of such risks and
uncertainties, our actual results could differ materially from such
forward-looking statements. Caution should be taken not to place undue reliance
on the Companys forward-looking statements, which represent the Companys
views only as of the date this report is filed. Except as may be required by
law, we do not undertake any obligation to publicly release any revisions to
any forward-looking statements contained herein to reflect events and
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events. References in this section to ALC, the Company, us or we refer to
Assisted Living Concepts, Inc. and its wholly owned subsidiaries. 11




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##### Table of Contents



General We operate owned and leased free-standing assisted living residences. These
residences are primarily located in small, middle-market, rural and suburban
communities with a population typically ranging from 10,000 to 40,000. As of
September 30, 2004, we had residences in 14 states. We provide personal care and support services, and make available routine
nursing services (as permitted by applicable law) designed to meet the personal
and health care needs of our residents. We believe that this combination of
residential, personal care, support and health care services provides a
cost-efficient alternative to, and affords an independent lifestyle for,
individuals who do not require the broader array of medical services that
nursing facilities are required by law to provide. As of September 30, 2004, we operated 177 assisted living residences (6,838
units), of which we owned 122 residences (4,734 units) and leased 55 residences
(2,104 units). We derive our revenues primarily from resident fees for room, board and care.
Resident fees typically are paid monthly by residents, their families, state
Medicaid agencies or other third parties. Resident fees include revenue derived
from a multi-tiered rate structure, which varies based on the level of care
provided. Resident fees are recognized as revenues when services are provided.
Our expenses include:  
    
    residence operating expenses, such as staff payroll, food, property
taxes, utilities, insurance and other direct residence operating expenses;
    
    general and administrative expenses consisting of regional management and
corporate support functions such as legal, accounting and other
administrative expenses;
    
    building rentals;
    
    depreciation and amortization; and
    
    interest expense related to debt. We anticipate that the majority of our revenues will continue to come from
private pay sources. However, we believe that by having located some of our
residences in states with favorable regulatory and reimbursement climates, we
should have a stable source of residents eligible for Medicaid reimbursement to
the extent that private pay residents are not available and, in addition,
provide our private pay residents with alternative sources of income when their
private funds are depleted and they become Medicaid eligible. Although we manage the mix of private paying residents and Medicaid paying
residents residing in our facilities, any significant increase in our Medicaid
population could have an adverse effect on our financial position, results of
operations and cash flows, particularly if states operating these programs
continue to limit, or more aggressively seek limits on, reimbursement rates. Sales of Residences During March 2003, the Company sold one residence in Ohio and one residence in
Indiana. The total sales price for these residences was $2.6 million, and the
Company recognized a gain from these sales of $899,000. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate these
estimates, including those related to bad debts, income taxes, professional and
general liability reserves, the carrying value of long-lived assets, financing
operations, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. For a further discussion
of the manner in which we make critical accounting estimates, see Critical
Accounting Policies and Estimates under Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operationsin the Companys
annual report on Form 10-K for the fiscal year ended December 31, 2003. 12




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##### Table of Contents



Results of Operations The following tables set forth, for the periods presented, operating expenses
as a percentage of revenue, the number of total residences and units operated,
average occupancy and rental rates and the sources of our revenue. The portion
of revenues received from state Medicaid agencies are labeled as Medicaid
state paid portion while the portion of our revenues that a Medicaid-eligible
resident must pay out of his or her own resources is labeled Medicaid resident
paid portion. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating expenses:Residence operating expenses
    
    
    66.9
    
    
    
    65.3
    
    
    
    66.8
    
    
    
    65.8Corporate general and administrative
    
    
    10.7
    
    
    
    11.2
    
    
    
    10.9
    
    
    
    11.1Building rentals
    
    
    7.8
    
    
    
    7.1
    
    
    
    7.5
    
    
    
    7.3Depreciation and amortization
    
    
    4.1
    
    
    
    4.4
    
    
    
    4.1
    
    
    
    4.4Total operating expenses
    
    
    89.5
    
    
    
    88.0
    
    
    
    89.3
    
    
    
    88.6Operating income
    
    
    10.5
    
    
    
    12.0
    
    
    
    10.7
    
    
    
    11.4Other income (expense):Interest expense
    
    
    (8.0
    )
    
    
    (5.3
    )
    
    
    (8.1
    )
    
    
    (5.5
    )Interest income
    
    
    0.2
    
    
    
    
    
    
    
    0.1
    
    
    
    Other expense, net
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    Total other expense, net
    
    
    (7.8
    )
    
    
    (5.3
    )
    
    
    (8.1
    )
    
    
    (5.5
    )Income from continuing operations before income taxes
    
    
    2.7
    
    
    
    6.7
    
    
    
    2.6
    
    
    
    5.9Income tax expense
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.8
    
    
    
    0.7Income from continuing operations
    
    
    2.3
    
    
    
    6.2
    
    
    
    1.8
    
    
    
    5.2Discontinued operations:Income from operations (including gain on sale
of assets)
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    Income tax expense
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    Net income
    
    
    2.3
    
    
    
    6.2
    
    
    
    2.2
    
    
    
    5.2
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Other Data Relating to Continuing Operations:Residences operated (end of period)
    
    
    177
    
    
    
    177
    
    
    
    177
    
    
    
    177Units operated (end of period)
    
    
    6,838
    
    
    
    6,838
    
    
    
    6,838
    
    
    
    6,838Average occupancy rate (based on available units)
    
    
    88.4
    %
    
    
    90.4
    %
    
    
    88.1
    %
    
    
    89.3
    %Average monthly rental rate
    
    $
    2,310
    
    
    $
    2,393
    
    
    $
    2,282
    
    
    $
    2,357Sources of revenue:Medicaid state paid portion
    
    
    14.0
    %
    
    
    15.2
    %
    
    
    13.4
    %
    
    
    14.6
    %Medicaid resident paid portion
    
    
    9.1
    %
    
    
    9.8
    %
    
    
    8.7
    %
    
    
    9.6
    %Private resident paid portion
    
    
    76.9
    %
    
    
    75.0
    %
    
    
    77.9
    %
    
    
    75.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 13




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##### Table of Contents



Three months ended September 30, 2004 compared to three months ended September
30, 2003: The Company recorded net income of $2.8 million on revenues of $44.9 million
for the three months ended September 30, 2004 (the September 2004 Quarter)
compared to net income of $1.0 million on revenues of $42.4 million for the
three months ended September 30, 2003 (the September 2003 Quarter). Revenues increased $2.5 million for the September 2004 Quarter compared to the
September 2003 Quarter primarily due to an increase in average occupancy
percentage of approximately 2.0 percentage points and an increase in average rental
rate received from residents of approximately $83 per month. In March 2004,
the Company instituted a private resident rent increase in all its residences. Residence operating expenses increased $904,000 for the September 2004 Quarter
compared to the September 2003 Quarter but decreased as a percentage of revenue
from 66.9% to 65.3%. Of the increase, $976,000 is attributable to an increase
in payroll expenses, which decreased slightly as a percentage of revenue. An
increase in utilities expenses of approximately $78,000 also accounted for a
portion of the increase. The increase in payroll is primarily due to increased
salaries and wages, including expenses related to employee incentives. The
increase in payroll and utilities was offset primarily by a decrease of
$196,000 in professional liability costs associated with favorable write-offs
and claim trends. Corporate, general and administrative expenses increased $495,000 for the
September 2004 Quarter compared to the September 2003 Quarter and increased as
a percentage of revenue from 10.7% to 11.2%. This increase is primarily due to
$316,000 of expenses related to the Companys announced exploration of
strategic alternatives as well as higher payroll costs of $346,000, including
expenses related to employee incentives. These increases were partially offset
by decreased travel related expenses of $49,000 and a reduction of $117,000 in
costs associated with a company wide management meeting held in September 2003. Building rentals decreased $137,000 for the September 2004 Quarter
compared to the September 2003 Quarter and decreased as a percentage of revenue
from 7.8% to 7.1%. Depreciation and amortization expense increased by $247,000 for the September
2004 Quarter compared to the September 2003 Quarter due to fixed asset
purchases in 2003 and 2004. Interest expense decreased $968,000 for the September 2004 Quarter compared to
the September 2003 Quarter due to the overall reduction of indebtedness and
lower interest rates resulting from the December 2003 refinancing. Nine months ended September 30, 2004 compared to nine months ended September
30, 2003: The Company recorded net income of $6.9 million on revenues of $131.2 million
for the nine months ended September 30, 2004 compared to net income of $2.8
million on revenues of $125.5 million for the nine months ended September 30,
2003. Revenues increased $5.6 million for the nine months ended September 2004
compared to the nine months ended September 2003 primarily due to an increase
in average occupancy percentage of approximately 1.2 percentage points and an
increase in average rental rate received from residents of approximately $75 per month. In March 2004,
the Company instituted a private resident rent increase in all its residences. Residence operating expenses increased $2.4 million for the nine months ended
September 2004 compared to the nine months ended September 2003 but decreased
as a percentage of revenue from 66.8% to 65.8%. Of the increase, $3.1 million
is attributable to an increase in payroll expenses attributable to higher
occupancy and higher benefit costs and approximately $498,000 is due to
increased kitchen related expenses, including food purchases. The increases in
payroll and kitchen expenses were offset primarily by a decrease of $630,000 in
bad debt expense associated with favorable write-off trends as well as a
decrease of $393,000 in professional liability costs associated with favorable
write-offs and claim trends. 14




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##### Table of Contents



Corporate, general and administrative expenses increased $963,000 for the nine
months ended September 2004 compared to the nine months ended September 2003
and increased as a percentage of revenue from 10.9% to 11.1%. This increase is
primarily due to $606,000 of expenses related to the Companys announced
exploration of strategic alternatives as well as higher payroll costs of $1.0
million, including expenses related to employee incentives, that were partially
offset by a decrease in office rent expense of $272,000 as well as a decrease
in travel related expenses of $244,000. The decrease in office rent expense
is primarily due to the absence in the nine months ended September 2004 of
expenses incurred in the nine months ended September 2003 related to operating
two corporate headquarters and other costs associated with the preparation to
close the corporate office in Portland, Oregon. Building rentals decreased $12,000 for the nine months ended September 2004
compared to the nine months ended September 2003 and decreased as a percentage
of revenue from 7.5% to 7.3%. Depreciation and amortization expense increased by $709,000 for the nine months
ended September 2004 compared to the nine months ended September 2003 due to
fixed asset purchases in 2003 and 2004. Interest expense decreased $3.0 million for the nine months ended September
2004 compared to the nine months ended September 2003 due to the overall
reduction of indebtedness and lower interest rates resulting from the December
2003 refinancing. Liquidity and Capital Resources At September 30, 2004, we had a working capital deficit of $11.6 million and
unrestricted cash and cash equivalents of $2.9 million. Cash increased from
December 31, 2003 to September 30, 2004 primarily due to the $13.7 million of
cash generated from operating activities offset by purchases of
equipment and payments of long-term debt. Cash generated year-to-date was
partially offset by repayments of $7.0 million on the GE Credit Facility,
thereby increasing our availability under the GE Credit Facility from $8.0
million as of December 31, 2003 to $15.0 million as of September 30, 2004. Net cash provided by operating activities was $13.7 million during the nine
months ended September 30, 2004. The primary sources were net income of $6.9
million and $5.8 million of depreciation and amortization. Net cash used in investing activities was $3.6 million during the nine months
ended September 30, 2004 and primarily related to purchases of equipment. Net cash used in financing activities was $9.1 million during the nine months
ended September 30, 2004, which primarily related to net payments on long-term
debt. Of this $9.1 million, $7.0 million related to repayments on the GE
Credit Facility. In December 2003, the Company refinanced the Senior and Junior Secured Notes
and a secured loan provided by GE Capital (collectively Refinanced Debt),
which had a total principal amount of approximately $90.5 million at the
refinancing date. The Senior Notes were due to mature in January 2009 and
accrued interest at 10%. The Junior Notes were due to mature in January 2012,
bearing interest payable in additional Junior Notes at 8% per annum through
2004 and bearing interest at 12% payable in cash beginning in 2005. The GE
Capital loan had a maturity of January 2005, and accrued interest at LIBOR plus
4.5% with a minimum interest rate of 8%. Under the terms of the Junior and
Senior Indentures, the Indentures and notes were legally defeased effective
December 29, 2003 and the notes were redeemed in their entirety. The Refinanced Debt was retired using proceeds from a new $38.4 million loan
from Red Mortgage Capital (FNMA Loan), as lender for Fannie Mae, a new $35
million term loan and a $15 million revolving loan, both from GE Capital (GE
Term Loan and GE Credit Facility, respectively). The FNMA Loan has a fixed interest rate of 6.24%, matures in 10 years, has a
25-year principal amortization and is secured by 24 residences, which serve as
collateral. Both the GE Term Loan and the GE Credit Facility mature in 5 years,
accrue interest at 15




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##### Table of Contents



LIBOR plus 4.0%, which is calculated based on a 360 day year and charged for
the actual number of days elapsed, with an interest rate floor of 5.75%, and
are secured by a collective pool of 30 residences, which serve as collateral.
The GE Term Loan and the GE Credit Facility had an interest rate of 5.75% at
September 30, 2004. The GE Term Loan requires monthly interest payments and
principal reductions based on a 25-year principal amortization schedule, with a
balloon payment at maturity. The GE Credit Facility has an initial revolving
borrowing period of 2 years, which may be extended annually thereafter for
three years upon mutual consent by GE Capital and the Company. During the
initial revolving borrowing period, the GE Credit Facility requires monthly
interest payments and no principal reductions. If the initial revolving
borrowing period is not extended, then the GE Credit Facility converts from a
revolving loan to a term loan with the same terms as the GE Term Loan. The GE Term Loan and the GE Credit Facility contain financial covenants that
require a certain level of financial performance for the residences, which
serve as collateral for the loan and require the Company to remain current on
its other debt service obligations. Failure to comply with these covenants
could restrict loan amounts available to the Company under the loan agreement
and could constitute an event of default, which would allow GE Capital to
declare any amounts outstanding under the loan documents to be immediately due
and payable. Any such default could have a material adverse effect on the
Company. The loans from Red Mortgage Capital and GE Capital were entered into
by subsidiaries of the Company and are non-recourse to the Company, subject to
a limited guaranty by the Company. The Company has a series of Reimbursement Agreements with U.S. Bank for Letters
of Credit that support certain of our Revenue Bonds Payable. The total amount
of these Letters of Credit, which secure $22.3 million of indebtedness and
accrued interest thereon,was approximately $22.8 million as of September 30,
2004. Our agreements with U.S. Bank contain certain financial covenants.
Failure to comply with these covenants could constitute an event of default,
which would allow U.S. Bank to declare any amounts outstanding under the loan
documents to be immediately due and payable. Any such default could have a
material adverse effect on the Company. The agreements also require us to
deposit $500,000 in cash collateral with U.S. Bank in the event certain
regulatory actions are commenced with respect to the properties securing our
obligations to U.S. Bank. U.S. Bank is required to release such deposits upon
satisfactory resolution of the regulatory action. As of the date of this
filing, no such cash collateral deposits are on deposit with U.S. Bank. Approximately $22.3 million of our indebtedness was secured by letters of
credit held by U.S. Bank as of September 30, 2004, which in some cases have
termination dates prior to the maturity of the underlying debt. As such letters
of credit expire in July 2005, we will need to extend the current letters of
credit, obtain replacement letters of credit, post cash collateral or refinance
the underlying debt. There can be no assurance that we will be able to extend
the current letters of credit or procure replacement letters of credit from the
same or other lending institutions on terms that are acceptable to us or at
all. In the event that we are unable to obtain a replacement letter of credit
or provide alternate collateral prior to the expiration of any of these letters
of credit, we would be in default on the underlying debt. Certain of our leases, loan agreements, and debt instruments contain covenants
and cross-default provisions such that a default on one of those agreements
could cause us to be in default on one or more other agreements, which would
have a material adverse effect on the Company. The Company leases 37 of its facilities, representing 1,426 units, from LTC
Properties, Inc. (LTC). In accordance with the Companys plan of
reorganization, effective January 1, 2002, the Company entered into a Master
Lease Agreement with LTC under which 16 leases were consolidated. This Master
Lease Agreement provides for aggregate rent reductions of $875,000 per year and
restructured the provision related to minimum rent increases for the 16
properties for the remaining initial term. The Master Lease Agreement and other
LTC lease agreements also provide LTC with the option to exercise certain
remedies, including the termination of the Master Lease Agreement and the other
LTC leases, upon the occurrence of an Event of Default. A change of control of
the Company is deemed to be an Event of Default if certain conditions are not
met. A change of control is deemed to occur if, among other things, (i) any
person, directly or indirectly, is or becomes the beneficial owner of thirty
percent (30%) or more of the combined voting power of the Companys outstanding
voting securities, (ii) the stockholders approve under certain conditions a
merger or consolidation of the Company with another corporation or entity, or
(iii) the stockholders approve a plan of liquidation or sale of all or
substantially all of the assets of the Company. However, if upon a change of
control, the surviving entity has a net worth of $75 million or more, the
change of control would not constitute an Event of Default. LTC in its Report
on Form 8K, dated September 13, 2004 (the LTC 8K), announced that it had
engaged a financial advisor to identify and distribute to a select group of
potential lessees an Information Memorandum containing information about the 37
LTC properties leased by the Company. According to the LTC 8K, if the Company
engaged in a transaction in connection with its announced exploration of
strategic alternatives that did not comply with the change in control
provisions contained in the LTC leases, LTC may elect to declare an event of
default and enter into a lease with one or more new tenants. 16




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In addition, there are cross default provisions in the LTC leases. At the same
time that the Company entered into the Master Lease Agreement, it also amended
16 other leases with LTC under which the renewal rights of certain of those
leases are tied. The lease agreements between the Company and LTC expire
according to the following schedule: Year of LeaseNumber of LTC Properties
    
    Expiration6
    
    
    
    200718
    
    
    
    20087
    
    
    
    20091
    
    
    
    20105
    
    
    
    2015Total
    
    
    37
 Sixteen of the 37 LTC leases expiring between 2007 and 2010 have been further
consolidated into two groups of eight leases each for purposes of applying
certain provisions of the underlying leases (collectively, the Pooled Leases).
Specifically the Pooled Leases provide for the right to collectively extend the
individual leases of each pool for two periods of five years each, provided no
uncured events of default exist and the right to extend is exercised upon the
earliest deadline of renewal for the individual lease in the pool. Under the
terms of the Pooled Leases, the Company must elect to exercise its option to
extend in 2007, or all of the leases will expire on their scheduled expiration
date. Below is summarized financial information for the 37 LTC properties: Three months ended(in thousands)
    
    March 31,
    
    June 30,
    
    September 30,(unaudited)
    
    2004
    
    2004
    
    2004Revenue
    
    $
    9,020
    
    
    $
    9,413

    
    
    $
    9,478Residence operating expenses
    
    
    5,719
    
    
    
    5,567
    
    
    
    5,814Building rentals
    
    
    2,187
    
    
    
    2,181
    
    
    
    2,181Depreciation & amortization
    
    
    50
    
    
    
    43
    
    
    
    49Total operating expenses
    
    
    7,956
    
    
    
    7,791
    
    
    
    8,044Operating income (1)
    
    $
    1,064
    
    
    $
    1,622
    
    
    $
    1,434
 (1) Excludes certain corporate and other
general and administrative expenses that
are not allocated at the property level,
and is therefore not consistent with the
presentation of operating income on the
Consolidated Statements of Income. The occurrence of an Event of Default under the LTC leases, including a change
of control of the Company that resulted in the termination of the LTC leases,
would significantly impair the Companys cash flow from operations and could
have a material adverse effect on the Company. Andre Dimitriadis, formerly a member of the Companys Board of Directors, is
the President, Chief Executive Officer and Chairman of the Board of LTC
Properties, Inc. (LTC). As previously disclosed in the Companys Form 10K
for the year ended
December 31,2003, Mr. Dimitriadis, representing that he was acting solely as a
director of the Company and not in his capacity as an officer or director of
LTC, on or about March 28, 2004 orally raised certain issues of inconsistency
and nonconformity regarding compliance with certain of the LTC Leases, which
include at this time, the following: 1) whether there are inconsistencies in
the number of units that constitute the leased property in the Athens, Texas,
Greenville, Texas and Tiffen, Ohio leases, 2) whether the LTC leases require
insurance based on the limits stated in the lease on a per facility basis, and
3) whether the 4 LTC leases with Carriage House, a wholly owned subsidiary of
the Company, require Carriage House to deliver on an annual basis audited
consolidated financial statements of Carriage House. Mr. Dimitriadis similarly
raised the issue as to whether the Company is required to obtain licenses for
the 2 facilities located in Elkhart, Indiana and Madison, Indiana as assisted
living facilities. On or about March 29, 2004, Mr. Dimitriadis sent a letter
to the Company, a copy of which was filed as exhibit 99 to our Form 10K for
the year ended December 31, 2003, further discussing these matters and the
circumstances that led him to raise these issues. 17




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Management believes that the Company has meritorious defenses available to it
and/or could exercise its cure rights under the leases to resolve these matters
in the event that LTC were to deliver a notice of default. LTC has not
delivered any notice of default to the Company. LTC confirmed in the LTC 8K dated
September 13, 2004 that no Event of Default has been declared. However, the
Company is continuing to review and assess these matters internally and no
assurance can be given as to whether the eventual resolution of these issues
will be favorable to the Company. The Company is in the process of obtaining
licenses for the 2 Indiana properties as assisted living facilities which is
expected to be completed by December 31, 2004. The Company provides LTC on an
annual basis with annual consolidated audited financial statements of the
Company, but not Carriage House, which was acquired in 1997. Failure to favorably resolve these issues in a manner that avoids an occurrence
of an Event of Default under one or more of the LTC leases would have a
material adverse effect on the Company. This would include, but not be limited
to, creating Events of Default on loan covenants regarding a significant
portion of outstanding indebtedness which, if not cured, would make such
indebtedness become immediately payable. Our ability to make payments on and to refinance any of our indebtedness, to
satisfy our lease obligations and to fund planned capital expenditures will
depend on our ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. In addition, our
ability to draw additional amounts under our credit facility with GE Capital
will depend on us maintaining certain levels of financial performance at the
residences that serve as collateral for the credit facility. Based upon our current level of operations, we believe that our current cash on
hand, along with our available credit and expected cash flow from operations,
are sufficient to meet our liquidity needs for at least the next twelve months. There can be no assurance, however, that our business will generate sufficient
cash flow from operations to enable us to pay our indebtedness, to satisfy our
lease obligations and to fund our other liquidity needs. As a result, we may
need to refinance all or a portion of our indebtedness, on or before maturity.
There can be no assurance that we will be able to refinance any of our
indebtedness, on commercially reasonable terms or at all. Recent Events For a number of reasons, including the exploration of strategic alternatives,
the Board has postponed indefinitely the Annual Shareholders Meeting scheduled
for June 3, 2004. On or about May 7, 2004, the Company received a letter from Bruce E. Toll
notifying the Company of Mr. Tolls intention of nominating four nominees to
the Board at our Annual Shareholders Meeting. After the postponement of the
Annual Shareholders Meeting, Mr. Toll filed an amendment to Schedule 13-D on
June 14, 2004 indicating, among other things, that he disagreed with the
Boards action in postponing the Annual Shareholders Meeting and questioning
whether the Board was seriously considering a transaction that would benefit
all shareholders. Mr. Toll further stated that he and the Filing Persons may
(a) file litigation against the Company and its interested directors for breach
of fiduciary duty, (b) form a group to protect the interests of all of the
shareholders of the Company and (c) communicate with various regulatory
agencies regarding the conduct of the Board. As previously announced,
the Company is in the process of exploring strategic alternatives
with the goal of maximizing shareholder value. The Company has
established an independent Special Committee for this purpose,
appointed a new independent director to the Board and Special
Committee and retained Jefferies & Company, Inc. as financial
advisor and retained independent legal counsel. The independent Special Committee
and its financial advisor are continuing with the process of exploring
strategic alternatives with the goal of maximizing shareholder value. On
October 4, 2004, the Company announced that it had received indications of
interest for the acquisition of the Company in a cash transaction from a number
of third parties and that the Special Committee is also continuing to review
other strategic alternatives available to the Company, including among other
things, refinancing, sale-leaseback of Company properties, special dividend to
Company stockholders and remaining a public Company. There can be no assurance,
however, that the Special Committees evaluation of strategic alternatives will
result in any transaction. On October 4, 2004, the Company also announced the
adoption of a shareholders rights plan in which preferred stock purchase rights
will be distributed as a dividend at the rate of one right for each share of
common stock of the Company held by stockholders of record as of the close of
business on September 30, 2004. 18




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On November 4, 2004, the Company entered into a Plan of Merger and Acquisition
Agreement (the Merger Agreement) with Extendicare Health Services, Inc., a
Delaware corporation (Extendicare), and Alpha Acquisition,
Inc., a Nevada
corporation (Merger Sub) and a wholly-owned subsidiary of Extendicare,
pursuant to which Extendicare will acquire ALC. On the terms and subject to the
conditions of the Merger Agreement, Merger Sub will be merged with and into
ALC, with ALC as the surviving corporation (the Merger), and each share of
Common Stock of ALC, $.01 par value (the ALC Common Stock) issued and
outstanding at the effective time of the Merger, and other than the shares for which ALC shareholders have properly demanded dissenters
rights, will be converted into the right to receive $18.50 in cash. The
completion of the Merger is subject to the approval by the holders of a
majority of the voting power of the Common Stock of ALC. The Merger Agreement
is subject to the satisfaction of other conditions customary to transactions of
this type, including the expiration of the waiting period under the
Hart-Scott-Rodino Act and any required governmental approvals. The Merger is
expected to be to completed during the early part of the first calendar quarter
of 2005. The above description of the Merger, Merger Agreement and related
transactions and agreements is qualified in its entirety by the terms of the
Merger Agreement, which is filed as Exhibit 2.1 to, and incorporated by
reference in, the Report on Form 8K filed by the Company on November 5, 2004. In connection with the Merger Agreement, the Rights Agreement, effective as of
October 1, 2004, between ALC and American Stock Transfer &
Trust Company, as Rights
Agent, was amended as of November 4, 2004. The Rights Agreement amendment
provides that Extendicare and its affiliates shall not become Acquiring
Persons and thus avoids triggering the rights set forth in the Rights Agreement
as a result of the execution or delivery of, or consummation of the
transactions contemplated by, the Merger Agreement or any amendments
thereto. A copy of the Rights Agreement amendment was filed as
Exhibit 4.1 to the Report on Form 8-K filed by the Company on
November 5, 2004. 
 Item 3.Quantitative and Qualitative Disclosure About Market Risk Market risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates and
equity prices. Changes in these factors could cause fluctuations in our results
of operations and cash flows. For fixed rate debt, changes in interest rates generally affect the fair market
value of the debt instrument, but not our results of operations or cash flows.
We do not have an obligation to prepay any of our fixed rate debt prior to
maturity, and therefore, interest rate risk and changes in the fair market
value of our fixed rate debt will not have an impact on our results of
operations or cash flows until we decide, or are required, to refinance such
debt. For variable rate debt, changes in interest rates generally do not impact the
fair market value of the debt instrument, but do affect our future earnings and
cash flows. We had variable rate debt of $56.9 million outstanding at September
30, 2004 with a weighted average interest rate of 4.1%, of which $34.6 million
has an interest rate floor of 5.75%. Assuming that our balance of variable
rate debt, excluding $34.6 million which has an interest rate floor of 5.75%,
remains constant at $22.3 million, each one-percent increase in interest rates
would result in an annual increase in interest expense, and a corresponding
decrease in net cash flows, of $223,400. Conversely, each one-percent decrease
in interest rates would result in an annual decrease in interest expense, and a
corresponding increase in net cash flows, of $223,400. For our $34.6 million of
variable rate debt which has an interest rate floor of 5.75%, each one-percent
increase in interest rates in excess of 5.75% would result in an annual
increase in interest expense, and a corresponding
decrease in net cash flows, of $345,730. Conversely, each one-percent decrease
at interest rates of 6.75% or greater would result in an annual decrease in
interest expense, and a corresponding increase in net cash flows, of $345,730. 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. 19




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##### Table of Contents



Item 4.Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and our
Chief Financial Officer, has evaluated our disclosure controls and procedures
(as defined in Securities Exchange Act of 1934 (the Exchange Act) Rules
13a-15(e) and 15d-15(e) as of the end of the period covered by this report
pursuant to Rule 13a-15(b) under the Exchange Act). Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of the period covered by this report, our disclosure controls and
procedures are effective to ensure that information required to be disclosed in
reports that we file or submit under the Exchange Act is (1) recorded,
processed, summarized and reported in a timely manner, and (2) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Changes in Internal Controls There has been no change in our internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) that occurred during our last
fiscal quarter that has materially affected or is reasonably likely to
materially affect, our internal control over financial reporting. 
 PART II  OTHER INFORMATION 
 Item 1.Legal Proceedings We are involved from time to time in ordinary, routine or regulatory legal
proceedings incidental to our business. As of November 10, 2004, we believe that
such legal proceedings should not have a material adverse effect on our
business. 
 Item 6.Exhibits  (a)
    
    The following documents are filed as part of this report: ExhibitNumber4.1
    
    
    
    Certificate of Designation of Series A Junior Participating Preferred
Stock. (Incorporated by reference to the same titled exhibit to the
Companys report on Form 8K filed October 4, 2004.)4.2
    
    
    
    Rights Agreement by and between Assisted Living Concepts, Inc. and
American Stock Transfer & Trust Company, as Rights Agent, effective as of
October 1, 2004, including the forms of Certificate of Designation, Rights
Certificate and Summary of Stockholder Rights Plan attached thereto as
Exhibits A, B and C, respectively. (Incorporated by reference to the same
titled exhibit to the Companys report on Form 8K filed October 4, 2004.)4.3
    
    
    
    First Amendment to Rights Agreement
dated November 4, 2004 (filed herewith)31.1
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)31.2
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)32.1
    
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)32.2
    
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 20




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. ASSISTED LIVING CONCEPTS, INC.
RegistrantBy:
    /s/ Edward A. BarnesName:
    
    Edward A. BarnesTitle:
    
    Senior Vice President,
Chief Financial Officer,
Chief Accounting Officer,
Secretary and Treasurer November 10, 2004 
 EXHIBIT INDEX ExhibitNumber4.1
    
    
    
    Certificate of Designation of Series A Junior Participating Preferred
Stock. (Incorporated by reference to the same titled exhibit to the
Companys report on Form 8K filed October 4, 2004.)4.2
    
    
    
    Rights Agreement by and between Assisted Living Concepts, Inc. and
American Stock Transfer & Trust Company, as Rights Agent, effective as of
October 1, 2004, including the forms of Certificate of Designation, Rights
Certificate and Summary of Stockholder Rights Plan attached thereto as
Exhibits A, B and C, respectively. (Incorporated by reference to the same
titled exhibit to the Companys report on Form 8K filed October 4, 2004.)4.3
    
    
    
    First Amendment to Rights Agreement
dated November 4, 2004 (filed herewith)31.1
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)31.2
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)32.1
    
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)32.2
    
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)