##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20459


Form 10-Q



|  |                                                                                            
|- | -------------------------------------------------------------------------------------------
|þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31,
2002

or



|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

For the Transition period
from                               to

Commission file number 1-83938

Assisted Living Concepts, Inc.

(Exact name of registrant as specified in its
charter)


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

11835 NE Glenn Widing Drive, Building
E

Portland, Oregon 97220


(Address of principle executive
offices)


(503) 252-6233

(Registrants telephone number, including
area code)


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

The Registrant had 6,431,759 shares of common
stock, $.01 par value, outstanding at May 13, 2002.



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TABLE OF CONTENTS



|                                |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION
|                                | Item 1. Financial Statements                                                                 
|                                |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                | Risk Factors                                                                                 
|                                | Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|PART II -- OTHER INFORMATION   
|                                | Item 1. Legal Proceedings                                                                    
|                                | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                     
|EXHIBIT INDEX                  
|EXHIBIT 12                     



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

FORM 10-Q

March 31, 2002


INDEX

|                                   |  |                                                                                                                                     |  |      |    | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                   |  |                                                                                                                                     |  | Page
|                                   |  |                                                                                                                                     |  |     
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Financial Statements                                                                                                                |  |      |    | 
|                                   |  | Consolidated Balance Sheets, December 31, 2001
    and March 31, 2002 (Successor Company)                                           |  |      | 2  | 
|                                   |  | Consolidated Statements of Operations Three
    Months Ended March 31, 2001 (Predecessor Company) and 2002
    (Successor Company)  |  |      | 3  | 
|                                   |  | Consolidated Statements of Cash Flows, Three
    Months Ended March 31, 2001 (Predecessor Company) and 2002
    (Successor Company) |  |      | 4  | 
|                                   |  | Notes to Consolidated Financial Statements                                                                                          |  |      | 5  | 
|Item 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                           |  |      | 18 | 
|                                   |  | Risk Factors                                                                                                                        |  |      | 25 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures About
    Market Risk and Risk Sensitive Instruments                                       |  |      | 31 | 
|PART II  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                                   |  |      | 32 | 
|Item 4.                            |  | Submission of Matters to a Vote of Security
    Holders                                                                             |  |      | 32 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                                    |  |      | 32 | 

1



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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)


|                                         |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |         |    |         | 
|---------------------------------------- | ------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | -- | ------- | ------- | ------- | -- | ------- | 
|                                         |                                                                                |                                                                                                                                                                           
|                                         |                                                                                | Successor Company                                                                                                                                                         
|                                         |                                                                                |                                                                                                                                                                           
|                                         |                                                                                | December 31,                                                                                                                                                               |                                            | March 31,  
|                                         |                                                                                | 2001                                                                                                                                                                       |                                            | 2002       
|                                         |                                                                                |                                                                                                                                                                            |                                            |            
|                                         |                                                                                |                                                                                                                                                                            |                                            | (Unaudited)
|ASSETS                                   |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|Current Assets:                          |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|                                         | Cash and cash equivalents                                                      |                                                                                                                                                                            | $                                          | 6,077       |    |         | $       | 3,618   |   
|                                         | Cash restricted for resident security deposits                                 |                                                                                                                                                                            |                                            | 2,415       |    |         |         | 2,417   |   
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $13 at 2002 |                                                                                                                                                                            |                                            | 2,328       |    |         |         | 2,415   |   
|                                         | Prepaid insurance                                                              |                                                                                                                                                                            |                                            | 160         |    |         |         | 2,667   |   
|                                         | Prepaid expenses                                                               |                                                                                                                                                                            |                                            | 823         |    |         |         | 637     |   
|                                         | Cash restricted for workers compensation
    claims                           |                                                                                                                                                                            |                                            | 2,825       |    |         |         | 4,519   |   
|                                         | Other current assets                                                           |                                                                                                                                                                            |                                            | 3,862       |    |         |         | 3,617   |   
|                                         |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|                                         |                                                                                |                                                                                                                                                                            | Total current assets                       |             |    | 18,490  |         |         |    | 19,890  | 
|Restricted cash                          |                                                                                |                                                                                                                                                                            | 5,349                                      |             |    |         | 5,372   |        
|Property and equipment, net              |                                                                                |                                                                                                                                                                            | 196,548                                    |             |    |         | 195,506 |        
|Other assets, net                        |                                                                                |                                                                                                                                                                            | 1,866                                      |             |    |         | 1,956   |        
|                                         |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|                                         |                                                                                |                                                                                                                                                                            | Total assets                               |             | $  | 222,253 |         |         | $  | 222,724 | 
|                                         |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|Current liabilities:                     |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|                                         | Accounts payable                                                               |                                                                                                                                                                            | $                                          | 1,450       |    |         | $       | 1,196   |   
|                                         | Accrued real estate taxes                                                      |                                                                                                                                                                            |                                            | 4,523       |    |         |         | 3,648   |   
|                                         | Accrued interest expense                                                       |                                                                                                                                                                            |                                            | 666         |    |         |         | 1,095   |   
|                                         | Accrued interest expense payable to related
    parties                        |                                                                                                                                                                            |                                            |            |    |         |         | 331     |   
|                                         | Accrued payroll expense                                                        |                                                                                                                                                                            |                                            | 4,561       |    |         |         | 5,882   |   
|                                         | Other accrued expenses                                                         |                                                                                                                                                                            |                                            | 7,163       |    |         |         | 6,270   |   
|                                         | Resident security deposits                                                     |                                                                                                                                                                            |                                            | 2,471       |    |         |         | 2,433   |   
|                                         | Insurance premium obligation                                                   |                                                                                                                                                                            |                                            |            |    |         |         | 1,224   |   
|                                         | Other current liabilities                                                      |                                                                                                                                                                            |                                            | 652         |    |         |         | 261     |   
|                                         | Current portion of unfavorable lease adjustment                                |                                                                                                                                                                            |                                            | 681         |    |         |         | 664     |   
|                                         | Current portion of long-term debt and capital
    lease obligation             |                                                                                                                                                                            |                                            | 2,622       |    |         |         | 2,583   |   
|                                         |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|                                         |                                                                                |                                                                                                                                                                            | Total current liabilities                  |             |    | 24,789  |         |         |    | 25,587  | 
|                                         | Other liabilities                                                              |                                                                                                                                                                            |                                            | 89          |    |         |         | 168     |   
|                                         | Unfavorable lease adjustment                                                   |                                                                                                                                                                            |                                            | 3,115       |    |         |         | 2,962   |   
|                                         | Long-term debt and capital lease obligation, net
    of current portion        |                                                                                                                                                                            |                                            | 161,461     |    |         |         | 162,658 |   
|                                         |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|                                         |                                                                                |                                                                                                                                                                            | Total liabilities                          |             |    | 189,454 |         |         |    | 191,375 | 
|                                         |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|                                         | Commitments and contingencies                                                  |                                                                                                                                                                            |                                            |             |    |         |         |         |   
|                                         | Shareholders equity:                                                          |                                                                                                                                                                            |                                            |             |    |         |         |         |   
|                                         |                                                                                | Preferred stock, $.01 par value; 3,250,000 shares
    authorized; none issued or outstanding                                                                               |                                            |             |   |         |         |         |   |        
|                                         |                                                                                | Common Stock, $.01 par value; 20,000,000 shares
    authorized; issued and outstanding 6,431,759 shares (68,241
    shares to be issued upon settlement of pending claims) |                                            |             | 65 |         |         |         | 65 |        
|                                         | Additional paid-in capital                                                     |                                                                                                                                                                            |                                            | 32,734      |    |         |         | 32,734  |   
|                                         | Accumulated deficit                                                            |                                                                                                                                                                            |                                            |            |    |         |         | (1,450  | ) 
|                                         |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|                                         |                                                                                |                                                                                                                                                                            | Total shareholders equity                 |             |    | 32,799  |         |         |    | 31,349  | 
|                                         |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        
|                                         |                                                                                |                                                                                                                                                                            | Total liabilities and shareholders equity |             | $  | 222,253 |         |         | $  | 222,724 | 
|                                         |                                                                                |                                                                                                                                                                            |                                            |             |    |         |         |        

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

2



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.






CONSOLIDATED STATEMENTS OF
OPERATIONS


(in thousands, except per share
amounts)


(unaudited)


|                                                                 |                                      |                          |        |                |        |   |        |        |        |  
|---------------------------------------------------------------- | ------------------------------------ | ------------------------ | ------ | -------------- | ------ | - | ------ | ------ | ------ | -
|                                                                 |                                      | Predecessor              |        | Successor     
|                                                                 |                                      | Company                  |        | Company       
|                                                                 |                                      |                          |        |               
|                                                                 |                                      | Three Months             |        | Three Months  
|                                                                 |                                      | Ended                    |        | Ended         
|                                                                 |                                      | March 31, 2001           |        | March 31, 2002
|                                                                 |                                      |                          |        |               
|Revenue                                                          |                                      | $                        | 36,877 |                |        | $ | 37,889 |       
|Operating expenses:                                              |                                      |                          |        |                |        |   |        |       
|                                                                 | Residence operating expenses         |                          |        | 25,558         |        |   |        | 26,335 |       
|                                                                 | Corporate general and administrative |                          |        | 4,268          |        |   |        | 4,316  |       
|                                                                 | Building rentals                     |                          |        | 1,958          |        |   |        | 982    |       
|                                                                 | Building rentals to related party    |                          |        | 2,213          |        |   |        | 2,055  |       
|                                                                 | Depreciation and amortization        |                          |        | 2,552          |        |   |        | 1,667  |       
|                                                                 |                                      |                          |        |                |        |   |        |       
|                                                                 |                                      | Total operating expenses |        |                | 36,549 |   |        |        | 35,355 |  
|                                                                 |                                      |                          |        |                |        |   |        |       
|Operating income                                                 |                                      |                          | 328    |                |        |   | 2,534  |       
|                                                                 |                                      |                          |        |                |        |   |        |       
|Other income (expense):                                          |                                      |                          |        |                |        |   |        |       
|                                                                 | Interest expense                     |                          |        | (4,402         | )      |   |        | (3,161 | )     
|                                                                 | Interest expense to related parties  |                          |        |               |        |   |        | (430   | )     
|                                                                 | Interest income                      |                          |        | 148            |        |   |        | 54     |       
|                                                                 | Other income, net                    |                          |        | 31             |        |   |        |       |       
|                                                                 |                                      |                          |        |                |        |   |        |       
|                                                                 |                                      | Total other expense, net |        |                | (4,223 | ) |        |        | (3,537 | )
|                                                                 |                                      |                          |        |                |        |   |        |       
|Loss before debt restructure and reorganization
    costs        |                                      |                          | (3,895 | )              |        |   | (1,003 | )     
|Debt restructure and reorganization costs                        |                                      |                          | 303    |                |        |   | 447    |       
|                                                                 |                                      |                          |        |                |        |   |        |       
|Net loss                                                         |                                      | $                        | (4,198 | )              |        | $ | (1,450 | )     
|                                                                 |                                      |                          |        |                |        |   |        |       
|Basic and diluted net loss per common share                      |                                      | $                        | (.25   | )              |        | $ | (.22   | )     
|                                                                 |                                      |                          |        |                |        |   |        |       
|Basic and diluted weighted average common shares
    outstanding |                                      |                          | 17,121 |                |        |   | 6,500  |       
|                                                                 |                                      |                          |        |                |        |   |        |       

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

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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.






CONSOLIDATED STATEMENTS OF CASH
FLOWS


(in thousands)


(unaudited)


|                                                                               |                                                                                                                                        |                                                         |        |                |        |   |        |        |        |  
|------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------ | -------------- | ------ | - | ------ | ------ | ------ | -
|                                                                               |                                                                                                                                        | Predecessor                                             |        | Successor     
|                                                                               |                                                                                                                                        | Company                                                 |        | Company       
|                                                                               |                                                                                                                                        |                                                         |        |               
|                                                                               |                                                                                                                                        | Three Months                                            |        | Three Months  
|                                                                               |                                                                                                                                        | Ended                                                   |        | Ended         
|                                                                               |                                                                                                                                        | March 31, 2001                                          |        | March 31, 2002
|                                                                               |                                                                                                                                        |                                                         |        |               
|Operating Activities:                                                          |                                                                                                                                        |                                                         |        |                |        |   |        |       
|Net loss                                                                       |                                                                                                                                        | $                                                       | (4,198 | )              |        | $ | (1,450 | )     
|Adjustment to reconcile net loss to net cash used
    in operating activities: |                                                                                                                                        |                                                         |        |                |        |   |        |       
|                                                                               | Depreciation and amortization                                                                                                          |                                                         |        | 2,552          |        |   |        | 1,667  |       
|                                                                               | Amortization of debt issuance costs                                                                                                    |                                                         |        |               |        |   |        | 20     |       
|                                                                               | Amortization of fair value adjustment to building
    rentals                                                                          |                                                         |        |               |        |   |        | (170   | )     
|                                                                               | Amortization of fair market adjustment to
    long-term debt                                                                           |                                                         |        |               |        |   |        | 107    |       
|                                                                               | Amortization of discount on long-term debt                                                                                             |                                                         |        |               |        |   |        | 106    |       
|                                                                               | Straight line adjustment to building rentals                                                                                           |                                                         |        |               |        |   |        | 86     |       
|                                                                               | Interest paid-in-kind                                                                                                                  |                                                         |        |               |        |   |        | 305    |       
|                                                                               | Provision for doubtful accounts                                                                                                        |                                                         |        | 156            |        |   |        | 13     |       
|Changes in assets and liabilities:                                             |                                                                                                                                        |                                                         |        |                |        |   |        |       
|                                                                               | Accounts receivable                                                                                                                    |                                                         |        | (166           | )      |   |        | (100   | )     
|                                                                               | Prepaid expenses                                                                                                                       |                                                         |        | 282            |        |   |        | (2,321 | )     
|                                                                               | Other current assets                                                                                                                   |                                                         |        | 378            |        |   |        | 245    |       
|                                                                               | Other assets                                                                                                                           |                                                         |        | (17            | )      |   |        | (31    | )     
|                                                                               | Accounts payable                                                                                                                       |                                                         |        | (166           | )      |   |        | (254   | )     
|                                                                               | Accrued expenses                                                                                                                       |                                                         |        | (1,341         | )      |   |        | 313    |       
|                                                                               | Insurance premium obligation                                                                                                           |                                                         |        | 2,507          |        |   |        | 1,224  |       
|                                                                               | Other current liabilities                                                                                                              |                                                         |        | (2,314         | )      |   |        | (429   | )     
|                                                                               | Other liabilities                                                                                                                      |                                                         |        | (106           | )      |   |        | (7     | )     
|                                                                               |                                                                                                                                        |                                                         |        |                |        |   |        |       
|                                                                               |                                                                                                                                        | Net cash used in operating activities                   |        |                | (2,433 | ) |        |        | (676   | )
|                                                                               |                                                                                                                                        |                                                         |        |                |        |   |        |       
|Investing Activities:                                                          |                                                                                                                                        |                                                         |        |                |        |   |        |       
|Increase in restricted cash                                                    |                                                                                                                                        |                                                         | (2,081 | )              |        |   | (1,719 | )     
|Purchases of property and equipment                                            |                                                                                                                                        |                                                         | (453   | )              |        |   | (625   | )     
|                                                                               |                                                                                                                                        |                                                         |        |                |        |   |        |       
|                                                                               |                                                                                                                                        | Net cash used in investing activities                   |        |                | (2,534 | ) |        |        | (2,344 | )
|                                                                               |                                                                                                                                        |                                                         |        |                |        |   |        |       
|Financing Activities:                                                          |                                                                                                                                        |                                                         |        |                |        |   |        |       
|Proceeds from long-term debt                                                   |                                                                                                                                        |                                                         | 1,300  |                |        |   | 1,000  |       
|Payments on long-term debt and capital lease
    obligation                    |                                                                                                                                        |                                                         | (340   | )              |        |   | (360   | )     
|Debt issuance costs                                                            |                                                                                                                                        |                                                         | (1,809 | )              |        |   | (79    | )     
|                                                                               |                                                                                                                                        |                                                         |        |                |        |   |        |       
|                                                                               |                                                                                                                                        | Net cash provided by (used in) financing
    activities |        |                | (849   | ) |        |        | 561    |  
|                                                                               |                                                                                                                                        |                                                         |        |                |        |   |        |       
|Net decrease in cash and cash equivalents                                      |                                                                                                                                        |                                                         | (5,816 | )              |        |   | (2,459 | )     
|Cash and cash equivalents, beginning of period                                 |                                                                                                                                        |                                                         | 9,889  |                |        |   | 6,077  |       
|                                                                               |                                                                                                                                        |                                                         |        |                |        |   |        |       
|Cash and cash equivalents, end of period                                       |                                                                                                                                        | $                                                       | 4,073  |                |        | $ | 3,618  |       
|                                                                               |                                                                                                                                        |                                                         |        |                |        |   |        |       
|Supplemental disclosure of cash flow
    information:                          |                                                                                                                                        |                                                         |        |                |        |   |        |       
|                                                                               | Cash payments for interest                                                                                                             |                                                         | $      | 1,730          |        |   | $      | 2,705  |       
|                                                                               | Reclassification of other current and other
    liabilities to current and non-current long-term debt and
    capital lease obligation |                                                         | $      | 550            |        |   | $      |       |       

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

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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)


1.     The
Company

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

2.     Basis of
Presentation

The accompanying unaudited consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the
Companys annual report on Form 10-K for the fiscal
year ended December 31, 2001.

The accompanying consolidated financial
statements are unaudited and have been prepared in accordance
with accounting principles generally accepted in the United
States of America. In the opinion of management, the unaudited
consolidated financial statements include all necessary
adjustments consisting of normal recurring accruals. Certain
prior year amounts have been reclassified to conform to the
current year presentation.

3.     Reorganization
and Fresh-Start Reporting

Reorganization

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

On January 1, 2002 (the Effective
Date) the Plan became effective. The Plan authorized the
issuance as of the Effective Date (subject to the Reserve
described below) of $40.25 million aggregate principal
amount of seven-year secured notes (the New Senior Secured
Notes), bearing interest at 10% per annum, payable
semi-annually in arrears, and $15.25 million aggregate
principal amount of ten-year secured notes (the New Junior
Secured Notes and collectively with the New Senior Secured
Notes, the New Notes), bearing interest payable in
additional New Junior Secured Notes for three years at 8% per
annum and thereafter payable in cash at 12% per annum, payable
semi-annually in arrears, and (c) 6,500,000 shares of new
common stock, par value $0.01 (the New Common Stock)
of the reorganized Company, of which 4% was issued to
shareholders of the Predecessor Company.

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

The Company held back from the initial issuance
of New Common Stock and New Notes on the Effective Date,
$440,178 of New Senior Secured Notes, $166,775 of New Junior
Secured Notes and 68,241 shares of New Common Stock
(collectively, the Reserve) to be issued to holders
of general unsecured claims at a later date. The total amount
of, and the identities of all of the holders of, the general
unsecured claims were not known as of the Effective Date, either
because they were disputed or they were not made by

5



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


their holders prior to December 19, 2001,
the cutoff date for calculating the Reserve (the Cutoff
Date). Once the total amount and the identities of the
holders of those claims are determined, the shares of New Common
Stock and the New Notes held in the Reserve will be distributed
pro rata among the holders of those claims (the date of this
distribution, the Subsequent Distribution Date).

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

Fresh Start
Reporting

Upon emergence from Chapter 11 proceedings,
the Company adopted fresh-start reporting in accordance with the
American Institute of Certified Public Accountants Statement of
Position 90-7, Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code(SOP 90-7). In
connection with the adoption of fresh-start reporting, a new
entity has been deemed created for financial reporting purposes.
For financial reporting purposes, the Company adopted the
provisions of fresh-start reporting effective December 31,
2001. Consequently, the consolidated balance sheet and related
information at and subsequent to December 31, 2001 is
labeled Successor Company, and reflects the Plan and the
principles of fresh-start reporting. Periods presented prior to
December 31, 2001 have been designated Predecessor Company.

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

4.     Factors
Affecting Comparability of Financial Information

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

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

6



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ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


5.     Cash and Cash
Equivalents

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

|                 |                                 |              |       |           |  |   |       |       | 
|---------------- | ------------------------------- | ------------ | ----- | --------- |  | - | ----- | ----- | 
|                 |                                 | December 31, |       | March 31,
|                 |                                 | 2001         |       | 2002     
|                 |                                 |              |       |          
|Cash             |                                 | $            | 5,022 |           |  | $ | 3,461 |      
|Cash equivalents |                                 |              | 1,055 |           |  |   | 157   |      
|                 |                                 |              |       |           |  |   |       |      
|                 | Total cash and cash equivalents |              | $     | 6,077     |  |   | $     | 3,618 | 
|                 |                                 |              |       |           |  |   |       |      

6.     Long-Term
Restricted Cash

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

|                                                          |                                         |                                 |     |           |       |  |     |       |       | 
|--------------------------------------------------------- | --------------------------------------- | ------------------------------- | --- | --------- | ----- |  | --- | ----- | ----- | 
|                                                          |                                         | December 31,                    |     | March 31,
|                                                          |                                         | 2001                            |     | 2002     
|                                                          |                                         |                                 |     |          
|Cash held for loan agreements with U.S.                   |                                         |                                 |     |           |       |  |     |      
|                                                          | Bank National Association (U.S. Bank) |                                 | $   | 4,338     |       |  | $   | 4,357 |      
|Cash held in accordance with lease agreements             |                                         |                                 | 970 |           |       |  | 974 |      
|State regulated restricted resident security
    deposits |                                         |                                 | 41  |           |       |  | 41  |      
|                                                          |                                         |                                 |     |           |       |  |     |      
|                                                          |                                         | Total long-term restricted cash |     | $         | 5,349 |  |     | $     | 5,372 | 
|                                                          |                                         |                                 |     |           |       |  |     |      

7.     Property and
Equipment

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

|                              |                              |              |         |           |  |   |         |         | 
|----------------------------- | ---------------------------- | ------------ | ------- | --------- |  | - | ------- | ------- | 
|                              |                              | December 31, |         | March 31,
|                              |                              | 2001         |         | 2002     
|                              |                              |              |         |          
|Land                          |                              | $            | 22,177  |           |  |   | 22,177  |        
|Buildings and improvements    |                              |              | 166,443 |           |  |   | 166,544 |        
|Equipment                     |                              |              | 3,937   |           |  |   | 4,380   |        
|Furniture                     |                              |              | 3,991   |           |  |   | 4,072   |        
|                              |                              |              |         |           |  |   |         |        
|                              | Total property and equipment |              |         | 196,548   |  |   |         | 197,173 | 
|Less accumulated depreciation |                              |              |        |           |  |   | 1,667   |        
|                              |                              |              |         |           |  |   |         |        
|Property and equipment, net   |                              | $            | 196,548 |           |  | $ | 195,506 |        
|                              |                              |              |         |           |  |   |         |        

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

Included in the 129 owned residences is one
residence with a carrying value of $870,000 which was closed in
March 2002. This closed residence is one of 57 residences which
secure our New Notes. Any proceeds received on disposal of this
residence must be used to reduce such debt.

8.     Insurance
Premium Obligation

During the three months ended March 31,
2002, the Company entered into several short-term agreements to
finance its annual insurance premiums. These are nine-month
agreements and bear interest at annual fixed rates of
approximately 5.5% to 6.0%.

7



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ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


9. Long-Term Debt

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

|                                                                                                                                 |  |                   |         |                |  |          |         |           |  |   |         |  |  |   |         | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | -------------- |  | -------- | ------- | --------- |  | - | ------- |  |  | - | ------- | 
|                                                                                                                                 |  |                   |         |               
|                                                                                                                                 |  | December 31, 2001 |         | March 31, 2002
|                                                                                                                                 |  |                   |         |               
|                                                                                                                                 |  | Carrying          |         | Principal      |  | Carrying |         | Principal
|                                                                                                                                 |  | Amount            |         | Amount         |  | Amount   |         | Amount   
|                                                                                                                                 |  |                   |         |                |  |          |         |          
|Trust Deed Notes, payable to the State of Oregon
    Housing and Community Services Department (OHCS) due 2028.                  |  | $                 | 9,849   |                |  | $        | 9,741   |           |  | $ | 9,809   |  |  | $ | 9,703   | 
|Variable Rate Multifamily Revenue Bonds, payable
    to the Washington State Housing Finance Commission Department
    due 2028. |  |                   | 7,521   |                |  |          | 7,605   |           |  |   | 7,523   |  |  |   | 7,605   | 
|Variable Rate Demand Revenue Bonds,
    Series 1997, payable to the Idaho Housing and Finance
    Association due 2017.          |  |                   | 6,542   |                |  |          | 6,615   |           |  |   | 6,543   |  |  |   | 6,615   | 
|Variable Rate Demand Revenue Bonds,
    Series A-1 and A-2 payable to the State of Ohio Housing
    Finance Agency due 2018.     |  |                   | 11,888  |                |  |          | 12,020  |           |  |   | 11,900  |  |  |   | 12,020  | 
|Housing and Urban Development Insured Mortgages
    due 2035                                                                     |  |                   | 7,374   |                |  |          | 7,457   |           |  |   | 7,363   |  |  |   | 7,446   | 
|New Senior Secured Notes due 2009.                                                                                               |  |                   | 40,250  |                |  |          | 40,250  |           |  |   | 40,250  |  |  |   | 40,250  | 
|New Junior Secured Notes due 2012.                                                                                               |  |                   | 12,628  |                |  |          | 12,628  |           |  |   | 13,038  |  |  |   | 13,038  | 
|Mortgages payable due 2008.                                                                                                      |  |                   | 28,513  |                |  |          | 28,463  |           |  |   | 28,388  |  |  |   | 28,338  | 
|G.E. Capital (Previously Heller Healthcare
    Finance, Inc.) Credit Facility due 2005                                           |  |                   | 39,222  |                |  |          | 40,458  |           |  |   | 40,252  |  |  |   | 41,386  | 
|Capital lease obligations due 2002.                                                                                              |  |                   | 296     |                |  |          | 301     |           |  |   | 175     |  |  |   | 188     | 
|                                                                                                                                 |  |                   |         |                |  |          |         |           |  |   |         |  |  |   |         | 
|Total long-term debt                                                                                                             |  |                   | 164,083 |                |  | $        | 165,538 |           |  |   | 165,241 |  |  | $ | 166,589 | 
|                                                                                                                                 |  |                   |         |                |  |          |         |           |  |   |         |  |  |   |         | 
|Less current portion                                                                                                             |  |                   | 2,622   |                |  |          |         |           |  |   | 2,583   |  |  |   |         | 
|                                                                                                                                 |  |                   |         |                |  |          |         |           |  |   |         |  |  |   |         | 
|Long-term debt                                                                                                                   |  | $                 | 161,461 |                |  |          |         |           |  | $ | 162,658 |  |  |   |         | 
|                                                                                                                                 |  |                   |         |                |  |          |         |           |  |   |         |  |  |   |         | 

On January 1, 2002 the Companys Plan
became effective. The Companys Plan of reorganization
included the issuance of $40.25 million aggregate principal
amount of seven-year secured notes (the New Senior Secured
Notes), bearing interest at 10% per annum, payable
semi-annually in arrears, and $15.25 million aggregate
principal amount of ten-year secured notes (the New Junior
Secured Notes and collectively with the New Senior Secured
Notes, the New Notes), bearing interest payable in
additional New Junior Secured Notes for three years at 8% per
annum and thereafter payable in cash at 12% per annum, payable
semi-annually in arrears. The New Junior Secured Notes were
issued at a discount of $2.6 million. The discount is being
amortized over the life of the New Junior Secured Notes at an
effective interest rate of 13.0%. The New Notes are secured by
57 properties. (See Notes 3 and 7).

Of the face amount of $55.5 million and
$55.8 million outstanding of the New Notes at
December 31, 2001 and March 31, 2002,
$18.2 million and $18.3 million, respectively, were
payable to related parties. (See Note 10).

The Companys Washington, Idaho and Ohio
Revenue Bonds are secured by a combination of cash, residences
and letters of credit. The letters of credit have been issued by
U.S. Bank and the underlying credit

8



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ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


agreements between U.S. Bank and the Company
contain restrictive covenants that include compliance with
certain financial ratios.

In May 2002, the Company received a waiver from
U.S. Bank regarding the Banks right to declare an
event of default for the Companys failure to meet the
March 31, 2002 financial covenant requirements established
for the Predecessor Company set forth in the amended
U.S. Bank loan agreement. Furthermore, the Company amended
its existing agreement with U.S. Bank, establishing new
covenants, with which the Company was in compliance as of
March 31, 2002.

As of March 31, 2001, the following annual
principal payments are required (in thousands):

|           |       |   |         |         | 
|---------- | ----- | - | ------- | ------- | 
|2002       |       | $ | 2,583   |        
|2003       |       |   | 2,672   |        
|2004       |       |   | 2,891   |        
|2005       |       |   | 41,315  |        
|2006       |       |   | 2,258   |        
|Thereafter |       |   | 114,870 |        
|           |       |   |         |        
|           | Total |   | $       | 166,589 | 
|           |       |   |         |        

10.     Related Party
Transactions

LTC
Properties, Inc. and CLC Healthcare, Inc.

Andre Dimitriadis, who has been a member of the
Companys Board of Directors and the Chair of its Audit
Committee since January 2002, is the President, Chief Executive
Officer and Chairman of the Board of LTC Properties, Inc.
(LTC) and is the Chief Executive Officer and
Chairman of the Board of CLC Healthcare, Inc. (previously LTC
Healthcare, Inc.). LTC owned $11.0 million of the
Companys New Notes and CLC Healthcare, Inc.
(CLC) owned 22.4% of the Companys common stock
and $1.9 million of the Companys New Notes at
March 31, 2002.

The Company has incurred interest expense on LTC
and CLCs New Notes in the amount of $260,000 and $45,000,
respectively. Of this interest, $200,000 and $35,000 is payable
in cash to LTC and CLC, respectively, at March 31, 2002.
The remaining interest is payable-in-kind and increases LTC and
CLCs ownership of the New Notes proportionately.

The Company currently leases 37 properties (1,426
units) from LTC. The Company incurred lease expense of
$2.2 million and $2.1 million for the three months
ended March 31, 2001 and 2002, respectively, pursuant to
these leases.

National
Health Investors, Inc.

W. Andrew Adams, who has been a member of
the Companys Board of Directors and its Chair since
January 2002, is the President, Chief Executive Officer and
Chairman of the Board of Directors of National Health Investors,
Inc. (NHI). NHI owned 557,214 shares of the
Companys common stock and $5.0 million of the
Companys New Notes at March 31, 2002.

The Company has incurred interest expense on
NHIs New Notes in the amount of $117,000. Of this
interest, $90,000 is payable in cash to NHI at March 31,
2002. The remaining interest is payable-in-kind and increases
NHIs ownership of the New Notes.

9



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ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


Leonard
Tannenbaum

Leonard Tannenbaum is a current member of the
Companys Board of Directors. Mr. Tannenbaum owned $323,875
of the Companys New Notes at March 31, 2002.

The Company has incurred interest expense on
Mr. Tannenbaums New Notes in the amount of $8,000. Of
this interest, $6,000 is payable in cash to Mr. Tannenbaum
at March 31, 2002. The remaining interest is
payable-in-kind and increases Mr. Tannenbaums
ownership of the New Notes.

11.     Income
Taxes

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

12.     Subsequent
Event

Effective May 16, 2002, Matthew Patrick
replaced Drew Q. Miller as Senior Vice President, Chief
Financial Officer and Treasurer. Mr. Patrick also serves as
a Director of the Company.

13.     Subsidiary
Guarantee of New Notes

The New Notes, issued by the Company, are
publicly traded and the repayment of these notes is guaranteed
by two wholly-owned subsidiaries of the Company: ALC
Indiana, Inc. and Home and Community Care, Inc.
(HCI). HCI and Carriage House Assisted
Living, Inc. (Carriage House), a wholly owned
subsidiary of the Company, are also co-obligors of the New
Notes. The following information is presented as required under
the Securities and Exchange Commission Financial Reporting
Release No. 55 in connection with the guarantee of the New
Notes by the Companys wholly owned subsidiaries. The
operating and

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ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


investing activities of the separate legal
entities included in the consolidated financial statements are
fully interdependent and integrated with the Company and each
other.

Successor Company

Consolidating Balance Sheets


March 31, 2002


|                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|------------------------------------------------------- |  | --------- | ------- | ------------------------- |  | -------- | ------ | ---- |  | ------------- | ----- | ------------- |  | ------------ | ----- |  |  | - | ------ |  |  | - | ------- | - |  | - | ------- | 
|                                                        |  |           |         |                           |  |          |        |     
|                                                        |  |           |         | Wholly-Owned Subsidiaries |  |          |        |     
|                                                        |  |           |         |                           |  |          |        |     
|                                                        |  |           |         | ALC                       |  |          |        | Non- |  |               |       |              
|                                                        |  |           |         | Indiana,                  |  | Carriage |        |      |  | Participating |       | Consolidating |  | Consolidated
|                                                        |  | ALC, Inc. |         | Inc.                      |  | House    |        | HCI  |  | Subsidiaries  |       | Adjustments   |  | Total       
|                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |             
|ASSETS                                                 
|Current Assets:                                         |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Cash and cash equivalents                               |  | $         | 3,348   |                           |  | $        |       |      |  | $             |      |               |  | $            |      |  |  | $ | 270    |  |  | $ |        |   |  | $ | 3,618   | 
|Receivable from subsidiaries/parent                     |  |           | 1,586   |                           |  |          | 5,357  |      |  |               |      |               |  |              |      |  |  |   | 4,949  |  |  |   | (11,892 | ) |  |   |        | 
|Cash restricted for resident security deposits          |  |           | 2,417   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 2,417   | 
|Accounts receivable, net                                |  |           | 2,176   |                           |  |          |       |      |  |               |      |               |  |              | 4     |  |  |   | 235    |  |  |   |        |   |  |   | 2,415   | 
|Prepaid insurance                                       |  |           | 2,667   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 2,667   | 
|Prepaid expenses                                        |  |           | 616     |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   | 21     |  |  |   |        |   |  |   | 637     | 
|Cash restricted for workers compensation
    claims    |  |           | 4,519   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 4,519   | 
|Other current assets                                    |  |           | 1,704   |                           |  |          | 9      |      |  |               |      |               |  |              | 23    |  |  |   | 1,881  |  |  |   |        |   |  |   | 3,617   | 
|                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Total current assets                                    |  |           | 19,033  |                           |  |          | 5,366  |      |  |               |      |               |  |              | 27    |  |  |   | 7,356  |  |  |   | (11,892 | ) |  |   | 19,890  | 
|                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Restricted cash                                         |  |           | 5,372   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 5,372   | 
|Property and equipment, net                             |  |           | 92,074  |                           |  |          | 12,818 |      |  |               | 3,586 |               |  |              | 6,568 |  |  |   | 80,460 |  |  |   |        |   |  |   | 195,506 | 
|Investment in subsidiaries                              |  |           | 36,161  |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   | (36,161 | ) |  |   |        | 
|Other assets, net                                       |  |           | 1,583   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   | 373    |  |  |   |        |   |  |   | 1,956   | 
|                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Total assets                                            |  | $         | 154,223 |                           |  | $        | 18,184 |      |  | $             | 3,586 |               |  | $            | 6,595 |  |  | $ | 88,189 |  |  | $ | (48,053 | ) |  | $ | 222,724 | 
|                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|LIABILITIES AND SHAREHOLDERS
    EQUITY               
|Current liabilities:                                    |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Accounts payable                                        |  | $         | 1,174   |                           |  | $        |       |      |  | $             |      |               |  | $            | 1     |  |  | $ | 21     |  |  | $ |        |   |  | $ | 1,196   | 
|Payable to subsidiaries/ parent                         |  |           | 4,949   |                           |  |          |       |      |  |               | 211   |               |  |              |      |  |  |   | 1,586  |  |  |   | (6,746  | ) |  |   |        | 
|Accrued real estate taxes                               |  |           | 2,173   |                           |  |          | 386    |      |  |               | 303   |               |  |              | 106   |  |  |   | 680    |  |  |   |        |   |  |   | 3,648   | 
|Accrued interest expense                                |  |           | 1,049   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   | 46     |  |  |   |        |   |  |   | 1,095   | 
|Accrued interest expense payable to related
    parties |  |           | 331     |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 331     | 
|Accrued payroll expense                                 |  |           | 5,801   |                           |  |          |       |      |  |               |      |               |  |              | 7     |  |  |   | 74     |  |  |   |        |   |  |   | 5,882   | 
|Other accrued expenses                                  |  |           | 6,204   |                           |  |          |       |      |  |               |      |               |  |              | 4     |  |  |   | 62     |  |  |   |        |   |  |   | 6,270   | 
|Resident security deposits                              |  |           | 2,155   |                           |  |          |       |      |  |               |      |               |  |              | 19    |  |  |   | 259    |  |  |   |        |   |  |   | 2,433   | 
|Insurance premium obligation                            |  |           | 1,224   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 1,224   | 
|Other current liabilities                               |  |           | 259     |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   | 2      |  |  |   |        |   |  |   | 261     | 
|Current portion of unfavorable lease adjustment         |  |           | 562     |                           |  |          |       |      |  |               | 89    |               |  |              |      |  |  |   | 13     |  |  |   |        |   |  |   | 664     | 

11



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ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |   |  |   |        |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | --------- | ------- | ------------------------- |  | -------- | ------ | ---- |  | ------------- | ----- | ------------- |  | ------------ | ----- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                        |  |           |         |                           |  |          |        |     
|                                                                        |  |           |         | Wholly-Owned Subsidiaries |  |          |        |     
|                                                                        |  |           |         |                           |  |          |        |     
|                                                                        |  |           |         | ALC                       |  |          |        | Non- |  |               |       |              
|                                                                        |  |           |         | Indiana,                  |  | Carriage |        |      |  | Participating |       | Consolidating |  | Consolidated
|                                                                        |  | ALC, Inc. |         | Inc.                      |  | House    |        | HCI  |  | Subsidiaries  |       | Adjustments   |  | Total       
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |             
|Current portion of long-term debt and capital
    lease obligation      |  |           | 1,364   |                           |  |          |       |      |  |               |      |               |  |              |      |   |  |   | 1,219  |   |  |   |        |   |  |   | 2,583   |  
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |   |  |   |        |   |  |   |         |   |  |   |         |  
|Total current liabilities                                               |  |           | 27,245  |                           |  |          | 386    |      |  |               | 603   |               |  |              | 137   |   |  |   | 3,962  |   |  |   | (6,746  | ) |  |   | 25,587  |  
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |   |  |   |        |   |  |   |         |   |  |   |         |  
|Other liabilities                                                       |  |           | 160     |                           |  |          |       |      |  |               | 8     |               |  |              |      |   |  |   |       |   |  |   |        |   |  |   | 168     |  
|Unfavorable lease adjustment                                            |  |           | 2,478   |                           |  |          |       |      |  |               | 409   |               |  |              |      |   |  |   | 75     |   |  |   |        |   |  |   | 2,962   |  
|Long-term debt and capital lease obligation, net
    of current portion |  |           | 87,874  |                           |  |          |       |      |  |               |      |               |  |              |      |   |  |   | 74,784 |   |  |   |        |   |  |   | 162,658 |  
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |   |  |   |        |   |  |   |         |   |  |   |         |  
|Total liabilities                                                       |  |           | 117,757 |                           |  |          | 386    |      |  |               | 1,020 |               |  |              | 137   |   |  |   | 78,821 |   |  |   | (6,746  | ) |  |   | 191,375 |  
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |   |  |   |        |   |  |   |         |   |  |   |         |  
|Shareholders equity:                                                   |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |   |  |   |        |   |  |   |         |   |  |   |         |  
|Common stock                                                            |  |           | 65      |                           |  |          |       |      |  |               |      |               |  |              |      |   |  |   |       |   |  |   |        |   |  |   | 65      |  
|Additional paid-in capital                                              |  |           | 37,880  |                           |  |          | 17,428 |      |  |               | 2,818 |               |  |              | 6,523 |   |  |   | 9,392  |   |  |   | (41,307 | ) |  |   | 32,734  |  
|Retained earnings (accumulated deficit)                                 |  |           | (1,479  | )                         |  |          | 370    |      |  |               | (252  | )             |  |              | (65   | ) |  |   | (24    | ) |  |   |        |   |  |   | (1,450  | )
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |   |  |   |        |   |  |   |         |   |  |   |         |  
|Total shareholders equity                                              |  |           | 36,466  |                           |  |          | 17,798 |      |  |               | 2,566 |               |  |              | 6,458 |   |  |   | 9,368  |   |  |   | (41,307 | ) |  |   | 31,349  |  
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |   |  |   |        |   |  |   |         |   |  |   |         |  
|Total liabilities and shareholders equity                              |  | $         | 154,223 |                           |  | $        | 18,184 |      |  | $             | 3,586 |               |  | $            | 6,595 |   |  | $ | 88,189 |   |  | $ | (48,053 | ) |  | $ | 222,274 |  
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |   |  |   |        |   |  |   |         |   |  |   |         |  

Successor Company

Consolidating Balance Sheets


December 31, 2001


|                                                     |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|---------------------------------------------------- |  | --------- | ------- | ------------------------- |  | -------- | ------ | ---- |  | ------------- | ----- | ------------- |  | ------------ | ----- |  |  | - | ------ |  |  | - | ------- | - |  | - | ------- | 
|                                                     |  |           |         |                           |  |          |        |     
|                                                     |  |           |         | Wholly-Owned Subsidiaries |  |          |        |     
|                                                     |  |           |         |                           |  |          |        |     
|                                                     |  |           |         | ALC                       |  |          |        | Non- |  |               |       |              
|                                                     |  |           |         | Indiana,                  |  | Carriage |        |      |  | Participating |       | Consolidating |  | Consolidated
|                                                     |  | ALC, Inc. |         | Inc.                      |  | House    |        | HCI  |  | Subsidiaries  |       | Adjustments   |  | Total       
|                                                     |  |           |         |                           |  |          |        |      |  |               |       |               |  |             
|Current Assets:                                      |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Cash and cash equivalents                            |  | $         | 6,077   |                           |  | $        |       |      |  | $             |      |               |  | $            |      |  |  | $ |       |  |  | $ |        |   |  | $ | 6,077   | 
|Receivable from subsidiaries/parent                  |  |           | 674     |                           |  |          | 4,906  |      |  |               | 1,074 |               |  |              | 1,177 |  |  |   |       |  |  |   | (7,831  | ) |  |   |        | 
|Cash restricted for resident security deposits       |  |           | 2,415   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 2,415   | 
|Accounts receivable, net                             |  |           | 2,086   |                           |  |          |       |      |  |               |      |               |  |              | 15    |  |  |   | 227    |  |  |   |        |   |  |   | 2,328   | 
|Prepaid insurance                                    |  |           | 160     |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 160     | 
|Prepaid expenses                                     |  |           | 780     |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   | 43     |  |  |   |        |   |  |   | 823     | 
|Cash restricted for workers compensation
    claims |  |           | 2,825   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 2,825   | 
|Other current assets                                 |  |           | 2,210   |                           |  |          |       |      |  |               |      |               |  |              | 24    |  |  |   | 1,628  |  |  |   |        |   |  |   | 3,862   | 
|                                                     |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Total current assets                                 |  |           | 17,227  |                           |  |          | 4,906  |      |  |               | 1,074 |               |  |              | 1,216 |  |  |   | 1,898  |  |  |   | (7,831  | ) |  |   | 18,490  | 
|                                                     |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Restricted cash                                      |  |           | 5,349   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 5,349   | 
|Property and equipment, net                          |  |           | 95,508  |                           |  |          | 12,917 |      |  |               | 3,576 |               |  |              | 6,611 |  |  |   | 77,936 |  |  |   |        |   |  |   | 196,548 | 
|Investment in subsidiaries                           |  |           | 23,171  |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   | (23,171 | ) |  |   |         | 
|Other assets, net                                    |  |           | 1,511   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   | 355    |  |  |   |        |   |  |   | 1,866   | 
|                                                     |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Total assets                                         |  | $         | 142,766 |                           |  | $        | 17,823 |      |  | $             | 4,650 |               |  | $            | 7,827 |  |  | $ | 80,189 |  |  | $ | (31,002 | ) |  | $ | 222,253 | 
|                                                     |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 

12



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|----------------------------------------------------------------------- |  | --------- | ------- | ------------------------- |  | -------- | ------ | ---- |  | ------------- | ----- | ------------- |  | ------------ | ----- |  |  | - | ------ |  |  | - | ------- | - |  | - | ------- | 
|                                                                        |  |           |         |                           |  |          |        |     
|                                                                        |  |           |         | Wholly-Owned Subsidiaries |  |          |        |     
|                                                                        |  |           |         |                           |  |          |        |     
|                                                                        |  |           |         | ALC                       |  |          |        | Non- |  |               |       |              
|                                                                        |  |           |         | Indiana,                  |  | Carriage |        |      |  | Participating |       | Consolidating |  | Consolidated
|                                                                        |  | ALC, Inc. |         | Inc.                      |  | House    |        | HCI  |  | Subsidiaries  |       | Adjustments   |  | Total       
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                    |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Current liabilities:                                                    |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Accounts payable                                                        |  |           | 935     |                           |  |          |       |      |  |               |      |               |  |              | 6     |  |  |   | 509    |  |  |   |        |   |  |   | 1,450   | 
|Payable to subsidiaries/parent                                          |  |           | 7,157   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   | 674    |  |  |   | (7,831  | ) |  |   |        | 
|Accrued real estate taxes                                               |  |           | 2,451   |                           |  |          | 315    |      |  |               | 240   |               |  |              | 90    |  |  |   | 1,427  |  |  |   |        |   |  |   | 4,523   | 
|Accrued interest expense                                                |  |           | 636     |                           |  |          | 30     |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 666     | 
|Accrued payroll expense                                                 |  |           | 4,480   |                           |  |          |       |      |  |               |      |               |  |              | 6     |  |  |   | 75     |  |  |   |        |   |  |   | 4,561   | 
|Other accrued expenses                                                  |  |           | 7,097   |                           |  |          |       |      |  |               |      |               |  |              | 11    |  |  |   | 55     |  |  |   |        |   |  |   | 7,163   | 
|Tenant security deposits                                                |  |           | 2,120   |                           |  |          |       |      |  |               |      |               |  |              | 18    |  |  |   | 333    |  |  |   |        |   |  |   | 2,471   | 
|Other current liabilities                                               |  |           | 652     |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 652     | 
|Current portion of unfavorable lease adjustment                         |  |           | 589     |                           |  |          |       |      |  |               | 92    |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 681     | 
|Current portion of long-term debt and capital
    lease obligation      |  |           | 2,079   |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   | 543    |  |  |   |        |   |  |   | 2,622   | 
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Total current liabilities                                               |  |           | 28,196  |                           |  |          | 345    |      |  |               | 332   |               |  |              | 131   |  |  |   | 3,616  |  |  |   | (7,831  | ) |  |   | 24,789  | 
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Other liabilities                                                       |  |           | 11      |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   | 78     |  |  |   |        |   |  |   | 89      | 
|Unfavorable lease adjustment                                            |  |           | 2,686   |                           |  |          |       |      |  |               | 429   |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 3,115   | 
|Long-term debt and capital lease obligation, net
    of current portion |  |           | 90,858  |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   | 70,603 |  |  |   |        |   |  |   | 161,461 | 
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Total liabilities                                                       |  |           | 121,751 |                           |  |          | 345    |      |  |               | 761   |               |  |              | 131   |  |  |   | 74,297 |  |  |   | (7,831  | ) |  |   | 189,454 | 
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Shareholders equity:                                                   |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Common stock                                                            |  |           | 65      |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   | 65      | 
|Additional paid-in capital                                              |  |           | 20,950  |                           |  |          | 17,478 |      |  |               | 3,889 |               |  |              | 7,696 |  |  |   | 5,892  |  |  |   | (23,171 | ) |  |   | 32,734  | 
|Accumulated deficit                                                     |  |           |        |                           |  |          |       |      |  |               |      |               |  |              |      |  |  |   |       |  |  |   |        |   |  |   |        | 
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Total shareholders equity                                              |  |           | 21,015  |                           |  |          | 17,478 |      |  |               | 3,889 |               |  |              | 7,696 |  |  |   | 5,892  |  |  |   | (23,171 | ) |  |   | 32,799  | 
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 
|Total liabilities and shareholders equity                              |  | $         | 142,766 |                           |  | $        | 17,823 |      |  | $             | 4,650 |               |  | $            | 7,827 |  |  | $ | 80,189 |  |  | $ | (31,002 | ) |  | $ | 222,253 | 
|                                                                        |  |           |         |                           |  |          |        |      |  |               |       |               |  |              |       |  |  |   |        |  |  |   |         |   |  |   |         | 

13



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


Successor Company

Consolidating Statements of
Operations

Three months ended March 31,
2002


|                                                                   |                                      |                                   |        |                           |        |          |      |      |     |               |      |              |     |   |     |     |     |   |       |        |       |   |        |        |        |  
|------------------------------------------------------------------ | ------------------------------------ | --------------------------------- | ------ | ------------------------- | ------ | -------- | ---- | ---- | --- | ------------- | ---- | ------------ | --- | - | --- | --- | --- | - | ----- | ------ | ----- | - | ------ | ------ | ------ | -
|                                                                   |                                      |                                   |        |                           |        |         
|                                                                   |                                      |                                   |        | Wholly-Owned Subsidiaries |        |         
|                                                                   |                                      |                                   |        |                           |        |         
|                                                                   |                                      |                                   |        | ALC                       |        |          |      | Non- |     |              
|                                                                   |                                      |                                   |        | Indiana,                  |        | Carriage |      |      |     | Participating |      | Consolidated
|                                                                   |                                      | ALC, Inc.                         |        | Inc.                      |        | House    |      | HCI  |     | Subsidiaries  |      | Total       
|                                                                   |                                      |                                   |        |                           |        |          |      |      |     |               |      |             
|Revenue                                                            |                                      | $                                 | 33,828 |                           |        | $        |     |      |     | $             |     |              |     | $ | 287 |     |     | $ | 3,774 |        |       | $ | 37,889 |       
|Operating expenses:                                                |                                      |                                   |        |                           |        |          |      |      |     |               |      |              |     |   |     |     |     |   |       |        |       |   |        |       
|                                                                   | Residence operating expenses         |                                   |        | 23,039                    |        |          |      | 71   |     |               |      | 62           |     |   |     | 287 |     |   |       | 2,876  |       |   |        | 26,335 |       
|                                                                   | Corporate general and administrative |                                   |        | 4,316                     |        |          |      |     |     |               |      |             |     |   |     |    |     |   |       |       |       |   |        | 4,316  |       
|                                                                   | Building rentals                     |                                   |        | 982                       |        |          |      |     |     |               |      |             |     |   |     |    |     |   |       |       |       |   |        | 982    |       
|                                                                   | Building rentals to related party    |                                   |        | 1,822                     |        |          |      |     |     |               |      | 233          |     |   |     |    |     |   |       |       |       |   |        | 2,055  |       
|                                                                   | Depreciation and amortization        |                                   |        | 845                       |        |          |      | 99   |     |               |      | 32           |     |   |     | 51  |     |   |       | 640    |       |   |        | 1,667  |       
|                                                                   |                                      |                                   |        |                           |        |          |      |      |     |               |      |              |     |   |     |     |     |   |       |        |       |   |        |       
|                                                                   |                                      | Total operating expenses          |        |                           | 31,004 |          |      |      | 170 |               |      |              | 327 |   |     |     | 338 |   |       |        | 3,516 |   |        |        | 35,355 |  
|                                                                   |                                      |                                   |        |                           |        |          |      |      |     |               |      |              |     |   |     |     |     |   |       |        |       |   |        |       
|Operating income (loss)                                            |                                      |                                   | 2,824  |                           |        |          | (170 | )    |     |               | (327 | )            |     |   | (51 | )   |     |   | 258   |        |       |   | 2,534  |       
|                                                                   |                                      |                                   |        |                           |        |          |      |      |     |               |      |              |     |   |     |     |     |   |       |        |       |   |        |       
|Other income (expense):                                            |                                      |                                   |        |                           |        |          |      |      |     |               |      |              |     |   |     |     |     |   |       |        |       |   |        |       
|                                                                   | Interest expense                     |                                   |        | (1,633                    | )      |          |      |     |     |               |      |             |     |   |     |    |     |   |       | (1,528 | )     |   |        | (3,161 | )     
|                                                                   | Interest expense to related parties  |                                   |        | (430                      | )      |          |      |     |     |               |      |             |     |   |     |    |     |   |       |       |       |   |        | (430   | )     
|                                                                   | Interest income                      |                                   |        | 54                        |        |          |      |     |     |               |      |             |     |   |     |    |     |   |       |       |       |   |        | 54     |       
|                                                                   | Management fee income (expense)      |                                   |        | (78                       | )      |          |      |     |     |               |      | 75           |     |   |     | (14 | )   |   |       | 17     |       |   |        |       |       
|                                                                   | Lease income (expense)               |                                   |        | (1,769                    | )      |          |      | 540  |     |               |      |             |     |   |     |    |     |   |       | 1,229  |       |   |        |       |       
|                                                                   |                                      |                                   |        |                           |        |          |      |      |     |               |      |              |     |   |     |     |     |   |       |        |       |   |        |       
|                                                                   |                                      | Total other income (expense), net |        |                           | (3,856 | )        |      |      | 540 |               |      |              | 75  |   |     |     | (14 | ) |       |        | (282  | ) |        |        | (3,537 | )
|                                                                   |                                      |                                   |        |                           |        |          |      |      |     |               |      |              |     |   |     |     |     |   |       |        |       |   |        |       
|Income (loss) before debt restructure and
    reorganization costs |                                      |                                   | (1,032 | )                         |        |          | 370  |      |     |               | (252 | )            |     |   | (65 | )   |     |   | (24   | )      |       |   | (1,003 | )     
|Debt restructure and reorganization costs                          |                                      |                                   | 447    |                           |        |          |     |      |     |               |     |              |     |   |    |     |     |   |      |        |       |   | 447    |       
|                                                                   |                                      |                                   |        |                           |        |          |      |      |     |               |      |              |     |   |     |     |     |   |       |        |       |   |        |       
|Net income (loss)                                                  |                                      | $                                 | (1,479 | )                         |        | $        | 370  |      |     | $             | (252 | )            |     | $ | (65 | )   |     | $ | (24   | )      |       | $ | (1,450 | )     
|                                                                   |                                      |                                   |        |                           |        |          |      |      |     |               |      |              |     |   |     |     |     |   |       |        |       |   |        |       

14



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


Successor Company

Consolidating Statements of Cash
Flows


Three months ended March 31,
2002


|                                                                                                      |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |        |  
|----------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | --------- | ------ | ------------------------- | - | -------- | --- | ---- | - | ------------- | ---- | ------------ | - | - | --- | -- | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                                                      |                                                               |           |        |                           |   |         
|                                                                                                      |                                                               |           |        | Wholly-Owned Subsidiaries |   |         
|                                                                                                      |                                                               |           |        |                           |   |         
|                                                                                                      |                                                               |           |        | ALC                       |   |          |     | Non- |   |              
|                                                                                                      |                                                               |           |        | Indiana,                  |   | Carriage |     |      |   | Participating |      | Consolidated
|                                                                                                      |                                                               | ALC, Inc. |        | Inc.                      |   | House    |     | HCI  |   | Subsidiaries  |      | Total       
|                                                                                                      |                                                               |           |        |                           |   |          |     |      |   |               |      |             
|Operating Activities:                                                                                 |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|Net income (loss)                                                                                     |                                                               | $         | (1,479 | )                         |   | $        | 370 |      |   | $             | (252 | )            |   | $ | (65 | )  |   | $ | (24    | )      |   | $ | (1,450 | )     
|Adjustment to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|                                                                                                      | Depreciation and amortization                                 |           |        | 845                       |   |          |     | 99   |   |               |      | 32           |   |   |     | 51 |   |   |        | 640    |   |   |        | 1,667  |  
|                                                                                                      | Amortization of debt issuance costs                           |           |        | 20                        |   |          |     |     |   |               |      |             |   |   |     |   |   |   |        |       |   |   |        | 20     |  
|                                                                                                      | Amortization of fair value adjustment to building
    rentals |           |        | (144                      | ) |          |     |     |   |               |      | (23          | ) |   |     |   |   |   |        | (3     | ) |   |        | (170   | )
|                                                                                                      | Amortization of fair market adjustment to
    long-term debt  |           |        | 4                         |   |          |     |     |   |               |      |             |   |   |     |   |   |   |        | 103    |   |   |        | 107    |  
|                                                                                                      | Amortization of discount on long-term debt                    |           |        | 106                       |   |          |     |     |   |               |      |             |   |   |     |   |   |   |        |       |   |   |        | 106    |  
|                                                                                                      | Straight line adjustment to building rentals                  |           |        | 86                        |   |          |     |     |   |               |      |             |   |   |     |   |   |   |        |       |   |   |        | 86     |  
|                                                                                                      | Interest paid-in-kind                                         |           |        | 305                       |   |          |     |     |   |               |      |             |   |   |     |   |   |   |        |       |   |   |        | 305    |  
|                                                                                                      | Provision (recoveries) for doubtful accounts                  |           |        | 26                        |   |          |     |     |   |               |      |             |   |   |     |   |   |   |        | (13    | ) |   |        | 13     |  
|Changes in assets and liabilities:                                                                    |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|                                                                                                      | Receivable from subsidiaries/ parent                          |           |        | 3,251                     |   |          |     | (531 | ) |               |      | 211          |   |   |     | 4  |   |   |        | (2,935 | ) |   |        |       |  
|                                                                                                      | Accounts receivable                                           |           |        | (116                      | ) |          |     |     |   |               |      |             |   |   |     | 11 |   |   |        | 5      |   |   |        | (100   | )
|                                                                                                      | Prepaid expenses                                              |           |        | (2,343                    | ) |          |     |     |   |               |      |             |   |   |     |   |   |   |        | 22     |   |   |        | (2,321 | )
|                                                                                                      | Other current assets                                          |           |        | 206                       |   |          |     | (9   | ) |               |      | 3            |   |   |     |   |   |   |        | 45     |   |   |        | 245    |  
|                                                                                                      | Other assets                                                  |           |        | (12                       | ) |          |     |     |   |               |      |             |   |   |     |   |   |   |        | (19    | ) |   |        | (31    | )
|                                                                                                      | Accounts payable                                              |           |        | (213                      | ) |          |     |     |   |               |      |             |   |   |     | (4 | ) |   |        | (37    | ) |   |        | (254   | )
|                                                                                                      | Payable to subsidiaries/ parent                               |           |        | (1,135                    | ) |          |     |     |   |               |      |             |   |   |     |   |   |   |        | 1,135  |   |   |        |       |  
|                                                                                                      | Accrued expenses                                              |           |        | 1,147                     |   |          |     | 71   |   |               |      | 62           |   |   |     | 11 |   |   |        | (978   | ) |   |        | 313    |  
|                                                                                                      | Insurance premium obligation                                  |           |        | 1,224                     |   |          |     |     |   |               |      |             |   |   |     |   |   |   |        |       |   |   |        | 1,224  |  
|                                                                                                      | Other current liabilities                                     |           |        | (370                      | ) |          |     |     |   |               |      |             |   |   |     |   |   |   |        | (59    | ) |   |        | (429   | )
|                                                                                                      | Other liabilities                                             |           |        | (15                       | ) |          |     |     |   |               |      | 8            |   |   |     |   |   |   |        |       |   |   |        | (7     | )
|                                                                                                      |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|Net cash provided by (used in) operating
    activities                                               |                                                               |           | 1,393  |                           |   |          |    |      |   |               | 41   |              |   |   | 8   |    |   |   | (2,118 | )      |   |   | (676   | )     
|                                                                                                      |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|Investing Activities:                                                                                 |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|Increase in restricted cash                                                                           |                                                               |           | (1,719 | )                         |   |          |    |      |   |               |     |              |   |   |    |    |   |   |       |        |   |   | (1,719 | )     
|Purchases of property and equipment                                                                   |                                                               |           | (355   | )                         |   |          |    |      |   |               | (41  | )            |   |   | (8  | )  |   |   | (221   | )      |   |   | (625   | )     
|                                                                                                      |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|Net cash used in investing activities                                                                 |                                                               |           | (2,074 | )                         |   |          |    |      |   |               | (41  | )            |   |   | (8  | )  |   |   | (221   | )      |   |   | (2,344 | )     
|                                                                                                      |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|Financing Activities:                                                                                 |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|Proceeds from long-term debt                                                                          |                                                               |           | (791   | )                         |   |          |    |      |   |               |     |              |   |   |    |    |   |   | 1,791  |        |   |   | 1,000  |       
|Payments on long-term debt and capital lease
    obligation                                           |                                                               |           | (360   | )                         |   |          |    |      |   |               |     |              |   |   |     |    |   |   |       |        |   |   | (360   | )     
|Debt issuance costs                                                                                   |                                                               |           | (79    | )                         |   |          |    |      |   |               |     |              |   |   |    |    |   |   |       |        |   |   | (79    | )     
|                                                                                                      |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|Net cash provided by (used in) financing
    activities                                               |                                                               |           | (1,230 | )                         |   |          |    |      |   |               |     |              |   |   |    |    |   |   | 1,791  |        |   |   | 561    |       
|                                                                                                      |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|Net decrease in cash and cash equivalents                                                             |                                                               |           | (1,911 | )                         |   |          |    |      |   |               |     |              |   |   |    |    |   |   | (548   | )      |   |   | (2,459 | )     
|Cash and cash equivalents, beginning of period                                                        |                                                               |           | 5,259  |                           |   |          |    |      |   |               |     |              |   |   |    |    |   |   | 818    |        |   |   | 6,077  |       
|                                                                                                      |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       
|Cash and cash equivalents, end of period                                                              |                                                               | $         | 3,348  |                           |   | $        |    |      |   | $             |     |              |   | $ |    |    |   | $ | 270    |        |   | $ | 3,618  |       
|                                                                                                      |                                                               |           |        |                           |   |          |     |      |   |               |      |              |   |   |     |    |   |   |        |        |   |   |        |       

15



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


Predecessor Company

Consolidating Statements of
Operations


Three months ended March 31,
2001


|                                                                   |                                      |                                   |        |                           |        |          |       |       |       |               |      |              |     |   |     |     |     |   |       |       |       |   |        |        |        |  
|------------------------------------------------------------------ | ------------------------------------ | --------------------------------- | ------ | ------------------------- | ------ | -------- | ----- | ----- | ----- | ------------- | ---- | ------------ | --- | - | --- | --- | --- | - | ----- | ----- | ----- | - | ------ | ------ | ------ | -
|                                                                   |                                      |                                   |        |                           |        |         
|                                                                   |                                      |                                   |        | Wholly-Owned Subsidiaries |        |         
|                                                                   |                                      |                                   |        |                           |        |         
|                                                                   |                                      |                                   |        | ALC                       |        |          |       | Non-  |       |              
|                                                                   |                                      |                                   |        | Indiana,                  |        | Carriage |       |       |       | Participating |      | Consolidated
|                                                                   |                                      | ALC, Inc.                         |        | Inc.                      |        | House    |       | HCI   |       | Subsidiaries  |      | Total       
|                                                                   |                                      |                                   |        |                           |        |          |       |       |       |               |      |             
|Revenue                                                            |                                      | $                                 | 27,963 |                           |        | $        | 1,710 |       |       | $             |     |              |     | $ | 287 |     |     | $ | 6,917 |       |       | $ | 36,877 |       
|Operating expenses:                                                |                                      |                                   |        |                           |        |          |       |       |       |               |      |              |     |   |     |     |     |   |       |       |       |   |        |       
|                                                                   | Residence operating expenses         |                                   |        | 19,527                    |        |          |       | 1,037 |       |               |      | 84           |     |   |     | 233 |     |   |       | 4,677 |       |   |        | 25,558 |       
|                                                                   | Corporate general and administrative |                                   |        | 4,268                     |        |          |       |      |       |               |      |             |     |   |     |    |     |   |       |      |       |   |        | 4,268  |       
|                                                                   | Building rentals                     |                                   |        | 761                       |        |          |       |      |       |               |      | 248          |     |   |     |    |     |   |       | 949   |       |   |        | 1,958  |       
|                                                                   | Building rentals to related party    |                                   |        | 2,213                     |        |          |       |      |       |               |      |             |     |   |     |    |     |   |       |      |       |   |        | 2,213  |       
|                                                                   | Depreciation and amortization        |                                   |        | 1,665                     |        |          |       | 155   |       |               |      | 54           |     |   |     | 112 |     |   |       | 566   |       |   |        | 2,552  |       
|                                                                   |                                      |                                   |        |                           |        |          |       |       |       |               |      |              |     |   |     |     |     |   |       |       |       |   |        |       
|                                                                   |                                      | Total operating expenses          |        |                           | 28,434 |          |       |       | 1,192 |               |      |              | 386 |   |     |     | 345 |   |       |       | 6,192 |   |        |        | 36,549 |  
|                                                                   |                                      |                                   |        |                           |        |          |       |       |       |               |      |              |     |   |     |     |     |   |       |       |       |   |        |       
|Operating income (loss)                                            |                                      |                                   | (471   | )                         |        |          | 518   |       |       |               | (386 | )            |     |   | (58 | )   |     |   | 725   |       |       |   | 328    |       
|                                                                   |                                      |                                   |        |                           |        |          |       |       |       |               |      |              |     |   |     |     |     |   |       |       |       |   |        |       
|Other income (expense):                                            |                                      |                                   |        |                           |        |          |       |       |       |               |      |              |     |   |     |     |     |   |       |       |       |   |        |       
|                                                                   | Interest expense                     |                                   |        | (3,637                    | )      |          |       |      |       |               |      |             |     |   |     |    |     |   |       | (765  | )     |   |        | (4,402 | )     
|                                                                   | Interest expense to related parties  |                                   |        |                          |        |          |       |      |       |               |      |             |     |   |     |    |     |   |       |      |       |   |        |       |       
|                                                                   | Interest income                      |                                   |        | 148                       |        |          |       |      |       |               |      |             |     |   |     |    |     |   |       |      |       |   |        | 148    |       
|                                                                   | Gain/loss on disposal of assets      |                                   |        | 1                         |        |          |       | (1    | )     |               |      |             |     |   |     |    |     |   |       |      |       |   |        |       |       
|                                                                   | Management fee income (expense)      |                                   |        | 180                       |        |          |       | (87   | )     |               |      | 67           |     |   |     | (14 | )   |   |       | (146  | )     |   |        |       |       
|                                                                   | Lease income (expense)               |                                   |        | (1,229                    | )      |          |       |      |       |               |      |             |     |   |     |    |     |   |       | 1,229 |       |   |        |       |       
|                                                                   | Other income, net                    |                                   |        | 31                        |        |          |       |      |       |               |      |             |     |   |     |    |     |   |       |      |       |   |        | 31     |       
|                                                                   |                                      |                                   |        |                           |        |          |       |       |       |               |      |              |     |   |     |     |     |   |       |       |       |   |        |       
|                                                                   |                                      | Total other income (expense), net |        |                           | (4,506 | )        |       |       | (88   | )             |      |              | 67  |   |     |     | (14 | ) |       |       | 318   |   |        |        | (4,223 | )
|                                                                   |                                      |                                   |        |                           |        |          |       |       |       |               |      |              |     |   |     |     |     |   |       |       |       |   |        |       
|Income (loss) before debt restructure and
    reorganization costs |                                      |                                   | (4,977 | )                         |        |          | 430   |       |       |               | (319 | )            |     |   | (72 | )   |     |   | 1,043 |       |       |   | (3,895 | )     
|Debt restructure and reorganization costs                          |                                      |                                   | 303    |                           |        |          |      |       |       |               |     |              |     |   |    |     |     |   |      |       |       |   | 303    |       
|                                                                   |                                      |                                   |        |                           |        |          |       |       |       |               |      |              |     |   |     |     |     |   |       |       |       |   |        |       
|Net income (loss)                                                  |                                      | $                                 | (5,280 | )                         |        | $        | 430   |       |       | $             | (319 | )            |     | $ | (72 | )   |     | $ | 1,043 |       |       | $ | (4,198 | )     
|                                                                   |                                      |                                   |        |                           |        |          |       |       |       |               |      |              |     |   |     |     |     |   |       |       |       |   |        |       

16



---



##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(Unaudited)


Predecessor Company

Consolidating Statements of Cash
Flows


Three months ended March 31,
2001


|                                                                                                      |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |        |        |  
|----------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------------------- | ------ | ------------------------- | ------ | -------- | --- | ---- | -- | ------------- | ---- | ------------ | -- | - | --- | --- | --- | - | ----- | ------ | ----- | - | ------ | ------ | ------ | -
|                                                                                                      |                                                               |                                                         |        |                           |        |         
|                                                                                                      |                                                               |                                                         |        | Wholly-Owned Subsidiaries |        |         
|                                                                                                      |                                                               |                                                         |        |                           |        |         
|                                                                                                      |                                                               |                                                         |        | ALC                       |        |          |     | Non- |    |              
|                                                                                                      |                                                               |                                                         |        | Indiana,                  |        | Carriage |     |      |    | Participating |      | Consolidated
|                                                                                                      |                                                               | ALC, Inc.                                               |        | Inc.                      |        | House    |     | HCI  |    | Subsidiaries  |      | Total       
|                                                                                                      |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |             
|Operating Activities:                                                                                 |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       
|Net income (loss)                                                                                     |                                                               | $                                                       | (5,280 | )                         |        | $        | 430 |      |    | $             | (319 | )            |    | $ | (72 | )   |     | $ | 1,043 |        |       | $ | (4,198 | )     
|Adjustment to reconcile net income (loss) to net
    case provided by (used in) operating activities: |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       
|                                                                                                      | Depreciation and amortization                                 |                                                         |        | 1,665                     |        |          |     | 155  |    |               |      | 54           |    |   |     | 112 |     |   |       | 566    |       |   |        | 2,552  |       
|                                                                                                      | Amortization of debt issuance costs                           |                                                         |        |                          |        |          |     |     |    |               |      |             |    |   |     |    |     |   |       |       |       |   |        |       |       
|                                                                                                      | Amortization of fair value adjustment to building
    rentals |                                                         |        |                          |        |          |     |     |    |               |      |             |    |   |     |    |     |   |       |       |       |   |        |       |       
|                                                                                                      | Amortization of fair market adjustment to
    long-term debt  |                                                         |        |                          |        |          |     |     |    |               |      |             |    |   |     |    |     |   |       |       |       |   |        |       |       
|                                                                                                      | Amortization of discount on long-term debt                    |                                                         |        |                          |        |          |     |     |    |               |      |             |    |   |     |    |     |   |       |       |       |   |        |       |       
|                                                                                                      | Straight line adjustment to building rentals                  |                                                         |        |                          |        |          |     |     |    |               |      |             |    |   |     |    |     |   |       |       |       |   |        |       |       
|                                                                                                      | Interest paid-in-kind                                         |                                                         |        |                          |        |          |     |     |    |               |      |             |    |   |     |    |     |   |       |       |       |   |        |       |       
|                                                                                                      | Provision for doubtful accounts                               |                                                         |        | 156                       |        |          |     |     |    |               |      |             |    |   |     |    |     |   |       |       |       |   |        | 156    |       
|Changes in assets and liabilities:                                                                    |                                                               |                                                         |       |                           |        |          |    |      |    |               |     |              |    |   |    |     |     |   |      |        |       |   |        |       
|                                                                                                      | Receivable from subsidiaries/parent                           |                                                         |        | 604                       |        |          |     | (604 | )  |               |      |             |    |   |     |    |     |   |       |       |       |   |        |       |       
|                                                                                                      | Accounts receivable                                           |                                                         |        | (188                      | )      |          |     | (24  | )  |               |      |             |    |   |     | (4  | )   |   |       | 50     |       |   |        | (166   | )     
|                                                                                                      | Prepaid expenses                                              |                                                         |        | 255                       |        |          |     |     |    |               |      |             |    |   |     | 1   |     |   |       | 26     |       |   |        | 282    |       
|                                                                                                      | Other current assets                                          |                                                         |        | 88                        |        |          |     | 1    |    |               |      |             |    |   |     | (1  | )   |   |       | 290    |       |   |        | 378    |       
|                                                                                                      | Other assets                                                  |                                                         |        | (40                       | )      |          |     | (12  | )  |               |      |             |    |   |     |    |     |   |       | 35     |       |   |        | (17    | )     
|                                                                                                      | Accounts payable                                              |                                                         |        | (1,801                    | )      |          |     | (6   | )  |               |      |             |    |   |     | 6   |     |   |       | 1,635  |       |   |        | (166   | )     
|                                                                                                      | Payable to subsidiaries/parent                                |                                                         |        | 3,636                     |        |          |     |     |    |               |      | 189          |    |   |     | 15  |     |   |       | (3,840 | )     |   |        |       |       
|                                                                                                      | Accrued expenses                                              |                                                         |        | (701                      | )      |          |     | 67   |    |               |      | 83           |    |   |     | (29 | )   |   |       | (761   | )     |   |        | (1,341 | )     
|                                                                                                      | Insurance premium obligation                                  |                                                         |        | 2,507                     |        |          |     |     |    |               |      |             |    |   |     |    |     |   |       |       |       |   |        | 2,507  |       
|                                                                                                      | Other current liabilities                                     |                                                         |        | (2,343                    | )      |          |     | (6   | )  |               |      |             |    |   |     | 2   |     |   |       | 33     |       |   |        | (2,314 | )     
|                                                                                                      | Other liabilities                                             |                                                         |        | (60                       | )      |          |     |     |    |               |      | (1           | )  |   |     |    |     |   |       | (45    | )     |   |        | (106   | )     
|                                                                                                      |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       
|                                                                                                      |                                                               | Net cash provided by (used in) operating
    activities |        |                           | (1,502 | )        |     |      | 1  |               |      |              | 6  |   |     |     | 30  |   |       |        | (968  | ) |        |        | (2,433 | )
|                                                                                                      |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       
|Investing Activities:                                                                                 |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       
|Increase in restricted cash                                                                           |                                                               |                                                         | (2,081 | )                         |        |          |    |      |    |               |     |              |    |   |    |     |     |   |      |        |       |   | (2,081 | )     
|Purchases of property and equipment                                                                   |                                                               |                                                         | (329   | )                         |        |          | (1  | )    |    |               | (6   | )            |    |   | (30 | )   |     |   | (87   | )      |       |   | (453   | )     
|                                                                                                      |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       
|                                                                                                      |                                                               | Net cash used in investing activities                   |        |                           | (2,410 | )        |     |      | (1 | )             |      |              | (6 | ) |     |     | (30 | ) |       |        | (87   | ) |        |        | (2,534 | )
|                                                                                                      |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       
|Financing Activities:                                                                                 |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       
|Proceeds from long-term debt                                                                          |                                                               |                                                         | 245    |                           |        |          |    |      |    |               |     |              |    |   |    |     |     |   | 1,055 |        |       |   | 1,300  |       
|Payments on long-term debt and capital lease
    obligation                                           |                                                               |                                                         | (340   | )                         |        |          |    |      |    |               |     |              |    |   |    |     |     |   |      |        |       |   | (340   | )     
|Debt issuance costs                                                                                   |                                                               |                                                         | (1,809 | )                         |        |          |    |      |    |               |     |              |    |   |    |     |     |   |      |        |       |   | (1,809 | )     
|                                                                                                      |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       
|                                                                                                      |                                                               | Net cash provided by (used in) financing
    activities |        |                           | (1,904 | )        |     |      |   |               |      |              |   |   |     |     |    |   |       |        | 1,055 |   |        |        | (849   | )
|                                                                                                      |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       
|Net decrease in cash and cash equivalents                                                             |                                                               |                                                         | (5,816 | )                         |        |          |    |      |    |               |     |              |    |   |    |     |     |   |      |        |       |   | (5,816 | )     
|Cash and cash equivalents, beginning of period                                                        |                                                               |                                                         | 9,889  |                           |        |          |    |      |    |               |     |              |    |   |    |     |     |   |      |        |       |   | 9,889  |       
|                                                                                                      |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       
|Cash and cash equivalents, end of period                                                              |                                                               | $                                                       | 4,073  |                           |        | $        |    |      |    | $             |     |              |    | $ |    |     |     | $ |      |        |       | $ | 4,073  |       
|                                                                                                      |                                                               |                                                         |        |                           |        |          |     |      |    |               |      |              |    |   |     |     |     |   |       |        |       |   |        |       

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

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

General

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

As of March 31, 2002, we operated 183
residences (7,076 units), of which we owned 128 residences
(5,010 units) and leased 55 residences (2,105 units).

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



| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | residence operating expenses, such as staff
    payroll, food, property taxes, utilities, insurance and other
    direct residence operating expenses;                    
|
| |  | general and administrative expenses consisting of
    regional management and corporate support functions such as
    legal, accounting and other administrative expenses;
|
| |  | building rentals;                                                                                                                                                         
|
| |  | depreciation and amortization; and                                                                                                                                        
|
| |  | debt and lease restructure costs.                                                                                                                                         

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

Certain Transactions and Events

Reorganization

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

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



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | $40.25 million principal amount of 10%
    senior secured notes, due January 1, 2009 (the Senior
    Secured Notes);

18



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

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

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

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

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

We adopted fresh-start reporting, as of
December 31, 2001, in accordance with the American
Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting By Entities in Reorganization Under
the Bankruptcy Code(SOP 90-7). Under fresh-starting
reporting, a new entity has been deemed created for financial
reporting purposes.

Fresh-Start
Reporting

Upon the Effective Date of our Plan of
reorganization, we adopted fresh-start reporting in accordance
with the American Institute of Certified Public Accountants
Statement of Position 90-7, Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code (SOP 90-7). In
connection with the adoption of fresh-start reporting, a new
entity has been deemed created for financial reporting purposes.
For financial reporting purposes, we adopted the provisions of
fresh-start reporting effective December 31, 2001.
Consequently, the consolidated balance sheet and related
information at December 31, 2001 is labeled Successor
Company, and reflects the Plan and the principles of
fresh-start reporting. Periods presented prior to
December 31, 2001 have been designated Predecessor
Company. For purposes of this Item 2, references to
operating results and cash flows for periods ended prior to
December 31, 2001 refer to the operating results and cash
flows of the Predecessor Company, and references to working
capital and other balance sheet data, liquidity and prospective
information regarding future periods refer to the Successor
Company.

In adopting the requirements of fresh-start
reporting as of December 31, 2001, we were required to
value our assets and liabilities at their estimated fair value
and eliminate our accumulated deficit at December 31, 2001.
With the assistance of financial advisors who relied upon
various valuation methods including discounted projected cash
flows and other applicable ratios and economic industry
information relevant to our operations, and through negotiations
with the various creditor parties in interest, we determined our
reorganization value to be $32.8 million.

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

19



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Factors
Affecting Comparability of Financial Information

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

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

Management
Changes

In February 2002, Steven L. Vick replaced Wm.
James Nicol as President and Chief Executive Officer. Effective
May 16, 2002, Matthew Patrick replaced Drew Q. Miller as
Senior Vice President, Chief Financial Officer and Treasurer.
Mr. Vick and Mr. Patrick also serve as Directors of
the Company.

Sale of
Existing Residences

We closed one residence in Indiana in March 2002.
This residence is currently being listed for sale. This
residence serves as collateral for our New Notes and, therefore,
any net proceeds received from the sale of this residence must
be used to reduce the outstanding principal amount of the New
Notes.

In addition, we are currently negotiating the
sale of four of our residences in Florida and one residence in
Georgia. These five residences serve as collateral for our New
Notes and any potential proceeds from the sale will be used to
reduce the outstanding principal amount of the New Notes.

Critical Accounting Policies and
Estimates

The discussion and analysis of our financial
condition and results of operations are based upon our
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, revenues and
expenses and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate these estimates,
including those related to bad debts, income taxes, financing
operations, contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

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

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

The determination of fair value of assets and
liabilities required significant estimates and judgments made by
management, particularly as it related to the fair market value
of our debt, operating leases and property, plant and equipment.
The fair value of our debt at December 31, 2001 was
determined based upon the then current effective interest rates
for similar debt instruments. The fair value of our leases and
property, plant and

20



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##### Table of Contents



equipment were based on the then current market
rentals and building values. Results may differ under different
assumptions or conditions.


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

Results of Operations

The following table sets forth, for the periods
presented, operating expenses as a percentage of revenue, the
number of total residences and units operated, average occupancy
and rental rates and the sources of our revenue. 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            
|                                                          |                                                            | March 31,                     
|                                                          |                                                            |                               
|                                                          |                                                            | Predecessor                    |                          | Successor
|                                                          |                                                            | Company                        |                          | Company  
|                                                          |                                                            |                                |                          |          
|                                                          |                                                            | 2001                           |                          | 2002     
|                                                          |                                                            |                                |                          |          
|Revenue                                                   |                                                            |                                | 100.0                    | %         |      |       | 100.0 | %    
|Operating expenses:                                       |                                                            |                                |                          |           |      |       |       |      
|                                                          | Residence operating expenses                               |                                |                          | 69.3      |      |       |       | 69.5  |     
|                                                          | Corporate general and administrative                       |                                |                          | 11.6      |      |       |       | 11.4  |     
|                                                          | Building rentals                                           |                                |                          | 11.3      |      |       |       | 8.0   |     
|                                                          | Depreciation and amortization                              |                                |                          | 6.9       |      |       |       | 4.4   |     
|                                                          |                                                            |                                |                          |           |      |       |       |      
|                                                          |                                                            |                                | Total operating expenses |           |      | 99.1  |       |       |      | 93.3  |  
|                                                          |                                                            |                                |                          |           |      |       |       |      
|Operating income                                          |                                                            |                                | 0.9                      |           |      |       | 6.7   |      
|                                                          |                                                            |                                |                          |           |      |       |       |      
|Other income (expense):                                   |                                                            |                                |                          |           |      |       |       |      
|                                                          | Interest expense                                           |                                |                          | (11.9     | )    |       |       | (9.5  | )   
|                                                          | Interest income                                            |                                |                          | 0.4       |      |       |       | 0.1   |     
|                                                          | Other income, net                                          |                                |                          | 0.1       |      |       |       |      |     
|                                                          |                                                            |                                |                          |           |      |       |       |      
|                                                          |                                                            |                                | Total other expense      |           |      | (11.4 | )     |       |      | (9.4  | )
|                                                          |                                                            |                                |                          |           |      |       |       |      
|Loss before debt restructure and reorganization
    costs |                                                            |                                | (10.5                    | )         |      |       | (2.7  | )    
|Debt restructure and reorganization costs                 |                                                            |                                | 0.8                      |           |      |       | 1.2   |      
|                                                          |                                                            |                                |                          |           |      |       |       |      
|Net loss                                                  |                                                            |                                | (11.3                    | )%        |      |       | (3.9  | )%   
|                                                          |                                                            |                                |                          |           |      |       |       |      
|Other Data:                                               |                                                            |                                |                          |           |      |       |       |      
|                                                          | Residences operated (end of period)                        |                                |                          | 185       |      |       |       | 183   |     
|                                                          | Units operated (end of period)                             |                                |                          | 7,149     |      |       |       | 7,076 |     
|                                                          | Average occupancy rate (based on occupied units)           |                                |                          | 83.4      | %    |       |       | 83.1  | %   
|                                                          | End of period occupancy rate (based on occupied
    units) |                                |                          | 83.3      | %    |       |       | 82.8  | %   
|                                                          | Average monthly rental rate                                |                                | $                        | 2,041     |      |       | $     | 2,117 |     
|                                                          | Sources of revenue:                                        |                                |                          |           |      |       |       |       |     
|                                                          |                                                            | Medicaid state paid portion    |                          |           | 12.1 | %     |       |       | 12.5 | %    
|                                                          |                                                            | Medicaid resident paid portion |                          |           | 7.2  | %     |       |       | 6.8  | %    
|                                                          |                                                            | Private resident paid portion  |                          |           | 80.7 | %     |       |       | 80.7 | %    
|                                                          |                                                            |                                |                          |           |      |       |       |      
|                                                          |                                                            |                                | Total                    |           |      | 100.0 | %     |       |      | 100.0 | %
|                                                          |                                                            |                                |                          |           |      |       |       |      

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##### Table of Contents



The following table sets forth, for the periods
presented, the results of operations for the three months ended
March 31, 2001 compared to March 31, 2002 (in
millions, except percentages):

|                                                          |                                      |                              |      |           |      |                    |      |      |      |   |     |      |      |   |       |        |      |  
|--------------------------------------------------------- | ------------------------------------ | ---------------------------- | ---- | --------- | ---- | ------------------ | ---- | ---- | ---- | - | --- | ---- | ---- | - | ----- | ------ | ---- | -
|                                                          |                                      | 2001                         |      | 2002      |      |                    |      |     
|                                                          |                                      |                              |      |           |      |                    |      |     
|                                                          |                                      |                             
|                                                          |                                      | Consolidated                
|                                                          |                                      | Three Months Ended March 31,
|                                                          |                                      |                             
|                                                          |                                      |                              |      |          
|                                                          |                                      |                              |      | Successor |      |                   
|                                                          |                                      | Predecessor                  |      | Company   |      | Increase/(Decrease
|                                                          |                                      | Company                      |      |           |      |                   
|                                                          |                                      |                              |      |           |      |                   
|Revenue                                                   |                                      | $                            | 36.9 |           |      | $                  | 37.9 |      |      | $ | 1.0 |      |      |   | 2.7   | %     
|Operating expenses:                                       |                                      |                              |      |           |      |                    |      |      |      |   |     |      |      |   |       |       
|                                                          | Residence operating expenses         |                              |      | 25.6      |      |                    |      | 26.3 |      |   |     | 0.7  |      |   |       | 2.7    |     
|                                                          | Corporate general and administrative |                              |      | 4.3       |      |                    |      | 4.3  |      |   |     |     |      |   |       |       |     
|                                                          | Building rentals                     |                              |      | 4.2       |      |                    |      | 3.1  |      |   |     | (1.1 | )    |   |       | (26.2  | )   
|                                                          | Depreciation and amortization        |                              |      | 2.5       |      |                    |      | 1.7  |      |   |     | (0.8 | )    |   |       | (32.0  | )   
|                                                          |                                      |                              |      |           |      |                    |      |      |      |   |     |      |      |   |       |       
|                                                          |                                      | Total operating expenses     |      |           | 36.6 |                    |      |      | 35.4 |   |     |      | (1.2 | ) |       |        | (3.3 | )
|                                                          |                                      |                              |      |           |      |                    |      |      |      |   |     |      |      |   |       |       
|Operating income                                          |                                      |                              | 0.3  |           |      |                    | 2.5  |      |      |   | 2.2 |      |      |   | 733.3 |       
|                                                          |                                      |                              |      |           |      |                    |      |      |      |   |     |      |      |   |       |       
|Other income (expense):                                   |                                      |                              |      |           |      |                    |      |      |      |   |     |      |      |   |       |       
|                                                          | Interest expense                     |                              |      | (4.4      | )    |                    |      | (3.6 | )    |   |     | 0.8  |      |   |       | 18.2   |     
|                                                          | Interest income                      |                              |      | 0.2       |      |                    |      |     |      |   |     | (0.2 | )    |   |       | (100.0 | )   
|                                                          |                                      |                              |      |           |      |                    |      |      |      |   |     |      |      |   |       |       
|                                                          |                                      | Total other expense          |      |           | (4.2 | )                  |      |      | (3.6 | ) |     |      | 0.6  |   |       |        | 14.3 |  
|                                                          |                                      |                              |      |           |      |                    |      |      |      |   |     |      |      |   |       |       
|Loss before debt restructure and reorganization
    costs |                                      |                              | (3.9 | )         |      |                    | (1.1 | )    |      |   | 2.8 |      |      |   | 71.8  | %     
|Debt restructure and reorganization costs                 |                                      |                              | 0.3  |           |      |                    | 0.4  |      |      |   | 0.1 |      |      |   | 33.3  |       
|                                                          |                                      |                              |      |           |      |                    |      |      |      |   |     |      |      |   |       |       
|                                                          |                                      | Net loss                     |      | $         | (4.2 | )                  |      | $    | (1.5 | ) |     | $    | 2.7  |   |       |        | 64.3 | %
|                                                          |                                      |                              |      |           |      |                    |      |      |      |   |     |      |      |   |       |       



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Three months ended March 31, 2002
    compared to three months ended March 31,
    2001:

We incurred a net loss of $1.5 million, or
$0.22 per basic and diluted common share, on revenue of
$37.9 million for the three months ended March 31,
2002 (the March 2002 Quarter) as compared to a net
loss of $4.2 million or $0.25 per basic and diluted
common share, on revenues of $36.9 million for the three
months ended March 31, 2001 (the March 2001
Quarter).

Revenues.Revenues
were $37.9 million for the March 2002 Quarter as compared
to $36.9 million for the March 2001 Quarter, a net increase
of $1.0 million. The increase in revenue was attributable
to an increase in the average monthly rental rate to $2,117 for
the March 2002 Quarter as compared to an average monthly rental
rate of $2,041 for March 2001 Quarter. The increase in revenue
due to increase in average monthly rental rates was offset by a
decline in average occupancy from 83.4% in the March 2001
Quarter to 83.1% in the March 2002 Quarter. Additionally,
revenue for the March 2001 Quarter included $149,000 of revenue
for one residence which is no longer being operated by us due to
the termination of our lease agreement, effective
December 1, 2001.

Residence Operating Expenses.Residence operating expenses were
$26.3 million for the March 2002 Quarter as compared to
$25.6 million for the March 2001 Quarter, a net increase of
$777,000.

The principal elements of the increase in these
expenses include:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | $1.0 million related to an increase in
    payroll costs as a result of increases in wages and benefits; and
|
| |  | $432,000 related to increases in professional and
    property liability insurance premiums.                

These increases were offset by:



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $135,000 of operating expenses included in the
    March 2001 Quarter results which related to one residence which
    is no longer being operated by us due to the termination of our
    lease agreement, effective December 1, 2001;
|
| |  | $283,000 related to decreases in utility costs;
    and                                                                                                                                                                                
|
| |  | $237,000 in other expenses.                                                                                                                                                                                                            

22



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Corporate, General and Administrative.Corporate, general and administrative
expenses remained consistent for the March 2002 Quarter as
compared to the March 2001 Quarter at $4.3 million.

Building Rentals.Building rentals were
$3.0 million for the March 2002 Quarter as compared to
$4.2 million for the March 2001 Quarter, a decrease of
$1.2 million.

The decrease in building rentals include:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $949,000 of building rental expense is excluded
    from the March 2002 Quarter due to the October 2001 repurchase
    of 16 properties previously leased;
|
| |  | $65,000 of building rental expense is included in
    March 2001 Quarter related to an operating lease terminated on
    December 1, 2001; and            
|
| |  | $219,000 due to rental concessions received from
    one lessor as a result of the bankruptcy process.                                                    

Depreciation and Amortization.Depreciation and amortization expense
was $1.7 million in the March 2002 Quarter as compared to
$2.6 million in the March 2001 Quarter. The decrease is
primarily due to impact of fresh-start reporting on the carrying
value of property and equipment, which were adjusted to their
estimated fair value as of December 31, 2001.

Interest Expense.Interest expense was $3.6 million for the March 2002
Quarter compared to $4.4 million for the March 2001
Quarter, a decrease of $811,000. The decrease is due to the
overall reduction of indebtedness following the Companys
Plan of reorganization which became effective on January 1,
2002.

Interest Income.Interest income was $54,000 for the
March 2002 Quarter compared to $148,000 for the March 2001
Quarter, a decrease of $94,000. This decrease is the result of
decreased balances in cash and cash equivalents.

Debt Restructure and Reorganization Costs.Debt restructure and reorganization
costs were $447,000 for the March 2002 Quarter as compared to
$303,000 for the March 2001 Quarter. These are professional
fees, including legal and investment advisory fees, related to
the Companys Plan of reorganization which became effective
January 1, 2002. We will continue to incur costs related to
the reorganization until all general and unsecured claims are
settled which is expected to occur within the next six months.

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

Net Loss.As a
result of the above, we incurred a net loss of $1.5 million
or $0.22 per basic and diluted common share for the March 2002
Quarter, compared to a net loss of $4.2 million, or $0.25
per basic and diluted common share, for the March 2001 Quarter.

Liquidity and Capital Resources

At March 31, 2002, we had a working capital
deficit of $5.7 million and unrestricted cash and cash
equivalents of $3.6 million.

Net cash used in operating activities was
$676,000 during the three months ended March 31, 2002. The
primary uses included the payment of $3.4 million related
to our 2002 property and professional liability insurance. These
reductions were partially offset by an increase in insurance
premium obligations of $1.2 million. During the three
months ended March 31, 2002, we entered into several
short-term agreements to finance our annual insurance premiums.
These agreements mature in September 2002 and bear interest at
annual fixed rates of approximately 5.5% to 6.0%.

Net cash used in investing activities was
$2.3 million during the three months ended March 31,
2002. The primary use was an increase of $1.7 million in
restricted cash related to workers compensation deposits
required by our insurance carrier. Funds will be withdrawn from
this account as workers compensation claims are incurred
and paid.

23



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##### Table of Contents



Net cash provided by financing activities was
$561,000 during the three months ended March 31, 2002.
Proceeds of $1.0 million were received on a draw of our
$44.0 million line of credit with G.E. Capital. Principal
payments on long-term debt and capital lease obligations were
$360,000 for the three months ended March 31, 2002.

As of March 31, 2002, approximately
$26.2 million of our indebtedness was secured by letters of
credit issued by U.S. Bank, which in some cases, have
termination dates prior to the maturity of the underlying debt.
As such letters of credit expire, beginning in 2003, we will
need to obtain replacement letters of credit, post cash
collateral or refinance the underlying debt. There can be no
assurance that we will be able to procure replacement letters of
credit from the same or other lending institutions on terms that
are acceptable to us. In the event that we are unable to obtain
a replacement letter of credit or provide alternate collateral
prior to the expiration of any of these letters of credit, we
would be in default on the underlying debt.

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

In May 2002, we received a waiver from U.S. Bank
regarding the Banks right to declare an event of default
for our failure to meet the March 31, 2002 financial
covenant requirements established for the Predecessor Company
set forth in the amended U.S. Bank loan agreement. Furthermore,
we amended our existing agreement with U.S. Bank, establishing
new covenants, with which we were in compliance as of
March 31, 2002.

Failure to comply with any covenant constitutes
an event of default, which will allow U.S. Bank (at its
discretion) to declare any amounts outstanding under the loan
documents to be due and payable. Certain of our leases and loan
agreements contain covenants and cross-default provisions such
that a default on one of those agreements could cause us to be
in default on one or more other agreements which would have a
material adverse effect on the Company.

We have future minimum annual lease payments over
the next five years of $13.1 million, $13.1 million,
$13.3 million, $12.8 million and $12.9 million,
respectively. At March 31, 2002, we had $166.6 million
of long-term indebtedness, of which annual principal payments
due over the next five years are $2.6 million,
$2.7 million, $2.9 million, $41.3 million and
$2.3 million, respectively.

Our ability to make payments on and to refinance
any of our indebtedness, to satisfy our lease obligations and to
fund planned capital expenditures will depend on our ability to
generate cash in the future. This, to a certain extent, is
subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control. In addition, our ability to draw additional amounts
under our G.E. Capital facility may depend on us satisfying
certain conditions to draw additional amounts under the facility.

Based upon our current level of operations, we
believe that our current cash on hand, available credit under
our G.E. Capital facility and 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,
that currently anticipated cost savings and operating
improvements will be realized on schedule or that we will
satisfy the conditions to draw additional amounts under the G.E.
Capital facility, all of which may be necessary to enable us to
pay our indebtedness, to satisfy our lease obligations and to
fund our other liquidity needs. As a result, we may need to
refinance all or a portion of our indebtedness, on or before
maturity. There can be no assurance that we will be able to
refinance any of our indebtedness, on commercially reasonable
terms or at all.

24



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##### Table of Contents






Risk Factors

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



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

We are highly leveraged. We had total
indebtedness, including short-term portion, of
$166.6 million and shareholders equity of
$31.3 million as of March 31, 2002. We obtained some
relief through the implementation of our Plan but will continue
to be highly leveraged (see Notes 3 and 9 of the
consolidated financial statements included elsewhere herein).
The degree to which we are leveraged could have important
consequences, including:



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

On March 31, 2002 we did not meet the financial
requirements established for the Predecessor Company as set
forth in the amended U.S. Bank loan agreement. In May 2002, we
received a waiver from U.S. Bank regarding the Banks right
to declare an event of default for our failure to meet the
March 31, 2002 financial requirements set forth in the
amended U.S. Bank loan agreement. Furthermore, we amended our
existing agreement with U.S. Bank, establishing new covenants,
with which we were in compliance as of March 31, 2002.

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



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | in the case of debt, declaring the entire amount
    of the debt immediately due and payable;
|
| |  | foreclosing on any residences or other collateral
    securing the obligation; and           

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| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | in the case of a lease, terminating the lease and
    suing for damages.

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



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

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



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

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

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

We are party
to other legal proceedings.

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



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

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



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

In order to protect ourselves against the
lawsuits and claims made against us, we currently maintain
insurance policies in amounts and covering risks that are
consistent with industry practice. However, as a result of poor
loss experience, a number of insurance carriers have stopped
providing insurance coverage to the

26



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##### Table of Contents



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


We are
subject to significant government regulation.

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



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

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

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



| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the imposition of fines  the Company
    paid $15,000 and $1,200, respectively, in the aggregate for the
    year ended December 31, 2001 and the quarter ended
    March 31, 2002;
|
| |  | temporary stop placement of admission of new
    residents, or imposition of other conditions to admission of new
    residents to a facility;                                      
|
| |  | termination of a facilitys Medicaid
    contract;                                                                                                                                  

27



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | conversion of a facilitys license to
    provisional status; and                                                                                                                                                                                    
|
| |  | suspension or revocation of a facilitys
    license, which in 2001 included one residence in Washington
    against which the state has commenced license revocation
    procedures. This matter is still pending as of the date of this
    filing.

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

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

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

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

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

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

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

HHS finalized the new transaction standards on
August 17, 2000, and covered entities will be required to
comply with them by October 16, 2002. Congress passed
legislation in December 2001 that delays for one year (to
October 16, 2003) the compliance date, but only for
entities that submit a compliance plan to HHS by the original
implementation deadline. The privacy standards were issued on
December 28, 2000, and, after certain delays, became
effective April 14, 2001, with a compliance date of
April 14, 2003. The Bush Administration

28



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##### Table of Contents



and Congress are taking a careful look at the
existing regulations, but it is uncertain whether there will be
additional changes to the privacy standards or their compliance
date. With respect to the security regulation, once they are
issued in final form, affected parties will have approximately
two years to be fully compliant. Sanctions for failing to comply
with HIPAA include criminal penalties and civil sanctions.


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

Under the Americans with Disabilities Act of
1990, all places of public accommodation are required to meet
certain federal requirements related to access and use by
disabled persons. A number of additional federal, state and
local laws exist that also may require us to modify existing
residences to allow disabled persons to access the residences.
We believe that their residences are either substantially in
compliance with present requirements or are exempt from them.
However, if required changes cost more than anticipated, or must
be made sooner than anticipated, we would incur additional
costs. Further legislation may impose additional burdens or
restrictions related to access by disabled persons, and the
costs of compliance could be substantial.

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

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

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

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

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

29



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Many assisted
living markets have been overbuilt.

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



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

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

Due to market conditions facing one location in
Indiana, we closed the facility, effective March 15, 2002.

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

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



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

Our business depends significantly on our
properties located in Texas, Indiana, Oregon, Ohio and
Washington. As of March 31, 2002, 21.9% of our residences
were located in Texas, 10.9% in Indiana, 9.8% in Oregon, 9.8% in
Ohio and 8.7% in Washington. An economic downturn, or changes in
the laws affecting our business, in these markets could have a
material adverse effect on our operating results.



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

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

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

|           |  |                    |      |                    |  |          |      |         |  |          |      |          |  |  |      |   |  |  |      |   |  |  |      |  
|---------- |  | ------------------ | ---- | ------------------ |  | -------- | ---- | ------- |  | -------- | ---- | -------- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|           |  |                    |      |                   
|           |  | Three Months Ended |      | Three Months Ended
|           |  | March 31, 2001     |      | March 31, 2002    
|           |  |                    |      |                   
|           |  |                    |      |                    |  |          |      |        
|           |  | Medicaid           |      | Private            |  | Medicaid |      | Private
|           |  |                    |      |                    |  |          |      |        
|           |  | State              |      | Resident           |  | Resident |      | State   |  | Resident |      | Resident
|           |  | Paid               |      | Paid               |  | Paid     |      | Paid    |  | Paid     |      | Paid    
|           |  | Portion            |      | Portion            |  | Portion  |      | Portion |  | Portion  |      | Portion 
|           |  |                    |      |                    |  |          |      |         |  |          |      |         
|Oregon     |  |                    | 29.4 | %                  |  |          | 17.8 | %       |  |          | 52.8 | %        |  |  | 25.3 | % |  |  | 14.6 | % |  |  | 60.1 | %
|Washington |  |                    | 29.8 | %                  |  |          | 17.8 | %       |  |          | 52.4 | %        |  |  | 29.9 | % |  |  | 17.2 | % |  |  | 52.9 | %
|Idaho      |  |                    | 13.3 | %                  |  |          | 10.6 | %       |  |          | 76.1 | %        |  |  | 14.0 | % |  |  | 10.9 | % |  |  | 75.1 | %
|Arizona    |  |                    | 13.7 | %                  |  |          | 10.7 | %       |  |          | 75.6 | %        |  |  | 17.4 | % |  |  | 15.2 | % |  |  | 67.4 | %
|New Jersey |  |                    | 16.7 | %                  |  |          | 9.3  | %       |  |          | 74.0 | %        |  |  | 27.1 | % |  |  | 4.7  | % |  |  | 68.2 | %
|Texas      |  |                    | 15.5 | %                  |  |          | 8.2  | %       |  |          | 76.3 | %        |  |  | 15.6 | % |  |  | 8.0  | % |  |  | 76.4 | %
|Nebraska   |  |                    | 8.5  | %                  |  |          | 5.5  | %       |  |          | 86.0 | %        |  |  | 10.3 | % |  |  | 6.4  | % |  |  | 83.3 | %

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




Item 3.     Quantitative
and Qualitative Disclosure About Market Risk

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

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

For variable rate debt, changes in interest rates
generally do not impact the fair market value of the debt
instrument, but do affect our future results of operations and
cash flows. We had variable rate debt of $67.6 million
outstanding at March 31, 2002 with a weighted average
interest rate of 5.5%, of which $41.4 million has an
interest rate floor of 8.0%. Assuming that our balance of
variable rate debt, excluding $41.4 million which has an
interest rate floor of 8.0%, remains constant at
$26.2 million, each one-percent increase in interest rates
would result in an annual increase in interest expense, and a
corresponding decrease in cash flows, of $262,000. Conversely,
each one-percent decrease in interest rates would result in an
annual decrease in interest expense, and a corresponding
increase in cash flows, of $262,000. For our $41.4 million
of variable rate debt which has a interest rate floor of 8.0%,
each one-percent increase in interest rates in excess of 8.0%
would result in an annual increase in interest expense, and a
corresponding decrease in cash flows, of $414,000. Conversely,
each one-percent decrease at interest rates of 9.0% or greater
would result in an annual decrease in interest expense, and a
corresponding increase in cash flows, of $414,000.

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

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

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




PART II  OTHER
INFORMATION




Item 1.     Legal
Proceedings

Insurance
Coverage Dispute

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

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

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




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

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




Item 6.     Exhibits
and Reports on Form 8-K

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

|        |    |  |  |                                   
|------- | -- |  |  | ----------------------------------
|Exhibit |    | 
|Number  |    | 
|        |    | 
|        | 12 |  |  | Ratio of Earnings to Fixed Charges

(b) Reports on Form 8-K.

We filed a report on Form 8-K on
January 24, 2002 pursuant to Item 5 of Form 8-K
announcing the appointment of Steven L. Vick as President and
Chief Executive Officer.

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SIGNATURES

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



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



| |     |                    
| | --- | -------------------
| | By: | /s/ MATTHEW PATRICK

| |                      
| | ---------------------
| |                      
| | Name: Matthew Patrick

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

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

May 20, 2002




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

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

| |        |                   
| | ------ | ------------------
| | Title: | Vice President and

| |                         
| | ------------------------
| | Chief Accounting Officer

May 20, 2002


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EXHIBIT INDEX

|        |    |  |  |                                   
|------- | -- |  |  | ----------------------------------
|Exhibit |    | 
|Number  |    | 
|        |    | 
|        | 12 |  |  | Ratio of Earnings to Fixed Charges

34