Document:

Asisted Living Concepts, Inc. December 31, 2002 Form 10-K

UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20459 
 

 
FORM 10-K 
 

 
(Mark One) 
 

	x	 	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
or 
 

	 ̈	 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the Transition Period
from             to              . 
 
For the fiscal year ended December 31, 2002 
 
Commission file number 1-13498 
 

 
ASSISTED LIVING CONCEPTS, INC. 
(Exact name of registrant as specified in its charter)

 

 

	 Nevada
	 	 93-1148702

	 (State or other jurisdiction of incorporation or organization)
	 	 (IRS Employer Identification No.)

 
11835
NE Glenn Widing Drive, Building E 
Portland, OR 97220-9057 
(503) 252-6233 
(Address, including zip code,
and telephone number, including area code, of registrant’s principal executive offices) 
 
Securities Registered Pursuant To Section 12(b) of The Act: 
None

 
Securities Registered Pursuant To Section
12(g) of The Act: 
Common Stock, Par Value $.01 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90
days.    Yes  x    No   ̈

 
Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K:  x 
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
    Yes   ̈    No   x

 
Indicate by check mark whether the registrant
has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No   ̈ 
 
The aggregate market value of the voting stock and non-voting
common equity held by non-affiliates computed by reference to average bid and asked price ($3.00) as reported through the OTCBB as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 28, 2002), was
$13.0 million. 
 
The number of shares outstanding
of the Registrant’s Common Stock as of March 20, 2003 was 6,431,759 shares. 
 
Documents Incorporated by Reference 
 
The Registrant has incorporated into Part III of Form 10-K, by reference, portions of its Proxy Statement for its 2003 Annual Meeting of Shareholders. 
 

PART I 
 
Except as otherwise noted, references in this report to “ALC,” the “Company,”
“us” or “we” refer to Assisted Living Concepts, Inc. and its subsidiaries. 
 
Item 1.    Business 
 
Overview 
 
We operate, own and lease freestanding assisted living residences. These residences are primarily located in small, middle-market, rural and suburban communities with a population typically ranging from 10,000 to 40,000. As of
December 31, 2002 we had operations in 14 states. Upon the completion of a pending sale of our 9 facilities located in South Carolina, our operations will be limited to 13 states. 
 
We provide personal care and support services and make available routine nursing services (as permitted by
applicable law) designed to meet the personal and health care needs of our residents. We believe that this combination of residential, personal care, support and health care services provides a cost-efficient alternative to, and affords an
independent lifestyle for, individuals who do not require the broader array of medical services that nursing facilities are required by law to provide. 
 
We experienced significant and rapid growth between 1994 and 1998, primarily through the development of assisted living residences and, to
a much lesser extent, through acquisition of assisted living residences, opening our last twenty residences in 1999. At the completion of our initial public offering in November 1994 we had an operating base of five leased residences located in
Oregon. As of December 31, 2002, we operated 178 assisted living residences (6,883 units) of which we owned 123 residences (4,778 units) and leased 55 residences (2,105 units). At December 31, 2002, we had an occupancy rate of 87.3% and an average
combined monthly rate for rent and services of $2,213 per unit. 
 
The principal elements of our business strategy are to: 
 

	 	•	 	increase occupancy and improve operating efficiencies at our residences; 

 

	 	•	 	increase rental and service revenue; 

 

	 	•	 	reduce overhead costs as a percentage of revenue; and 

 

	 	•	 	improve financial strength through reduction of debt and refinancing of debt. 

 
We anticipate that the majority of our revenues will continue to come from private pay sources. However, we
believe that by having located some of our residences in states with favorable regulatory and reimbursement climates, we should have a stable source of residents eligible for Medicaid reimbursement to the extent that private pay residents are not
available and, in addition, provide our private pay residents with alternative sources of income if their private funds are depleted and they become Medicaid eligible. 
 
Although we manage the mix of private paying tenants and Medicaid paying tenants 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 the states operating these programs continue to limit, or more aggressively seek limits
on, reimbursement rates. See “Forward-looking statements and factors affecting our business and prospects—We depend on reimbursement by government payors and other third parties for a significant portion of our revenues” included in
Item 7. 
 
Assisted Living Concepts, Inc., is a
Nevada corporation. Our principal executive offices are located at 11835 NE Glenn Widing Drive, Building E, Portland, Oregon 97220-9057, and our telephone number is (503) 252-6233. 
 
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 

 

1 

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, of the following securities: 
 

	 	•	 	$40.25 million principal amount of 10% senior secured notes, due January 1, 2009 (the “Senior Secured Notes”); 

 

	 	•	 	$15.25 million principal amount of junior secured notes, due January 1, 2012 (the “Junior Secured Notes”); and 

 

	 	•	 	6.24 million shares of new common stock (representing 96% of the new common stock). 

 
The Senior Secured Notes and the Junior Secured Notes (collectively the “New Notes”) were secured
by 57 of our properties. Five of these properties were sold in 2002, and all of the net proceeds of that sale were used to redeem a portion of the Senior Secured Notes as required by the Senior Indenture. 
 
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 Secured Notes, Junior Secured 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. 
 
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. See Note 1 to the consolidated financial statements included in Item 8 of this report for additional information. 
 
Management Changes 
 
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. 
 
In February 2002, Steven L. Vick replaced Wm. James Nicol as
President and Chief Executive Officer and as a Director. In May 2002, Matthew Patrick replaced Drew Q. Miller as Senior Vice President, Chief Financial Officer, Treasurer and Secretary. Mr. Vick and Mr. Patrick also serve as Directors of the
Company. 
 
In June 2002, we eliminated the
positions held by Nancy Gorshe and Sandra Campbell, both of whom were senior officers of the Company. As a result of eliminating these positions, we entered into Separation Agreements and Mutual General Releases with Ms. Gorshe and Ms. Campbell
under which, pursuant to their employment agreements, Ms. Gorshe and Ms. Campbell will receive severance payments totaling $420,000 which are being paid over twelve months. In August 2002, Linda Martin joined the Company as Chief Operating Officer.

 
In November 2002, Mr. Dimitriadis resigned from
the audit committee due to his related party status, as defined under the emerging rules of Sarbanes-Oxley, arising from his position as an executive of one of the Company’s landlords. Mr. Dimitriadis continues to serve as a director of the
Company. As a result of Mr. Dimitriadis’ resignation, the Company’s Board of Directors appointed Mark Holliday, a current director and member of the audit committee, as chair and appointed Richard Ladd, a current director, as a member of
the audit committee. 
 

2 

 
Services 
 
Our residences offer residents a supportive,
“home-like” setting and assistance with activities of daily living. Residents are individuals who, for a variety of reasons, cannot live alone, or elect not to do so, and do not need the 24-hour skilled medical care provided in nursing
facilities. We design services provided to these residents to respond to their individual needs and to improve their quality of life. This individualized assistance is available 24 hours a day and includes routine health-related services, which are
made available and are provided according to the resident’s individual needs and state regulatory requirements. Available services include: 
 

	 	•	 	General services, such as meals, laundry and housekeeping; 

 

	 	•	 	Support services, such as assistance with medication, monitoring health status, coordination of transportation; and 

 

	 	•	 	Personal care, such as dressing, grooming and bathing. 

 
We also provide or arrange access to additional services beyond basic housing and related services, including physical therapy and
pharmacy services. 
 
Although a typical package of
basic services provided to a resident includes meals, housekeeping, laundry and personal care, we do not have a standard service package for all residents. Instead, we are able to accommodate the changing needs of our residents through the use of
individual service plans and flexible staffing patterns. Our multi-tiered rate structure for services is based upon the acuity of, or level of services needed by, each resident. Supplemental and specialized health-related services for those
residents requiring 24-hour supervision or more extensive assistance with activities of daily living are provided by third-party providers who are reimbursed directly by the resident or a third-party payor (such as Medicaid or long-term care
insurance). Our policy is to assess the level of need of each resident regularly. 
 
Operations 
 
Each
residence has an on-site administrator who is responsible for the overall day-to-day operation of the residence, including quality of care, marketing, social services and financial performance. The administrator is assisted by professional and
non-professional personnel, some of whom may be independent providers or part-time personnel, including nurses, personal service assistants, maintenance and kitchen personnel. The nursing hours vary depending on the residents’ needs. We consult
with outside providers, such as registered nurses, pharmacists, and dietitians, for purposes of medication review, menu planning and responding to any special dietary needs of residents. Personal service assistants who primarily are full-time
employees are responsible for personal care, dietary services, housekeeping and laundry services. Maintenance services are performed by full and part-time employees. 
 
We have an infrastructure that includes 3 division vice presidents of operations who each oversee the overall
performance of a geographic division, 13 regional directors of operations who oversee the day-to-day operations of 4 to 25 residences, and team leaders who provide peer support for subgroups of residences. We also have regional property managers who
oversee the maintenance of the residences and several regional marketing coordinators who assist with marketing the residences. Corporate home office (“Home Office”) and regional personnel work with the administrators to establish
residence goals and strategies, quality assurance oversight, development of our internal policies and procedures, government relations, marketing and sales, community relations, development and implementation of new programs, cash management, legal
support, treasury functions, and human resource management. 
 
Competition 
 
The
long-term care industry generally is highly competitive. We expect that the assisted living business, in particular, will become even more competitive in the future given the relatively low barriers to entry and continuing health care cost
containment pressures. 
 

3 

 
We compete
with numerous other companies providing similar long-term care alternatives. We operate in 14 states and each community in which we operate provides a unique market. Overall, most of our markets include an assisted living competitor offering
assisted living facilities that are similar in size, price and range of service. Our competitors include other companies that provide adult day care in the home, higher priced assisted living centers (typically larger facilities with more
amenities), congregate care facilities where tenants elect the services to be provided, and continuing care retirement centers on campus-like settings. 
 
We expect to face increased competition from new market entrants as assisted living receives increased attention and the number of states
which include assisted living in their Medicaid programs increases. Competition will also grow from new market entrants, including publicly and privately held companies focusing primarily on assisted living. Nursing facilities that provide long-term
care services are also a potential source of competition for us. Providers of assisted living residences compete for residents primarily on the basis of quality of care, price, reputation, physical appearance of the facilities, services offered,
family preferences, physician referrals and location. Some of our competitors operate on a not-for-profit basis or as charitable organizations. Some of our competitors are significantly larger than us and have, or may obtain, substantially greater
resources than ours. While we generally believe that there is moderate competition for less expensive segments of the private market and for Medicaid residents in small communities, we have seen an increase in competition in certain of our markets.

 
We believe that many assisted living markets
have been overbuilt. Regulation and other barriers to entry into the assisted living industry are not substantial. In addition, because the segment of the population that can afford to pay our daily resident fee is finite, the number of new assisted
living facilities may outpace demand in some markets. The effects of such overbuilding include (a) significantly longer fill-up periods, (b) newly opened facilities attract residents from existing facilities, (c) pressure to lower or refrain from
increasing rates, (d) competition for workers in already tight labor markets and (e) lower margins until excess units are absorbed. 
 
We believe that each local market is different, and we are and will continue to react in a variety of ways, to the specific competitive
environment that exists in each market. There can be no assurance that we will be able to compete effectively in those markets where overbuilding exists, or that future overbuilding in other markets where we operate our residences will not adversely
affect our operations. 
 
Funding 
 
Assisted living residents or their families generally pay the
cost of care from their own financial resources. Depending on the nature of an individual’s health insurance program or long-term care insurance policy, the individual may receive reimbursement for costs of care under an “assisted
living,” “custodial” or “alternative care benefit.” Government payments for assisted living have been limited. Some state and local governments offer subsidies for rent or services for low-income elders. Others may provide
subsidies in the form of additional payments for those who receive Supplemental Security Income (SSI). Medicaid provides coverage for certain financially or medically needy persons, regardless of age, and is funded jointly by federal, state and
local governments. Medicaid contracts for assisted living vary from state to state. 
 
In 1981, the federal government approved a Medicaid waiver program called Home and Community Based Care which was designed to permit states to develop programs specific to the healthcare and housing
needs of the low-income elderly eligible for nursing home placement (a “Medicaid Waiver Program”). In 1986, Oregon became the first state to use federal funding for licensed assisted living services through a Medicaid Waiver Program
authorized by the Center for Medicaid Services (“CMS”), formerly the Health Care Financing Administration. Under a Medicaid Waiver Program, states apply to CMS for a waiver to use Medicaid funds to support community-based options for the
low-income elderly who need long-term care. These waivers permit states to reallocate a portion of Medicaid funding for nursing facility care to other forms of care such as assisted living. In 1994, the federal government implemented new regulations
which empowered states to further expand their Medicaid Waiver Programs and eliminated restrictions on the amount of Medicaid funding states could allocate to community-based care, such as assisted living. Certain states including Oregon, New
Jersey, Texas, Arizona, Nebraska, Idaho and Washington currently have 

 

4 

operating Medicaid Waiver Programs that allow them to pay for assisted living care. We participate in Medicaid programs in all of these
states. Without a Medicaid Waiver Program, states can only use federal Medicaid funds for long-term care in nursing facilities. 
 
During the years ended December 31, 2000, 2001 and 2002, direct payments received from state Medicaid agencies accounted for approximately
11.1%, 12.5%, and 12.8% respectively, of our revenue while the tenant-paid portion received from Medicaid residents accounted for approximately 6.2%, 6.8%, and 7.5% respectively, of our revenue during these periods. We expect in the future that
state Medicaid reimbursement programs will continue to constitute a significant source of our revenue, however in 2003 there have been, and we expect that there will continue to be, proposals to reduce the federal and state budget deficits by
limiting Medicaid reimbursement in general. If any of these proposals are adopted at either the federal or the state level, such adoptions could have a material adverse affect on our business, financial condition, and results of operations.

 
Government Regulation 
 
Our assisted living residences are subject to certain state
statutes, rules and regulations, including those which provide for licensing requirements. In order to qualify as a state licensed facility, our residences must comply with regulations, which address, among other things, staffing, physical design,
required services and resident characteristics. As of December 31, 2002, we had obtained licenses in Oregon, Washington, Idaho, Nebraska, Texas, Arizona, Iowa, Louisiana, Ohio, New Jersey, Pennsylvania, Michigan and South Carolina. We are currently
subject to state licensure requirements for only one of our 20 residences in Indiana. Our residences are also subject to various local building codes and other ordinances, including fire safety codes. These requirements vary from state to state and
are monitored to varying degrees by state agencies. 
 
As a provider of services under the Medicaid program in the United States, we are subject to Medicaid fraud and abuse laws, which prohibit any bribe, kickback, rebate or remuneration of any kind in return for the referral of Medicaid
patients, or to induce the purchasing, leasing, ordering or arranging of any goods or services to be paid for by Medicaid. Violations of these laws may result in civil and criminal penalties and exclusions from participation in the Medicaid program.
The Inspector General of the Department of Health and Human Services issued “safe harbor” regulations specifying certain business practices, which are exempt from sanctions under the fraud and abuse law. Several states in which we operate
have laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers if such arrangements are designed to induce or encourage the referral of patients to a particular provider. We, at all times,
attempt to comply with all applicable fraud and abuse laws. There can be no assurance that administrative or judicial interpretation of existing laws or regulations or enactment of new laws or regulations will not have a material adverse effect on
our results of operations or financial condition. 
 
Currently, the federal government does not regulate assisted living residences as such. State standards required of assisted living providers are less in comparison with those required of other licensed health care operators. Current
Medicaid regulations provide for comparatively flexible state control over the licensure and regulation of assisted living residences. There can be no assurance that federal regulations governing the operation of assisted living residences will not
be implemented in the future or that existing state regulations will not be expanded. 
 
In 1996, the Health Insurance Portability and Accountability Act of 1996 (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 are currently working to improve our practices for maintaining and transmitting healthcare information for our
residents in order to comply with these regulations. The compliance deadline for the Privacy Standards is April 14, 2003 and the compliance deadline for the Security Standards is October 16, 2003. Sanctions for failing to comply with HIPAA include
criminal penalties and civil sanctions. 
 

5 

 
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. Although we believe that our facilities are substantially in compliance
with, or are exempt from, present requirements, we will incur additional costs if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated. Further legislation may impose additional
burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial. 
 
Forward looking statements and factors affecting our business and prospects, “We are subject to significant government
regulation.” 
 
Liability And Insurance 
 
Providing services in the senior living industry involves an
inherent risk of liability. Participants in the senior living and long-term care industry are subject to lawsuits alleging negligence and related legal theories, many of which may involve large claims and result in the incurrence of significant
legal defense costs. We currently maintain insurance policies to cover such risks in amounts which we believe are consistent with industry practice. There can be no assurance that a claim in excess of our insurance will not be asserted. If a lawsuit
or claim arises which ultimately results in an uninsured loss or a loss in excess of insured limits, such an outcome could have a material adverse effect on the Company. 
 
Based on poor loss experience, insurers for the long term care industry have become increasingly wary of
liability exposures. A number of insurance carriers have stopped writing coverage to this market, and those remaining have increased premiums and deductibles substantially. While nursing homes have been primarily affected, assisted living companies,
including us, have experienced significant premium and deductible increases. During the claim year ended December 31, 2002, our professional liability insurance coverage included retention levels of $250,000 per incident for all states except
Florida and Texas in which our retention level was $500,000. Our professional liability insurance is on a claims-made basis. In certain states, particularly Texas, many long-term care providers are experiencing difficulty in renewing their insurance
policies. There can be no assurance that we will be able to obtain liability insurance in the future or that, if such insurance is available, it will be available on terms acceptable to us. 
 
Employees 
 
As of December 31, 2002 we had 3,567 employees, of whom 1,726 were full-time employees and 1,841 were
part-time employees. None of our employees are represented by any labor union. We believe that our labor relations are generally good. 
 
Item 2.    Properties 
 
The following chart sets forth, as of December 31, 2002, the location, number of units, opening date, ownership status and occupancy of
our residences. 
 

	 Residence

	  	 Units

	  	 Opening
 Date(1)

	  	 Ownership(2)

	    	 Occupancy (%)
 at 12/31/02(3)

	 West Division
	  	 	  	 	  	 	    	 
	 Idaho
	  	 	  	 	  	 	    	 
	 Burley
	  	 35
	  	 08/97
	  	 Leased
	    	 97.3

	 Caldwell
	  	 35
	  	 08/97
	  	 Leased
	    	 99.8

	 Garden City
	  	 48
	  	 04/97
	  	 Owned
	    	 95.1

	 Hayden
	  	 39
	  	 11/96
	  	 Leased
	    	 83.4

	 Idaho Falls
	  	 39
	  	 01/97
	  	 Owned
	    	 96.3

	 Moscow
	  	 35
	  	 04/97
	  	 Owned
	    	 100.0

	 Nampa
	  	 39
	  	 02/97
	  	 Leased
	    	 99.6

 

6 

 

	 Residence

	  	 Units

	  	 Opening
 Date(1)

	  	 Ownership(2)

	    	 Occupancy (%)
 at 12/31/02(3)

	 Rexburg
	  	 35
	  	 08/97
	  	 Owned
	    	 69.2

	 Twin Falls
	  	 39
	  	 09/97
	  	 Owned
	    	 100.0

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 344
	  	 	  	 	    	 93.4

	 Oregon
	  	 	  	 	  	 	    	 
	 Astoria
	  	 28
	  	 08/96
	  	 Owned
	    	 99.6

	 Bend
	  	 46
	  	 11/95
	  	 Owned
	    	 96.1

	 Brookings
	  	 36
	  	 07/96
	  	 Owned
	    	 98.2

	 Canby
	  	 25
	  	 12/90
	  	 Leased
	    	 96.0

	 Estacada
	  	 30
	  	 01/97
	  	 Owned
	    	 100.0

	 Eugene
	  	 47
	  	 08/97
	  	 Leased
	    	 97.3

	 Hood River
	  	 30
	  	 10/95
	  	 Owned
	    	 87.7

	 Klamath Falls
	  	 36
	  	 10/96
	  	 Leased
	    	 99.6

	 Lincoln City
	  	 33
	  	 10/94
	  	 Owned
	    	 87.9

	 Madras
	  	 27
	  	 03/91
	  	 Owned
	    	 99.7

	 Newberg
	  	 26
	  	 10/92
	  	 Leased
	    	 89.5

	 Newport
	  	 36
	  	 06/96
	  	 Leased
	    	 83.2

	 Pendleton
	  	 39
	  	 04/91
	  	 Leased
	    	 88.0

	 Prineville
	  	 30
	  	 10/95
	  	 Owned
	    	 76.7

	 Redmond
	  	 37
	  	 03/95
	  	 Leased
	    	 100.0

	 Silverton
	  	 30
	  	 07/95
	  	 Owned
	    	 100.0

	 Sutherlin
	  	 30
	  	 01/97
	  	 Leased
	    	 98.7

	 Talent
	  	 36
	  	 10/97
	  	 Owned
	    	 91.7

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 602
	  	 	  	 	    	 93.9

	 Washington
	  	 	  	 	  	 	    	 
	 Battleground
	  	 40
	  	 11/96
	  	 Leased
	    	 93.6

	 Bremerton
	  	 39
	  	 05/97
	  	 Owned
	    	 96.6

	 Camas
	  	 36
	  	 03/96
	  	 Leased
	    	 80.9

	 Enumclaw
	  	 40
	  	 04/97
	  	 Owned
	    	 85.3

	 Ferndale
	  	 39
	  	 10/98
	  	 Owned
	    	 82.1

	 Grandview
	  	 36
	  	 02/96
	  	 Leased
	    	 76.6

	 Hoquiam
	  	 40
	  	 07/97
	  	 Leased
	    	 93.4

	 Kelso
	  	 40
	  	 08/96
	  	 Leased
	    	 83.1

	 Kennewick
	  	 36
	  	 12/95
	  	 Leased
	    	 100.0

	 Port Orchard
	  	 39
	  	 06/97
	  	 Owned
	    	 95.9

	 Port Townsend
	  	 39
	  	 01/98
	  	 Owned
	    	 97.6

	 Spokane
	  	 39
	  	 09/97
	  	 Owned
	    	 86.3

	 Sumner(4)
	  	 48
	  	 03/98
	  	 Owned
	    	 87.3

	 Vancouver
	  	 44
	  	 06/96
	  	 Leased
	    	 90.9

	 Walla Walla
	  	 36
	  	 02/96
	  	 Leased
	    	 94.1

	 Yakima
	  	 48
	  	 07/98
	  	 Owned
	    	 96.5

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 639
	  	 	  	 	    	 90.0

	 Arizona
	  	 	  	 	  	 	    	 
	 Apache Junction
	  	 48
	  	 03/98
	  	 Owned
	    	 77.9

	 Bullhead City
	  	 40
	  	 08/97
	  	 Leased
	    	 84.7

	 Lake Havasu
	  	 36
	  	 04/97
	  	 Leased
	    	 97.8

 
 
 

7 

 
 

	 Residence

	  	 Units

	  	 Opening
 Date(1)

	  	 Ownership(2)

	    	 Occupancy (%)
 at 12/31/02(3)

	 Mesa
	  	 50
	  	 01/98
	  	 Owned
	    	 91.9

	 Payson
	  	 39
	  	 10/98
	  	 Owned
	    	 91.6

	 Peoria
	  	 50
	  	 07/99
	  	 Owned
	    	 98.0

	 Prescott Valley
	  	 39
	  	 10/98
	  	 Owned
	    	 78.7

	 Surprise
	  	 50
	  	 10/98
	  	 Owned
	    	 84.9

	 Yuma
	  	 48
	  	 03/98
	  	 Owned
	    	 97.4

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 400
	  	 	  	 	    	 89.2

	 Central Division
	  	 	  	 	  	 	    	 
	 Texas
	  	 	  	 	  	 	    	 
	 Abilene
	  	 38
	  	 10/96
	  	 Owned
	    	 100.0

	 Amarillo
	  	 50
	  	 03/96
	  	 Owned
	    	 80.3

	 Athens
	  	 38
	  	 11/95
	  	 Leased
	    	 69.3

	 Beaumont
	  	 50
	  	 04/96
	  	 Owned
	    	 91.7

	 Big Springs
	  	 38
	  	 05/96
	  	 Owned
	    	 98.8

	 Bryan
	  	 30
	  	 06/96
	  	 Owned
	    	 95.9

	 Canyon
	  	 30
	  	 06/96
	  	 Owned
	    	 94.7

	 Carthage
	  	 30
	  	 10/95
	  	 Leased
	    	 90.0

	 Cleburne
	  	 45
	  	 01/96
	  	 Owned
	    	 99.6

	 Conroe
	  	 38
	  	 07/96
	  	 Leased
	    	 91.9

	 College Station
	  	 39
	  	 10/96
	  	 Owned
	    	 80.7

	 Denison
	  	 30
	  	 01/96
	  	 Owned
	    	 93.9

	 Gainesville
	  	 40
	  	 01/96
	  	 Owned
	    	 96.5

	 Greenville
	  	 40
	  	 11/95
	  	 Leased
	    	 100.0

	 Gun Barrel City
	  	 40
	  	 10/95
	  	 Leased
	    	 87.8

	 Henderson
	  	 30
	  	 09/96
	  	 Owned
	    	 95.7

	 Jacksonville
	  	 39
	  	 12/95
	  	 Leased
	    	 99.9

	 Levelland
	  	 30
	  	 01/96
	  	 Owned
	    	 93.2

	 Longview
	  	 30
	  	 09/95
	  	 Leased
	    	 96.6

	 Lubbock
	  	 50
	  	 07/96
	  	 Leased
	    	 85.2

	 Lufkin
	  	 39
	  	 05/96
	  	 Leased
	    	 77.1

	 Marshall
	  	 40
	  	 07/95
	  	 Leased
	    	 78.7

	 McKinney
	  	 39
	  	 01/97
	  	 Owned
	    	 97.4

	 McKinney
	  	 50
	  	 05/98
	  	 Owned
	    	 100.0

	 Mesquite
	  	 50
	  	 07/96
	  	 Leased
	    	 87.9

	 Midland
	  	 50
	  	 12/96
	  	 Owned
	    	 77.1

	 Mineral Wells
	  	 30
	  	 07/96
	  	 Owned
	    	 87.0

	 Nacogdoches
	  	 30
	  	 06/96
	  	 Owned
	    	 100.0

	 Orange
	  	 36
	  	 03/96
	  	 Owned
	    	 94.4

	 Pampa
	  	 36
	  	 08/96
	  	 Owned
	    	 87.1

	 Paris Oaks
	  	 50
	  	 12/98
	  	 Owned
	    	 99.0

	 Plainview
	  	 36
	  	 07/96
	  	 Owned
	    	 100.0

	 Plano
	  	 62
	  	 05/98
	  	 Owned
	    	 81.3

	 Port Arthur
	  	 50
	  	 05/96
	  	 Owned
	    	 100.0

	 Rowlett
	  	 36
	  	 10/96
	  	 Owned
	    	 91.1

	 Sherman
	  	 39
	  	 10/95
	  	 Leased
	    	 84.5

 
 

8 

 
 

	 Residence

	  	 Units

	  	 Opening
 Date(1)

	  	 Ownership(2)

	    	 Occupancy (%)
 at 12/31/02(3)

	 Sulphur Springs
	  	 30
	  	 01/96
	  	 Owned
	    	 100.0

	 Sweetwater
	  	 30
	  	 03/96
	  	 Owned
	    	 99.3

	 Temple
	  	 40
	  	 01/97
	  	 Leased
	    	 97.9

	 Wichita Falls
	  	 50
	  	 10/96
	  	 Leased
	    	 83.4

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 1,578
	  	 	  	 	    	 91.6

	 Nebraska
	  	 	  	 	  	 	    	 
	 Beatrice
	  	 39
	  	 07/97
	  	 Leased
	    	 98.2

	 Blair
	  	 30
	  	 07/98
	  	 Owned
	    	 76.7

	 Columbus
	  	 39
	  	 06/98
	  	 Owned
	    	 95.9

	 Fremont
	  	 39
	  	 05/98
	  	 Owned
	    	 89.0

	 Nebraska City
	  	 30
	  	 06/98
	  	 Owned
	    	 54.3

	 Norfolk
	  	 39
	  	 04/97
	  	 Leased
	    	 97.1

	 Seward
	  	 30
	  	 10/98
	  	 Owned
	    	 90.0

	 Wahoo
	  	 39
	  	 06/97
	  	 Leased
	    	 89.3

	 York
	  	 39
	  	 05/97
	  	 Leased
	    	 83.4

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 324
	  	 	  	 	    	 86.0

	 Iowa
	  	 	  	 	  	 	    	 
	 Atlantic
	  	 30
	  	 09/98
	  	 Owned
	    	 62.6

	 Carroll
	  	 35
	  	 01/99
	  	 Owned
	    	 62.2

	 Clarinda
	  	 35
	  	 09/98
	  	 Owned
	    	 99.9

	 Council Bluffs
	  	 50
	  	 03/99
	  	 Owned
	    	 60.5

	 Denison
	  	 35
	  	 05/98
	  	 Leased
	    	 82.5

	 Sergeant Bluff
	  	 39
	  	 11/99
	  	 Owned
	    	 48.0

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 224
	  	 	  	 	    	 60.3

	 Louisiana
	  	 	  	 	  	 	    	 
	 Alexandria
	  	 47
	  	 07/98
	  	 Owned
	    	 81.5

	 Bunkie
	  	 39
	  	 01/99
	  	 Owned
	    	 96.5

	 Houma
	  	 48
	  	 08/98
	  	 Owned
	    	 95.5

	 Ruston
	  	 39
	  	 01/99
	  	 Owned
	    	 96.9

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 173
	  	 	  	 	    	 92.6

	 East Division
	  	 	  	 	  	 	    	 
	 South Carolina
	  	 	  	 	  	 	    	 
	 Aiken(6)
	  	 39
	  	 02/98
	  	 Owned
	    	 100.0

	 Clinton(6)
	  	 39
	  	 11/97
	  	 Leased
	    	 89.3

	 Goose Creek(6)
	  	 39
	  	 08/98
	  	 Leased
	    	 86.2

	 Greenwood(6)
	  	 39
	  	 05/98
	  	 Leased
	    	 93.0

	 Greer(6)
	  	 39
	  	 06/99
	  	 Owned
	    	 92.1

	 James Island(6)
	  	 39
	  	 08/98
	  	 Owned
	    	 100.0

	 North Augusta(6)
	  	 39
	  	 10/98
	  	 Owned
	    	 99.4

	 Port Royal(6)
	  	 39
	  	 09/98
	  	 Owned
	    	 76.6

	 Summerville(6)
	  	 39
	  	 02/98
	  	 Owned
	    	 92.3

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 351
	  	 	  	 	    	 92.1

	 Indiana
	  	 	  	 	  	 	    	 
	 Bedford
	  	 39
	  	 03/98
	  	 Owned
	    	 95.1

	 Bloomington
	  	 39
	  	 01/98
	  	 Owned
	    	 81.3

 
 

9 

 
 

	 Residence

	  	 Units

	  	 Opening
 Date(1)

	  	 Ownership(2)

	    	 Occupancy (%)
 at 12/31/02(3)

	 Camby
	  	 39
	  	 12/98
	  	 Owned
	    	 78.1

	 Crawfordsville
	  	 39
	  	 06/99
	  	 Owned
	    	 88.9

	 Elkhart
	  	 39
	  	 09/97
	  	 Leased
	    	 50.7

	 Fort Wayne
	  	 39
	  	 06/98
	  	 Owned
	    	 72.9

	 Franklin
	  	 39
	  	 05/98
	  	 Owned
	    	 72.8

	 Huntington
	  	 39
	  	 02/98
	  	 Owned
	    	 43.0

	 Jeffersonville(5)
	  	 39
	  	 03/99
	  	 Owned
	    	 —  

	 Kendallville
	  	 39
	  	 05/98
	  	 Owned
	    	 43.1

	 Lafayette
	  	 39
	  	 11/99
	  	 Owned
	    	 53.9

	 LaPorte
	  	 39
	  	 10/98
	  	 Owned
	    	 65.9

	 Logansport
	  	 39
	  	 02/98
	  	 Owned
	    	 91.2

	 Madison
	  	 39
	  	 10/97
	  	 Leased
	    	 74.0

	 Marion
	  	 39
	  	 03/98
	  	 Owned
	    	 90.8

	 Muncie
	  	 39
	  	 02/98
	  	 Owned
	    	 99.5

	 New Albany
	  	 39
	  	 05/98
	  	 Owned
	    	 73.2

	 New Castle
	  	 39
	  	 02/98
	  	 Owned
	    	 98.3

	 Seymour
	  	 39
	  	 05/98
	  	 Owned
	    	 72.1

	 Shelbyville
	  	 39
	  	 05/98
	  	 Owned
	    	 62.1

	 Warsaw
	  	 39
	  	 10/97
	  	 Owned
	    	 75.6

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 780
	  	 	  	 	    	 73.6

	 Michigan
	  	 	  	 	  	 	    	 
	 Coldwater
	  	 39
	  	 10/99
	  	 Owned
	    	 80.0

	 Kalamazoo
	  	 39
	  	 11/99
	  	 Owned
	    	 90.9

	 Three Rivers
	  	 39
	  	 04/99
	  	 Owned
	    	 62.8

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 117
	  	 	  	 	    	 77.9

	 New Jersey
	  	 	  	 	  	 	    	 
	 Bridgeton
	  	 39
	  	 03/98
	  	 Owned
	    	 98.3

	 Burlington
	  	 39
	  	 11/97
	  	 Owned
	    	 92.2

	 Egg Harbor
	  	 39
	  	 04/99
	  	 Owned
	    	 92.8

	 Glassboro
	  	 39
	  	 03/97
	  	 Leased
	    	 96.2

	 Millville
	  	 39
	  	 05/97
	  	 Leased
	    	 97.8

	 Pennsville
	  	 39
	  	 11/97
	  	 Owned
	    	 88.9

	 Rio Grande
	  	 39
	  	 11/97
	  	 Owned
	    	 71.0

	 Vineland
	  	 39
	  	 01/97
	  	 Leased
	    	 91.9

	 	  	
	  	 	  	 	    	 
	 Sub Total
	  	 312
	  	 	  	 	    	 91.1

	 Ohio
	  	 	  	 	  	 	    	 
	 Bellefontaine
	  	 35
	  	 03/97
	  	 Owned
	    	 73.1

	 Bucyrus
	  	 35
	  	 01/97
	  	 Owned
	    	 86.1

	 Cambridge
	  	 39
	  	 10/97
	  	 Owned
	    	 88.7

	 Celina
	  	 39
	  	 04/97
	  	 Owned
	    	 59.6

	 Defiance
	  	 35
	  	 02/96
	  	 Owned
	    	 100.0

	 Findlay
	  	 39
	  	 03/97
	  	 Owned
	    	 64.1

	 Fremont
	  	 39
	  	 07/97
	  	 Leased
	    	 82.7

	 Greenville
	  	 39
	  	 02/97
	  	 Owned
	    	 92.6

	 Hillsboro
	  	 39
	  	 03/98
	  	 Owned
	    	 72.9

 
 

10 

 

	 Residence

	  	 Units

	  	 Opening
 Date(1)

	  	 Ownership(2)

	    	 Occupancy (%)
 at 12/31/02(3)

	 
	 Kenton
	  	 35
	  	 03/97
	  	 Owned
	    	 94.6
	  

	 Lima.(6)
	  	 39
	  	 06/97
	  	 Owned
	    	 61.9
	  

	 Marion
	  	 39
	  	 04/97
	  	 Owned
	    	 89.1
	  

	 Newark
	  	 39
	  	 10/97
	  	 Leased
	    	 95.0
	  

	 Sandusky
	  	 39
	  	 09/98
	  	 Owned
	    	 63.7
	  

	 Tiffin
	  	 35
	  	 06/97
	  	 Leased
	    	 74.8
	  

	 Troy
	  	 39
	  	 03/97
	  	 Leased
	    	 94.5
	  

	 Wheelersburg
	  	 39
	  	 09/97
	  	 Leased
	    	 58.6
	  

	 Zanesville
	  	 39
	  	 12/97
	  	 Owned
	    	 86.3
	  

	 	  	
	  	 	  	 	    	 	 
	 Sub Total
	  	 682
	  	 	  	 	    	 79.9
	  

	
	 Pennsylvania
	  	 	  	 	  	 	    	 	 
	 Butler
	  	 40
	  	 12/97
	  	 Owned
	    	 99.9
	  

	 Hermitage
	  	 39
	  	 03/98
	  	 Owned
	    	 72.6
	  

	 Indiana
	  	 40
	  	 03/98
	  	 Leased
	    	 93.7
	  

	 Johnstown
	  	 39
	  	 06/98
	  	 Owned
	    	 80.0
	  

	 Latrobe
	  	 40
	  	 12/97
	  	 Owned
	    	 98.8
	  

	 Lower Burrell
	  	 40
	  	 01/97
	  	 Owned
	    	 99.1
	  

	 New Castle
	  	 40
	  	 04/98
	  	 Owned
	    	 98.8
	  

	 Penn Hills
	  	 40
	  	 05/98
	  	 Owned
	    	 97.5
	  

	 Uniontown
	  	 39
	  	 06/98
	  	 Owned
	    	 92.2
	  

	 	  	
	  	 	  	 	    	 	 
	 Sub Total
	  	 357
	  	 	  	 	    	 92.5
	  

	 	  	
	  	 	  	 	    	 	 
	 Grand Total
	  	 6,883
	  	 	  	 	    	 87.3 
	 %

	 	  	
	  	 	  	 	    	 	 

	(1)	 	Reflects the date we commenced operations. 

	(2)	 	As of December 31, 2002, we owned 123 residences and we leased 55 residences pursuant to long-term operating leases. Of the 123 owned residences, 52 are collateral
for the New Notes and the remaining 71 residences are subject to various mortgage financings. See Notes 5, 6 and 7 to the consolidated financial statements included elsewhere herein. 

	(3)	 	Occupancy is calculated based upon occupied units at December 31, 2002. 

	(4)	 	As of December 31, 2002, our facility in Sumner, Washington had received a notice of license revocation. This revocation has been lifted and the license reinstated,
per a settlement signed in February 2003 between the State of Washington and ALC. 

	(5)	 	Due to market conditions impacting one location in Indiana, we closed the facility, effective March 15, 2002. Sale of this facility is expected to be completed in
the latter part of the First Quarter or early Second Quarter of 2003. 

	(6)	 	These facilities are pending sale pursuant to an Asset Purchase Agreement and are scheduled to close, subject to satisfaction of closing conditions sometime during
the latter part of the First Quarter or early Second Quarter of 2003. 

 
As of December 31, 2002, we also leased office space for our corporate offices in Portland, Oregon and Dallas, Texas. 
 
Item 3.    Legal Proceedings 
 
On October 1, 2001, we voluntarily filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code.
The bankruptcy court gave final approval to our Plan of reorganization on December 28, 2001, and the plan became effective on the Effective Date, January 1, 2002. 
 

11 

Under the Plan, on the Effective Date, the Company issued general unsecured creditors
their pro rata shares, subject to the Reserve, of the following securities: 
 

	 	•	 	$40.25 million principal amount of Senior Secured Notes; 

 

	 	•	 	$15.25 million principal amount of Junior Secured Notes; and 

 

	 	•	 	6.24 million shares of new common stock (representing 96% of the new common stock). 

 
The New Notes are currently secured by 52 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 in 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 will be distributed pro rata among the holders of all general unsecured claims, including those settled prior to the cutoff date. 
 
Insurance Coverage Dispute 
 
In September 2000, we reached an agreement to settle 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 arose with our corporate
liability insurance carriers. 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 our bankruptcy petition 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 disputed that claim. In
January 2003, the Company and the insurance carrier agreed to settle all outstanding claims and provide mutual releases from the matters arising from the class action litigation. Upon approval by the bankruptcy court of the stipulated settlement,
which approval was received on March 12, 2003, the insurance carrier has agreed to withdraw its claim against the Company. See Note 13 to the consolidated financial statements included elsewhere herein. 
 
Other Litigation 
 
In addition to the matters referred to in the immediately
preceding paragraphs, we are involved from time to time in ordinary, routine or regulatory legal proceedings incidental to our business. As of March 23, 2003, we believe that such other legal proceedings should not have a material adverse effect on
our business. 
 

12 

 
Item
4.    Submission of Matters to a Vote of Security Holders 
 
Not applicable. 
 
PART II 
 
Item
5.    Market for the Registrant’s Common Equity and Related Stockholder Matters 
 
Predecessor Company 
 
Our Common Stock, par value $0.01 (the “Common Stock”), was listed on the American Stock Exchange (“AMEX”) under the symbol “ALF” until October 26, 2001. On October 26,
2001, our Common Stock was delisted and ceased trading on the AMEX. On November 29, 2001, our Common Stock was listed and began trading on the OTC Bulletin Board® (“OTC.BB”) under the symbol “ALFC”. The following table sets forth the high and low closing sales prices of our Common Stock, as
reported by the AMEX, for the periods indicated. 
 

	 	  	 2000

	  	 2001(1)

	 	  	 High

	  	 Low

	  	 High

	  	 Low

	 Years ended December 31:
	  	 	 	  	 	 	  	 	 	  	 	 
	 1st Quarter
	  	 $
	 2.38
	  	 $
	 1.31
	  	 $
	 0.94
	  	 $
	 0.25

	 2nd Quarter
	  	  
	 1.50
	  	  
	 0.63
	  	  
	 0.49
	  	  
	 0.06

	 3rd Quarter
	  	  
	 0.88
	  	  
	 0.44
	  	  
	 0.13
	  	  
	 0.05

	 4th Quarter
	  	  
	 0.63
	  	  
	 0.19
	  	  
	 0.09
	  	  
	 0.01

	(1)	 	From the period from November 29, 2001 through December 31, 2001, the high and low closing sales prices of our Common Stock, as reported by OTC.BB, were $0.04 and
$0.01, respectively. 

 
Successor Company

 
Our Common Stock, par value $0.01 (the
“Common Stock”), is listed on the OTC.BB under the symbol “ASLC”. The following table sets forth the high and low closing sales prices of our Common Stock, as reported by the OTC.BB, for the periods indicated. The OTC.BB market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. 
 

	 	  	 High

	  	 Low

	 Year ended December 31, 2002
	  	 	 	  	 	 
	 1st Quarter
	  	 $
	 3.30
	  	 $
	 0.50

	 2nd Quarter
	  	  
	 3.65
	  	  
	 2.95

	 3rd Quarter
	  	  
	 3.25
	  	  
	 2.65

	 4th Quarter
	  	  
	 3.65
	  	  
	 2.75

 
During
our last two fiscal years no cash dividends have been declared on our common stock. Our current policy is to retain any earnings to finance the operations of our business. In addition, the terms of certain outstanding indebtedness and certain lease
agreements materially affect our ability to pay cash dividends. It is anticipated that the terms of future debt financing may do so as well. Therefore, the payment of any cash dividends on the Common Stock is unlikely in the foreseeable future.

 
As of March 4, 2003, we had approximately 36
holders of record of the Successor Company’s Common Stock. Of these 36 holders of record, related parties as a group own approximately 51.24% of the Company’s stock. We are unable to estimate the number of additional shareholders whose
shares are held for them in street name or nominee accounts. 
 

13 

 
The following
table summarizes equity securities authorized for issuance as of December 31, 2002. 
 
Equity Compensation Plan Information 
 

	 Plan Category

	    	 Number of Securities
 To Be Issued Upon
 Exercise of
 Outstanding Options,
 Warrants and Rights

	    	 Weighted Average
 Exercise Price of
 Outstanding Options,
 Warrants and Rights

	    	 Number of Securities
 Remaining Available
 For Future Issuance
 Under Equity
 Compensation Plans
 (Excluding Securities
 Reflected in Column(a))

	 	    	 (a)
	    	 (b)
	    	 (c)

	 Equity compensation plans approved by shareholders
	    	 241,500
	    	 $
	 3.18
	    	 408,500

	 Equity compensation plans not approved by shareholders
	    	 —  
	    	  
	 —  
	    	 —  

	 Total
	    	 241,500
	    	 $
	 3.18
	    	 408,500

 
Item
6.    Selected Financial Data 
 
The following table presents selected historical consolidated financial data. The consolidated statement of operations data for the years ended December 31, 2000, 2001, and 2002 as well as the consolidated balance sheet data as of
December 31, 2001 and 2002, are derived from our consolidated financial statements included elsewhere in this report which have been audited by KPMG LLP, independent auditors. Upon emergence from Chapter 11 proceedings, 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. In connection with the adoption of fresh-start
reporting, a new entity has been deemed created for financial reporting purposes effective December 31, 2001. Consequently, the consolidated balance sheet data at December 31, 2001 and 2002 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.” Note 1 to our consolidated financial statements, included elsewhere in this Report, provides a
reconciliation of the Predecessor Company’s consolidated balance sheet as of December 31, 2001 to that of the Successor Company which presents the adjustments that give effect to the reorganization and fresh-start reporting. You should read the
selected financial data below in conjunction with our consolidated financial statements, including the related notes, and the information in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” 
 

14 

 

	 	  	 Predecessor Company

	 	  	 Successor
 Company

	 
	 	  	 Years Ended December 31,

	 
	 	  	 1998

	 	  	 1999

	 	  	 2000

	 	  	 2001

	 	  	 2002

	 
	 	  	 (In thousands, except per share data)
	 
	 Consolidated Statements Of Operations Data:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
	 Revenue
	  	 $
	 86,326
	  
	  	 $
	 111,679
	  
	  	 $
	 130,318
	  
	  	 $
	 139,771
	  
	  	 $
	 146,269
	  

	 Operating expenses:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
	 Residence operating expenses
	  	  
	 55,400
	  
	  	  
	 76,081
	  
	  	  
	 87,086
	  
	  	  
	 94,689
	  
	  	  
	 100,351
	  

	 Corporate general and administrative
	  	  
	 11,099
	  
	  	  
	 21,178
	  
	  	  
	 18,365
	  
	  	  
	 17,119
	  
	  	  
	 18,140
	  

	 Building rentals
	  	  
	 12,363
	  
	  	  
	 14,618
	  
	  	  
	 15,237
	  
	  	  
	 15,234
	  
	  	  
	 11,823
	  

	 Depreciation and amortization
	  	  
	 6,002
	  
	  	  
	 8,139
	  
	  	  
	 8,797
	  
	  	  
	 9,212
	  
	  	  
	 6,369
	  

	 Other operating expenses
	  	  
	 11,966
	  
	  	  
	 5,140
	  
	  	  
	 10,020
	  
	  	  
	 —  
	  
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Total operating expenses
	  	  
	 96,830
	  
	  	  
	 125,156
	  
	  	  
	 139,505
	  
	  	  
	 136,254
	  
	  	  
	 136,683
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Operating income (loss)
	  	  
	 (10,504
	 )
	  	  
	 (13,477
	 )
	  	  
	 (9,187
	 )
	  	  
	 3,517
	  
	  	  
	 9,586
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Other income (expense):
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
	 Interest expense
	  	  
	 (11,039
	 )
	  	  
	 (15,200
	 )
	  	  
	 (16,070
	 )
	  	  
	 (19,465
	 )
	  	  
	 (14,148
	 )

	 Interest income
	  	  
	 3,869
	  
	  	  
	 1,598
	  
	  	  
	 786
	  
	  	  
	 650
	  
	  	  
	 213
	  

	 Loss on sale of marketable securities
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (368
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  

	 Other income (expense), net
	  	  
	 (1,174
	 )
	  	  
	 (260
	 )
	  	  
	 55
	  
	  	  
	 30
	  
	  	  
	 64
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Total other expense
	  	  
	 (8,344
	 )
	  	  
	 (13,862
	 )
	  	  
	 (15,597
	 )
	  	  
	 (18,785
	 )
	  	  
	 (13,871
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Loss before debt restructure and reorganization cost, fresh start adjustments,
discontinued operations, extraordinary item and cumulative effect of change in accounting principle
	  	  
	 (18,848
	 )
	  	  
	 (27,339
	 )
	  	  
	 (24,784
	 )
	  	  
	 (15,268
	 )
	  	  
	 (4,285
	 )

	 Debt restructure and reorganization cost
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (8,581
	 )
	  	  
	 (708
	 )

	 Fresh start adjustments
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (119,320
	 )
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Loss from continuing operations
	  	  
	 (18,848
	 )
	  	  
	 (27,339
	 )
	  	  
	 (24,784
	 )
	  	  
	 (143,169
	 )
	  	  
	 (4,993
	 )

	 Income (loss) from discontinued operations
	  	  
	 (374
	 )
	  	  
	 (1,594
	 )
	  	  
	 (1,002
	 )
	  	  
	 (237
	 )
	  	  
	 579
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Loss before extraordinary item and cumulative effect of change in accounting
principle
	  	  
	 (19,222
	 )
	  	  
	 (28,933
	 )
	  	  
	 (25,786
	 )
	  	  
	 (143,406
	 )
	  	  
	 (4,414
	 )

	 Extraordinary item—gain on reorganization
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 79,520
	  
	  	  
	 —  
	  

	 Cumulative effect of change in accounting principle
	  	  
	 (1,523
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Net loss
	  	 $
	 (20,745
	 )
	  	 $
	 (28,933
	 )
	  	 $
	 (25,786
	 )
	  	 $
	 (63,886
	 )
	  	 $
	 (4,414
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Basic and diluted net loss per common share:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
	 Loss from continuing operations
	  	 $
	 (1.16
	 )
	  	 $
	 (1.60
	 )
	  	 $
	 (1.45
	 )
	  	 $
	 (8.36
	 )
	  	 $
	 (0.77
	 )

	 Discontinued operations
	  	  
	 (0.02
	 )
	  	  
	 (0.09
	 )
	  	  
	 (0.06
	 )
	  	  
	 (0.01
	 )
	  	  
	 0.09
	  

	 Extraordinary item
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 4.64
	  
	  	  
	 —  
	  

	 Cumulative effect of change in accounting principle
	  	  
	 (0.09
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Basic and diluted net loss per common share
	  	 $
	 (1.27
	 )
	  	 $
	 (1.69
	 )
	  	 $
	 (1.51
	 )
	  	 $
	 (3.73
	 )
	  	 $
	 (0.68
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Basic and diluted weighted average common shares Outstanding
	  	  
	 16,273
	  
	  	  
	 17,119
	  
	  	  
	 17,121
	  
	  	  
	 17,121
	  
	  	  
	 6,500
	 (1)

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	(1)	 	6,431,759 shares of common stock of the Successor Company were issued upon the cancellation of all shares of the Predecessor Company as of the Effective Date,
excluding 68,241 shares subject to the Reserve that will be issued upon settlement of certain unsecured bankruptcy claims. See Note 1 to the consolidated financial statements included elsewhere herein. 

 

15 

 

	 	  	 Predecessor Company

	 	  	 Successor
 Company

	 
	 	  	 At December 31,

	 
	 	  	 1998

	  	 1999

	  	 2000

	 	  	 2001

	 	  	 2002

	 
	 	  	 (In thousands)
	 
	 Consolidated Balance Sheet Data:
	  	 	 	  	 	 	  	 	 	 	  	 	 	 	  	 	 	 
	 Cash and cash equivalents
	  	 $
	 55,036
	  	 $
	 7,606
	  	 $
	 7,444
	  
	  	 $
	 6,077
	  
	  	 $
	 7,165
	  

	 Working capital (deficit)
	  	  
	 43,856
	  	  
	 37
	  	  
	 (15,911
	 )
	  	  
	 (6,299
	 )
	  	  
	 (2,854
	 )

	 Total assets
	  	  
	 414,669
	  	  
	 346,188
	  	  
	 336,458
	  
	  	  
	 222,253
	  
	  	  
	 216,040
	  

	 Long-term debt, excluding current portion
	  	  
	 266,286
	  	  
	 233,199
	  	  
	 231,657
	  
	  	  
	 161,461
	  
	  	  
	 151,071
	  

	 Shareholders’ equity
	  	  
	 119,197
	  	  
	 89,344
	  	  
	 63,886
	  
	  	  
	 32,799
	  
	  	  
	 28,385
	  

 
 
 

16 

 
Quarterly
Financial Data 
 
(Unaudited)

 
(In thousands except per share, occupancy
and average rental data) 
 

	 	 	 Predecessor Company
 2001 Quarterly Financial Data

	 	 	 Successor Company
 2002 Quarterly Financial Data

	 
	 Results Of Operations

	 	 1st
 Qtr

	 	 	 2nd
 Qtr

	 	 	 3rd
 Qtr

	 	 	 4th
 Qtr

	 	 	 Year To
 Date

	 	 	 1st
 Qtr

	 	 	 2nd
 Qtr

	 	 	 3rd
 Qtr

	 	 	 4th
 Qtr

	 	 	 Year To
 Date

	 
	 Revenue
	 	 $
	 34,258
	  
	 	 $
	 34,671
	  
	 	 $
	 35,266
	  
	 	 $
	 35,576
	  
	 	 $
	 139,771
	  
	 	 $
	 35,196
	  
	 	 $
	 35,966
	  
	 	 $
	 37,217
	  
	 	 $
	 37,890
	  
	 	 $
	 146,269
	  

	 Operating expenses:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Residence operating expenses
	 	  
	 23,293
	  
	 	  
	 22,673
	  
	 	  
	 23,796
	  
	 	  
	 24,927
	  
	 	  
	 94,689
	  
	 	  
	 24,081
	  
	 	  
	 24,795
	  
	 	  
	 25,697
	  
	 	  
	 25,778
	  
	 	  
	 100,351
	  

	 Corporate general and administrative
	 	  
	 4,268
	  
	 	  
	 4,440
	  
	 	  
	 4,536
	  
	 	  
	 3,875
	  
	 	  
	 17,119
	  
	 	  
	 4,316
	  
	 	  
	 5,578
	  
	 	  
	 4,179
	  
	 	  
	 4,067
	  
	 	  
	 18,140
	  

	 Building rentals
	 	  
	 3,979
	  
	 	  
	 3,961
	  
	 	  
	 3,920
	  
	 	  
	 3,374
	  
	 	  
	 15,234
	  
	 	  
	 2,938
	  
	 	  
	 2,967
	  
	 	  
	 2,957
	  
	 	  
	 2,961
	  
	 	  
	 11,823
	  

	 Depreciation and amortization
	 	  
	 2,269
	  
	 	  
	 2,286
	  
	 	  
	 2,262
	  
	 	  
	 2,395
	  
	 	  
	 9,212
	  
	 	  
	 1,546
	  
	 	  
	 1,574
	  
	 	  
	 1,616
	  
	 	  
	 1,633
	  
	 	  
	 6,369
	  

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Total operating expenses
	 	  
	 33,809
	  
	 	  
	 33,360
	  
	 	  
	 34,514
	  
	 	  
	 34,571
	  
	 	  
	 136,254
	  
	 	  
	 32,881
	  
	 	  
	 34,914
	  
	 	  
	 34,449
	  
	 	  
	 34,439
	  
	 	  
	 136,683
	  

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Operating income (loss)
	 	  
	 449
	  
	 	  
	 1,311
	  
	 	  
	 752
	  
	 	  
	 1,005
	  
	 	  
	 3,517
	  
	 	  
	 2,315
	  
	 	  
	 1,052
	  
	 	  
	 2,768
	  
	 	  
	 3,451
	  
	 	  
	 9,586
	  

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Other income (expense):
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Interest expense
	 	  
	 (4,402
	 )
	 	  
	 (4,905
	 )
	 	  
	 (5,303
	 )
	 	  
	 (4,855
	 )
	 	  
	 (19,465
	 )
	 	  
	 (3,591
	 )
	 	  
	 (3,465
	 )
	 	  
	 (3,545
	 )
	 	  
	 (3,547
	 )
	 	  
	 (14,148
	 )

	 Interest income
	 	  
	 146
	  
	 	  
	 139
	  
	 	  
	 95
	  
	 	  
	 270
	  
	 	  
	 650
	  
	 	  
	 54
	  
	 	  
	 50
	  
	 	  
	 55
	  
	 	  
	 54
	  
	 	  
	 213
	  

	 Other income (expense), net
	 	  
	 31
	  
	 	  
	 (98
	 )
	 	  
	 12
	  
	 	  
	 85
	  
	 	  
	 30
	  
	 	  
	 —  
	  
	 	  
	 20
	  
	 	  
	 14
	  
	 	  
	 30
	  
	 	  
	 64
	  

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Total other expense
	 	  
	 (4,225
	 )
	 	  
	 (4,864
	 )
	 	  
	 (5,196
	 )
	 	  
	 (4,500
	 )
	 	  
	 (18,785
	 )
	 	  
	 (3,537
	 )
	 	  
	 (3,395
	 )
	 	  
	 (3,476
	 )
	 	  
	 (3,463
	 )
	 	  
	 (13,871
	 )

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Loss before debt restructure and reorganization cost, fresh start adjustments,
discontinued operations, extraordinary item and cumulative effect of change in accounting principle
	 	  
	 (3,776
	 )
	 	  
	 (3,553
	 )
	 	  
	 (4,444
	 )
	 	  
	 (3,495
	 )
	 	  
	 (15,268
	 )
	 	  
	 (1,222
	 )
	 	  
	 (2,343
	 )
	 	  
	 (708
	 )
	 	  
	 (12
	 )
	 	  
	 (4,285
	 )

	 Debt restructure and reorganization cost
	 	  
	 (303
	 )
	 	  
	 (1,064
	 )
	 	  
	 (2,805
	 )
	 	  
	 (4,409
	 )
	 	  
	 (8,581
	 )
	 	  
	 (447
	 )
	 	  
	 (219
	 )
	 	  
	 (14
	 )
	 	  
	 (28
	 )
	 	  
	 (708
	 )

	 Fresh start adjustments
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 (119,320
	 )
	 	  
	 (119,320
	 )
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Loss from continuing operations
	 	  
	 (4,079
	 )
	 	  
	 (4,617
	 )
	 	  
	 (7,249
	 )
	 	  
	 (127,224
	 )
	 	  
	 (143,169
	 )
	 	  
	 (1,669
	 )
	 	  
	 (2,562
	 )
	 	  
	 (722
	 )
	 	  
	 (40
	 )
	 	  
	 (4,993
	 )

	 Income (loss) from discontinued operations
	 	  
	 (119
	 )
	 	  
	 6
	  
	 	  
	 (84
	 )
	 	  
	 (40
	 )
	 	  
	 (237
	 )
	 	  
	 219
	  
	 	  
	 (68
	 )
	 	  
	 159
	  
	 	  
	 269
	  
	 	  
	 579
	  

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Loss before extraordinary item
	 	  
	 (4,198
	 )
	 	  
	 (4,611
	 )
	 	  
	 (7,333
	 )
	 	  
	 (127,264
	 )
	 	  
	 (143,406
	 )
	 	  
	 (1,450
	 )
	 	  
	 (2,630
	 )
	 	  
	 (563
	 )
	 	  
	 229
	  
	 	  
	 (4,414
	 )

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Extraordinary item—gain on reorganization
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 79,520
	  
	 	  
	 79,520
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Net income (loss)
	 	 $
	 (4,198
	 )
	 	 $
	 (4,611
	 )
	 	 $
	 (7,333
	 )
	 	 $
	 (47,744
	 )
	 	 $
	 (63,886
	 )
	 	 $
	 (1,450
	 )
	 	 $
	 (2,630
	 )
	 	 $
	 (563
	 )
	 	 $
	 229
	  
	 	 $
	 (4,414
	 )

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Basic and diluted net loss per common share:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Loss from continuing operations
	 	 $
	 (0.24
	 )
	 	 $
	 (0.27
	 )
	 	 $
	 (0.42
	 )
	 	 $
	 (7.43
	 )
	 	 $
	 (8.37
	 )
	 	 $
	 (0.25
	 )
	 	 $
	 (0.39
	 )
	 	 $
	 (0.11
	 )
	 	 $
	  —
	  
	 	 $
	 (0.77
	 )

	 Discontinued operations
	 	  
	 (0.01
	 )
	 	  
	 —  
	  
	 	  
	 (0.01
	 )
	 	  
	 —  
	  
	 	  
	 (0.01
	 )
	 	  
	 0.03
	  
	 	  
	 (0.01
	 )
	 	  
	 0.02
	  
	 	  
	 0.04
	  
	 	  
	 0.09
	  

	 Extraordinary item
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 4.64
	  
	 	  
	 4.64
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Basic and diluted net loss per common share(1)
	 	 $
	 (0.25
	 )
	 	 $
	 (0.27
	 )
	 	 $
	 (0.43
	 )
	 	 $
	 (2.79
	 )
	 	 $
	 (3.73
	 )
	 	 $
	 (0.22
	 )
	 	 $
	 (0.40
	 )
	 	 $
	 (0.09
	 )
	 	 $
	 0.04
	  
	 	 $
	 (0.68
	 )

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	

	 Basic and diluted weighted average common shares outstanding
	 	  
	 17,121
	  
	 	  
	 17,121
	  
	 	  
	 17,121
	  
	 	  
	 17,121
	  
	 	  
	 17,121
	  
	 	  
	 6,500
	  
	 	  
	 6,500
	  
	 	  
	 6,500
	  
	 	  
	 6,500
	  
	 	  
	 6,500
	 (2)

	 Average monthly rental rate per unit
	 	 $
	 2,041
	  
	 	 $
	 2,056
	  
	 	 $
	 2,082
	  
	 	 $
	 2,112
	  
	 	 $
	 2,073
	  
	 	 $
	 2,117
	  
	 	 $
	 2,156
	  
	 	 $
	 2,179
	  
	 	 $
	 2,213
	  
	 	 $
	 2,157
	  

	 Average occupancy rate(3)
	 	  
	 83.4 
	 %
	 	  
	 83.9 
	 %
	 	  
	 84.3 
	 %
	 	  
	 84.2 
	 %
	 	  
	 84.0 
	 %
	 	  
	 83.1 
	 %
	 	  
	 84.3 
	 %
	 	  
	 85.6 
	 %
	 	  
	 87.4 
	 %
	 	  
	 84.8 
	 %

	 End of period occupancy rate(3)
	 	  
	 83.3 
	 %
	 	  
	 84.2 
	 %
	 	  
	 84.9 
	 %
	 	  
	 83.7 
	 %
	 	  
	 83.7 
	 %
	 	  
	 82.8 
	 %
	 	  
	 84.6 
	 %
	 	  
	 87.2 
	 %
	 	  
	 87.3 
	 %
	 	  
	 87.3 
	 %

	(1)	 	Quarter net loss per share amounts may not add to the full year total due to rounding. 

	(2)	 	6,431,759 shares of common stock of the Successor Company were issued upon the cancellation of all shares of the Predecessor Company as of the Effective Date,
excluding 68,241 shares subject to the Reserve that will be issued upon settlement of certain unsecured bankruptcy claims. See Note 1 to the consolidated financial statements included elsewhere herein. 

	(3)	 	Based upon available units. 

 
 

17 

 
Item
7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations 
 
Overview 
 
We operate, own and lease free-standing assisted living residences. These residences are primarily located in small middle-market rural
and suburban communities with a population typically ranging from 10,000 to 40,000. 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 December 31, 2002, we had operations in 14 states. 
 
We experienced significant and rapid growth between 1994 and 1998, primarily through the development of assisted living residences and, to a lesser extent, through the acquisition of assisted living
residences. At the closing of our initial public offering in November 1994, we had an operating base of five leased residences (137 units) located in Oregon. We opened twenty residences (798 units) in 1999 and no residences in 2000, 2001 and 2002.
We sold five residences in 2002 and the sales of eleven residences are pending as of March 23, 2003. As of December 31, 2002, we operated 178 residences (6,883 units), of which we owned 123 residences (4,778 units) and leased 55 residences (2,105
units). 
 
We derive our revenues primarily from
resident fees for the delivery of assisted living services. 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 upon type of room and 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 Home Office support functions such as legal, accounting and other administrative expenses;

 

	 	•	 	building rentals; and 

 

	 	•	 	depreciation and amortization. 

 
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 tenants and Medicaid paying tenants 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, or more aggressively seek, limits on reimbursement rates. See
“Forward-looking statements and factors affecting our business and prospects.—We depend on reimbursement by third-party payors.” 
 
Reorganization 
 
On October 1, 2001, we voluntarily filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. The bankruptcy court gave
final approval to our Plan of reorganization on December 28, 2001, and the plan became effective on the Effective Date, January 1, 2002. 
 
Under the Plan, on the Effective Date, the Company issued general unsecured creditors their pro rata shares, subject to the Reserve, of
the following securities: 
 

	 	•	 	$40.25 million principal amount of Senior Secured Notes; 

 

	 	•	 	$15.25 million principal amount of Junior Secured Notes; and 

 

	 	•	 	6.24 million shares of new common stock (representing 96% of the new common stock). 

 

18 

 
As of December
31, 2002, the New Notes are secured by 52 of the Company’s 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 in 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 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. See Note 1 to the
consolidated financial statements included in Item 14 of this report for additional information. 
 
Fresh-Start Reporting 
 
Upon emergence from Chapter 11 proceedings, 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 included in Item 6 and Item 8 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 7, 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. See
Note 1 to the consolidated financial statements included elsewhere herein for a reconciliation of the Predecessor Company and the Successor Company consolidated balance sheets as of December 31, 2001. 
 

19 

 
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, the carrying value of long-lived assets, financing operations, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. 
 
We believe the following critical accounting policies are more significant to the judgments and estimates used in the preparation of our consolidated financial statements: 
 
Fresh-Start Reporting. Upon emerging from Chapter 11 proceedings 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 relative 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 current effective interest rates for similar debt instruments. The fair
value of our leases and property, plant and equipment were based on 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 believed 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 recorded as an adjustment to additional paid-in capital. 
 

20 

 
Results of Operations

 
Year ended December 31,
2002 compared to year ended December 31, 2001 
 
The following table sets forth, for the periods presented, the sources of our revenue and operating expenses as a percentage of revenue. 
 

	 	  	 Years Ended December 31,

	 	  	 Years
 Ended
 December 31,

	 
	 	  	 2001

	 	  	 2002

	 	  	 Increase/
 Decrease

	 	  	 Percentage Increase/ Decrease

	 	  	 2001

	 	  	 2002

	 
	 	  	 (In millions, except percentages)
	 	  	 (As percentage
 of revenue)
	 
	 Revenue
	  	 $
	 139.8
	  
	  	 $
	 146.3
	  
	  	 $
	 6.5
	  
	  	 4.6 
	 %
	  	 100.0
	 %
	  	 100.0
	 %

	 Operating expenses:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	  	 	 	  	 	 
	 Residence operating expenses
	  	  
	 94.7
	  
	  	  
	 100.4
	  
	  	  
	 5.7
	  
	  	 6.0 
	 %
	  	 67.7
	 %
	  	 68.6
	 %

	 Corporate general and administrative
	  	  
	 17.1
	  
	  	  
	 18.1
	  
	  	  
	 1.0
	  
	  	 5.8 
	 %
	  	 12.2
	 %
	  	 12.4
	 %

	 Building rentals
	  	  
	 15.3
	  
	  	  
	 11.8
	  
	  	  
	 (3.5
	 )
	  	 (22.9
	 )%
	  	 10.9
	 %
	  	 8.1
	 %

	 Depreciation and amortization
	  	  
	 9.2
	  
	  	  
	 6.4
	  
	  	  
	 (2.8
	 )
	  	 (30.4
	 )%
	  	 6.6
	 %
	  	 4.4
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Total operating expenses
	  	  
	 136.3
	  
	  	  
	 136.7
	  
	  	  
	 0.4
	  
	  	 0.3 
	 %
	  	 97.5
	 %
	  	 93.4
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Operating income (loss)
	  	  
	 3.5
	  
	  	  
	 9.6
	  
	  	  
	 6.1
	  
	  	 174.3 
	 %
	  	 2.5
	 %
	  	 6.6
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Other income (expense):
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	  	 	 	  	 	 
	 Interest expense
	  	  
	 (19.5
	 )
	  	  
	 (14.1
	 )
	  	  
	 5.4
	  
	  	 27.7
	 %
	  	 (13.9
	 )%
	  	 (9.6
	 )%

	 Interest income
	  	  
	 0.7
	  
	  	  
	 0.2
	  
	  	  
	 (0.5
	 )
	  	 (71.4
	 )%
	  	 0.5
	 %
	  	 0.1
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Total other expense
	  	  
	 (18.8
	 )
	  	  
	 (13.9
	 )
	  	  
	 4.9
	  
	  	 26.1
	 %
	  	 (13.4
	 )%
	  	 (9.5
	 )%

	 Loss before debt restructure, reorganization costs, fresh start adjustments,
discontinued operations and extraordinary item
	  	  
	 (15.3
	 )
	  	  
	 (4.3
	 )
	  	  
	 11.0
	  
	  	 71.9
	 %
	  	 (11.0
	 )%
	  	 (2.9
	 )%

	 Debt restructure and reorganization costs
	  	  
	 (8.6
	 )
	  	  
	 (0.7
	 )
	  	  
	 7.9
	  
	  	 91.9
	 %
	  	 (6.2
	 )%
	  	 (0.5
	 )%

	 Fresh start adjustments
	  	  
	 (119.3
	 )
	  	  
	 —  
	  
	  	  
	 (119.3
	 )
	  	 100.0
	 %
	  	 (85.3
	 )%
	  	 0.0
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Loss from continuing operations
	  	  
	 (143.2
	 )
	  	  
	 (5.0
	 )
	  	  
	 138.3
	  
	  	 96.5
	 %
	  	 (102.5
	 )%
	  	 (3.4
	 )%

	 Discontinued operations:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	  	 	 	  	 	 
	 Loss on sale of assets
	  	  
	 (0.1
	 )
	  	  
	 (0.6
	 )
	  	  
	 (0.5
	 )
	  	 (500.0
	 )%
	  	 (0.1
	 )%
	  	 (0.4
	 )%

	 Income (loss) from operations
	  	  
	 (0.1
	 )
	  	  
	 1.2
	  
	  	  
	 1.3
	  
	  	 1,300.0
	 %
	  	 (0.1
	 )%
	  	 0.8
	 %

	 Income (loss) from discontinued operations
	  	  
	 (0.2
	 )
	  	  
	 0.6
	  
	  	  
	 0.8
	  
	  	 400.0
	 %
	  	 (0.1
	 )%
	  	 0.4
	 %

	 Loss before extraordinary item
	  	  
	 (143.4
	 )
	  	  
	 (4.4
	 )
	  	  
	 139.0
	  
	  	 96.9
	 %
	  	 (102.6
	 )%
	  	 (3.0
	 )%

	 Extraordinary item—gain on reorganization
	  	  
	 79.5
	  
	  	  
	 —  
	  
	  	  
	 79.5
	  
	  	 100.0
	 %
	  	 56.9
	 %
	  	 0.0
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Net loss
	  	 $
	 (63.9
	 )
	  	 $
	 (4.4
	 )
	  	 $
	 59.5
	  
	  	 93.1
	 %
	  	 (45.7
	 )%
	  	 (3.0
	 )%

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

 
Other Data:

 
The following table sets forth, for the periods
presented, the number of total residences and units operated, and average occupancy rates. The portion of revenues received from state Medicaid agencies are 

 

21 

labeled as “Medicaid state 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 portion.” 
 

	 	  	 Years Ended December 31,

	 
	 Total Residences

	  	 2000

	 	  	 2001

	 	  	 2002

	 
	 Residences operated (end of period)
	  	  
	 185
	  
	  	  
	 184
	  
	  	  
	 178
	  

	 Units operated (end of period)
	  	  
	 7,149
	  
	  	  
	 7,115
	  
	  	  
	 6,883
	  

	 Average occupancy rate (based on occupied units)
	  	  
	 80.7
	 %
	  	  
	 84.0
	 %
	  	  
	 84.8
	 %

	 End of year occupancy rate (based on occupied units)
	  	  
	 83.0
	 %
	  	  
	 83.7
	 %
	  	  
	 87.3
	 %

	 Average monthly rental rate
	  	 $
	 1,991
	  
	  	 $
	 2,073
	  
	  	 $
	 2,157
	  

	 Sources of revenue:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Medicaid state portion
	  	  
	 11.1
	 %
	  	  
	 12.5
	 %
	  	  
	 12.8
	 %

	 Medicaid resident portion
	  	  
	 6.2
	 %
	  	  
	 6.8
	 %
	  	  
	 7.5
	 %

	 Private
	  	  
	 82.7
	 %
	  	  
	 80.7
	 %
	  	  
	 79.7
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Total
	  	  
	 100.0
	 %
	  	  
	 100.0
	 %
	  	  
	 100.0
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	

 
We
incurred a net loss of $4.4 million, or $.68 per basic and diluted share, on revenue of $146.3 million for the year ended December 31, 2002 (the “2002 Period”) as compared to a net loss of $63.9 million, or $3.73 per basic and diluted
share, on revenue of $139.8 million for the year ended December 31, 2001 (the “2001 Period”). Net loss before extraordinary gain on reorganization was $143.4 million, or $8.36 per basic and diluted share, for the 2001 Period. 
 
We had certificates of occupancy for 178 residences (6,883
units) at the end of 2002 compared to 184 residences (7,115 units) in 2001. 
 
Revenue. Revenue was $146.3 million for the 2002 Period as compared to $139.8 million for the 2001 Period, an increase of $6.5 million or 4.6%. The increase in revenue was primarily attributable
to a combination of an increase in average occupancy to 84.8% and average monthly rental rate of $2,157 for the 2002 period compared to average occupancy of 84.0% and average monthly rental rate of $2,073 for the 2001 period. We expect revenues to
increase for 2003 due to increases in rental rates and occupancies. 
 
Residence Operating Expenses. Residence operating expenses were $100.4 million for the 2002 Period as compared to $94.7 million for the 2001 Period, an increase of $5.7 million or 6.0%. Of this increase, $3.6 million
was due to increases in payroll costs due to increased wages, benefits, and insurance, $848,000 was due to increases in property liability insurance, $455,000 was due to increased bad debt, $349,000 was due to increased property taxes, and $364,000
was due to increased repairs and maintenance. Resident operating expenses are expected to increase in 2003 as revenues and occupancies increase. 
 
Corporate General and Administrative. Corporate general and administrative expenses were $18.1 million for the 2002 Period as
compared to $17.1 million for the 2001 Period, an increase of $1.0 million or 5.8%. The increase was mainly due to an increase in payroll costs of $2.0 million. This increase was offset by decreases of $280,000 related to reduced fees and expenses
for directors, $1.2 million related to lower professional fees, including financial advisory and legal, a $200,000 decrease in communication expense due to implementation of more efficient communications infrastructure, and $250,000 related to other
overhead expenses due to implementation of more efficient cost saving strategies. Corporate general and administrative expenses are expected to remain constant in 2003. 
 
Building Rentals. Building rentals were $11.8 million for the 2002 Period as compared to $15.3 million
for the 2001 Period, a decrease of $3.5 million or 22.4%. The decrease in building rents was from renegotiated lease payments due to the reorganization plan and the purchase of certain lease facilities in 2001. Building rentals are expected to
remain constant in 2003. 
 
Depreciation and
Amortization. Depreciation and amortization was $6.4 million for the 2002 Period as compared to $9.2 million for the 2001 Period, a decrease of $2.8 million or 30.4%. The decrease in 

 

22 

depreciation was due to the reduction of assets to their estimated fair values in 2001. Depreciation expense is expected to remain constant
or slightly increase in 2003 as improvements are made to the residences. 
 
Interest Expense. Interest expense was $14.1 million for the 2002 Period as compared to $19.5 million for the 2001 Period, a decrease of $5.4 million or 27.7%. The decrease was related to the reduction of debt in the
reorganization and deferred financing costs that were written off to interest expense in 2001 from the reorganization of our debt. Interest expense is expected to remain constant or decrease as additional principal is paid down or as debt is
refinanced. 
 
Interest Income. Interest
income was $213,000 for the 2002 Period as compared to $650,000 for the 2001 Period, a decrease of $437,000. The decrease is related to interest income earned on lower average cash balances during the 2002 Period. 
 
Debt Restructure and Reorganization Costs. During the
2002 Period debt restructure and reorganization costs incurred were $708,000 as compared to $8.6 million in the 2001 Period. In the 2002 and 2001 Period, these costs include $7.4 million of professional fees, primarily legal, accounting and
investment advisory fees and $1.2 million of payments related to the Plan made in accordance with employment agreements.  
 
Fresh-Start Adjustments. Fresh-start valuation adjustments of $119.3 million were recorded in the 2001 Period pursuant to the
provisions of AICPA SOP 90-7, which require entities to record their assets and liabilities at estimated fair values. The fresh-start valuation adjustment is principally the result of the elimination of predecessor company goodwill and the
revaluation of debt and property, plant and equipment to estimated fair values. 
 
Income From Discontinued Operations. Income from discontinued operations was $579,000 for the 2002 Period as compared to a loss of $237,000 in the 2001 Period. Income from discontinued
operations relates to five properties sold in 2002, one property sold in 2001 and eleven properties designated as held-for-sale. The following table summarizes revenue and expense information for these properties sold and held-for-sale:

 

	 	  	 Years Ended December 31,

	 
	 	  	 2001

	 	  	 2002

	 
	 	  	 (In thousands)
	 
	 Revenue
	  	 $
	 10,907
	  
	  	 $
	 10,278
	  

	 Operating expenses:
	  	 	 	 	  	 	 	 
	 Residence operating expenses
	  	  
	 9,178
	  
	  	  
	 8,354
	  

	 Building rentals
	  	  
	 746
	  
	  	  
	 401
	  

	 Depreciation and amortization
	  	  
	 1,137
	  
	  	  
	 392
	  

	 Other expense (income)
	  	  
	 (5
	 )
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	

	 Total operating expenses
	  	  
	 11,056
	  
	  	  
	 9,147
	  

	 	  	
	
	
	  	
	
	

	
	 Income (loss) from operations
	  	  
	 (149
	 )
	  	  
	 1,131
	  

	 Gain (loss) on sale of assets
	  	  
	 (88
	 )
	  	  
	 (552
	 )

	 	  	
	
	
	  	
	
	

	 Income (loss) from discontinued operations
	  	 $
	 (237
	 )
	  	 $
	 579
	  

	 	  	
	
	
	  	
	
	

 
During
the 2001 Period, an extraordinary gain on reorganization of $79.5 million was recorded in accordance with the implementation of the Plan (See Note 1 to the consolidated financial statements included elsewhere herein). 
 

23 

 
Year ended
December 31, 2001 compared to year ended December 31, 2000 
 
The following table sets forth, for the periods presented, the sources of our revenue and operating expenses as a percentage of revenue. 
 

	 	  	 Years Ended December 31,

	 	  	 Years
 Ended
 December 31,

	 
	 	  	 2000

	 	  	 2001

	 	  	 Increase/
 Decrease

	 	  	 Percentage
 Increase/
 Decrease

	 	  	 2000

	 	  	 2001

	 
	 	  	 (In millions, except percentages)
	 	  	 As percentage of revenue)
	 
	 Revenue
	  	 $
	 130.3
	  
	  	 $
	 139.8
	  
	  	 $
	 9.5
	  
	  	 7.3
	 %
	  	 100.0
	 %
	  	 100.0
	 %

	 Operating expenses:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	  	 	 	  	 	 
	 Residence operating expenses
	  	  
	 87.1
	  
	  	  
	 94.7
	  
	  	  
	 7.6
	  
	  	 8.7
	 %
	  	 66.8
	 %
	  	 67.7
	 %

	 Corporate general and administrative
	  	  
	 18.4
	  
	  	  
	 17.1
	  
	  	  
	 (1.3
	 )
	  	 (7.1
	 )%
	  	 14.1
	 %
	  	 12.2
	 %

	 Building rentals
	  	  
	 15.2
	  
	  	  
	 15.3
	  
	  	  
	 0.1
	  
	  	 0.7
	 %
	  	 11.7
	 %
	  	 10.9
	 %

	 Depreciation and amortization
	  	  
	 8.8
	  
	  	  
	 9.2
	  
	  	  
	 0.4
	  
	  	 4.5
	 %
	  	 6.8
	 %
	  	 6.6
	 %

	 Class action litigation settlement
	  	  
	 10.0
	  
	  	  
	 —  
	  
	  	  
	 (10.0
	 )
	  	 (100.0
	 )%
	  	 7.7
	 %
	  	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Total operating expenses
	  	  
	 139.5
	  
	  	  
	 136.3
	  
	  	  
	 (3.2
	 )
	  	 (2.3
	 )%
	  	 107.1
	 %
	  	 97.5
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Operating income (loss)
	  	  
	 (9.2
	 )
	  	  
	 3.5
	  
	  	  
	 12.7
	  
	  	 138.0
	 %
	  	 (7.1
	 )%
	  	 2.5
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Other income (expense):
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	  	 	 	  	 	 
	 Interest expense
	  	  
	 (16.1
	 )
	  	  
	 (19.5
	 )
	  	  
	 (3.4
	 )
	  	 21.1
	 %
	  	 (12.4
	 )%
	  	 (13.9
	 )%

	 Interest income
	  	  
	 0.8
	  
	  	  
	 0.7
	  
	  	  
	 (0.1
	 )
	  	 (12.5
	 )%
	  	 0.6
	 %
	  	 0.5
	 %

	 Loss on sale of marketable securities
	  	  
	 (0.4
	 )
	  	  
	 —  
	  
	  	  
	 0.4
	  
	  	 100.0
	 %
	  	 (0.3
	 )%
	  	 —  
	  

	 Other income (expense), net
	  	  
	 0.1
	  
	  	  
	 —  
	  
	  	  
	 (0.1
	 )
	  	 (100.0
	 )%
	  	 0.1
	 %
	  	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Total other expense
	  	  
	 (15.6
	 )
	  	  
	 (18.8
	 )
	  	  
	 (3.2
	 )
	  	 (20.5
	 )%
	  	 (12.0
	 )%
	  	 (13.4
	 )%

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Loss before debt restructure and reorganization costs, fresh start adjustments,
discontinued operations and extraordinary item
	  	  
	 (24.8
	 )
	  	  
	 (15.3
	 )
	  	  
	 9.5
	  
	  	 37.9
	 %
	  	 (19.0
	 )%
	  	 (11.0
	 )%

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Debt restructure and reorganization costs
	  	  
	 —  
	  
	  	  
	 (8.6
	 )
	  	  
	 (8.6
	 )
	  	 100.0
	 %
	  	 —  
	  
	  	 (5.7
	 )%

	 Fresh start adjustments
	  	  
	 —  
	  
	  	  
	 (119.3
	 )
	  	  
	 (119.3
	 )
	  	 100.0
	 %
	  	 —  
	  
	  	 (79.2
	 )%

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Loss from continuing operations
	  	  
	 (24.8
	 )
	  	  
	 (143.2
	 )
	  	  
	 9.4
	  
	  	 37.9
	 %
	  	 (19.0
	 )%
	  	 (11.0
	 )%

	 Loss on sale of assets
	  	  
	 —  
	  
	  	  
	 (0.1
	 )
	  	  
	 (0.1
	 )
	  	 (100.0
	 )%
	  	 —  
	  
	  	 (0.1
	 )%

	 Loss from operations
	  	  
	 (1.0
	 )
	  	  
	 (0.1
	 )
	  	  
	 0.9
	  
	  	 90.0
	 %
	  	 (0.8
	 )%
	  	 (0.1
	 )%

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Income (loss) from discontinued operations
	  	  
	 (1.0
	 )
	  	  
	 (0.2
	 )
	  	  
	 0.8
	  
	  	 80.0
	 %
	  	 (0.8
	 )%
	  	 (0.1
	 )%

	 Loss before extraordinary item
	  	  
	 (25.8
	 )
	  	  
	 (143.4
	 )
	  	  
	 (117.6
	 )
	  	 455.8
	 %
	  	 (19.8
	 )%
	  	 (102.6
	 )%

	 Extraordinary item—gain on reorganization
	  	  
	 —  
	  
	  	  
	 79.5
	  
	  	  
	 79.5
	  
	  	 100.0
	 %
	  	 —  
	  
	  	 56.9
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

	 Net loss
	  	 $
	 (25.8
	 )
	  	 $
	 (63.9
	 )
	  	 $
	 (38.1
	 )
	  	 147.7
	 %
	  	 (19.8
	 )%
	  	 (45.7
	 )%

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	  	
	
	  	
	

 
Other Data:

 
The following table sets forth, for the periods
presented, the number of total residences and units operated, and average occupancy rates. The portion of revenues received from state Medicaid agencies are 

 

24 

labeled as “Medicaid state 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 portion.” 
 

	 	  	 Years Ended December 31,

	 
	 Total Residences

	  	 1999

	 	  	 2000

	 	  	 2001

	 
	 Residences operated (end of period)
	  	  
	 185
	  
	  	  
	 185
	  
	  	  
	 184
	  

	 Units operated (end of period)
	  	  
	 7,148
	  
	  	  
	 7,149
	  
	  	  
	 7,115
	  

	 Average occupancy rate (based on occupied units)
	  	  
	     75.1
	 %
	  	  
	 80.7
	 %
	  	  
	 84.0
	 %

	 End of year occupancy rate (based on occupied units)
	  	  
	 78.1
	 %
	  	  
	 83.0
	 %
	  	  
	 83.7
	 %

	 Average monthly rental rate
	  	 $
	 1,898
	  
	  	 $
	 1,991
	  
	  	 $
	 2,073
	  

	 Sources of revenue:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Medicaid state portion
	  	  
	 10.4
	 %
	  	  
	 11.1
	 %
	  	  
	 12.5
	 %

	 Medicaid resident portion
	  	  
	 5.9
	 %
	  	  
	 6.2
	 %
	  	  
	 6.8
	 %

	 Private
	  	  
	 83.7
	 %
	  	  
	 82.7
	 %
	  	  
	 80.7
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Total
	  	  
	 100.0
	 %
	  	  
	 100.0
	 %
	  	  
	 100.0
	 %

	 	  	
	
	
	  	
	
	
	  	
	
	

 
We
incurred a net loss of $63.9 million, or $3.73 per basic and diluted share, on revenue of $139.8 million for the year ended December 31, 2001 (the “2001 Period”) as compared to a net loss of $25.8 million, or $1.51 per basic and diluted
share, on revenue of $130.3 million for the year ended December 31, 2000 (the “2000 Period”). Net loss before extraordinary gain on reorganization was $143.4 million, or $8.38 per basic and diluted share, for the 2001 Period as compared to
a net loss of $25.8 million, or $1.51 per basic and diluted share, for the 2000 Period. 
 
We had certificates of occupancy for 184 residences (7,115 units) at the end of 2001 compared to 185 residences (7,149 units) in 2000. In accordance with the Plan, we discontinued one lease (34 units),
effective December 1, 2001. 
 
Revenue.
Revenue was $139.8 million for the 2001 Period as compared to $130.3 million for the 2000 Period, an increase of $9.5 million or 7.3%. The increase in revenue was primarily attributable to a combination of an increase in average occupancy to
84.0% and average monthly rental rate of $2,073 for the 2001 period compared to average occupancy of 80.7% and average monthly rental rate of $1,991 for the 2000 period. 
 
Residence Operating Expenses. Residence operating expenses were $94.7 million for the 2001 Period as
compared to $87.1 million for the 2000 Period, an increase of $7.6 million or 8.7%. Of this increase, $7.6 million was due to increases in payroll costs due to increases in occupancy, wages, benefits, and medical and workers compensation insurance
premiums, $1.0 million was due to increased utility costs, $2.0 million was due to increases in professional and property liability insurance, and $700,000 was due to an increase in kitchen expense, including food, as a result of increased
occupancy. These increases were offset by decreases of $1.9 million due to a decrease in bad debt expense due to more timely collection of aged account receivable balances, $600,000 due to a decrease in property tax expense as a result of changes in
assessments and related estimates, and $100,000 due to a decrease in property related repairs and maintenance. 
 
Corporate General and Administrative Expenses. Corporate general and administrative expenses as reported were $17.1 million for the
2001 Period as compared to $18.4 million for the 2000 Period, a decrease of $1.3 million or 7.1%. The 2000 Period includes a reduction of $900,000 related to an insurance reimbursement for legal and professional fees incurred in prior periods in
connection with the class action litigation. Excluding the $900,000 reimbursement, corporate general and administrative expenses for the 2000 Period were $19.3 million, compared to $17.2 million for the 2001 Period, a decrease of $2.1 million. Of
this decrease, $440,000 was due to a decrease related to reduced premiums for directors, officers and corporate liability insurance, $600,000 was due to a decrease related to lower professional fees, including financial advisory and legal, $200,000
was due to a decrease in communication expense due to implementation of more efficient communications infrastructure, and $180,000 was due to a decrease in payroll and related expenses due to 2000 corporate general and administrators expenses
including $1.2 million of severance related pay for 

 

25 

prior officers, offset by a $1.0 million increase due to increases in wages and benefits resulting primarily from increased employee
retention and increases in benefit rates. 
 
Depreciation and amortization was $9.2 million for the 2001 Period as compared to $8.8 million for the 2000 Period, an increase of $400,000 or 4.0%. Depreciation expense was $10.0 million and amortization expense related to goodwill
was $292,000 for the 2001 Period as compared to $9.6 million and $292,000, respectively, for the 2000 Period. The increase in depreciation is the result of improvements to our communications infrastructure and the purchase of 16 previously leased
residences on October 24, 2001. 
 
Interest expense
was $19.5 million for the 2001 Period as compared to $16.1 million for the 2000 Period, an increase of $3.4 million or 21.1%. The increase was related to interest incurred on our $4.0 million bridge loan, interest incurred on HUD loans with
principal of $7.9 million, interest incurred on GE Capital (formerly Heller Healthcare, Inc. ) credit facility draws of $17.0 million and $23.5 million of GE Capital financing in connection with the purchase of 16 previously leased facilities.
Additionally, $1.9 million of deferred financing costs were written off to interest expense when the maturity of the GE Capital credit facility changed during the fourth quarter of 2001. 
 
Interest income was $650,000 for the 2001 Period as compared to $786,000 for the 2000 Period, a decrease of
$136,000. The decrease is related to interest income earned on lower average cash balances during the 2001 Period. 
 
Other income was $30,000 for the 2001 Period as compared to $55,000 for the 2000 Period. Other income during the 2000 Period was primarily
related to a contract to provide development services to a third party. 
 
During the 2001 Period we incurred $8.6 million of costs associated with establishing and implementing the Plan. These costs include $7.4 million of professional fees, primarily legal, accounting and investment advisory fees
and $1.2 million of payments related to the Plan made in accordance with employment agreements. 
 
Fresh-start valuation adjustments of $119.3 million were recorded pursuant to the provisions of AICPA SOP 90-7, which require entities to record their assets and liabilities at estimated fair values.
The fresh-start valuation adjustment is principally the result of the elimination of predecessor company goodwill and the revaluation of debt and property, plant and equipment to estimated fair values. 
 
Loss from discontinued operations was $237,000 for the 2001
Period as compared to $1.0 million in the 2000 Period. Income from discontinued operations relates to five properties sold in 2002, eleven properties designated as held for sale, and the sale of undeveloped land in 2001. The following table
summarizes revenue and expense information for these properties sold and held-for-sale: 
 
 

	 	  	 Years Ended December 31,

	 
	 	  	 2000

	 	  	 2001

	 
	 	  	 (In thousands)
	 
	 Revenue
	  	 $
	 9,105
	  
	  	 $
	 10,907
	  

	 Operating expenses:
	  	 	 	 	  	 	 	 
	 Residence operating expenses
	  	  
	 7,944
	  
	  	  
	 9,178
	  

	 Building rentals
	  	  
	 767
	  
	  	  
	 746
	  

	 Depreciation and amortization
	  	  
	 1,126
	  
	  	  
	 1,137
	  

	 Other expense (income)
	  	  
	 282
	  
	  	  
	 (5
	 )

	 	  	
	
	
	  	
	
	

	 Total operating expenses
	  	  
	 10,119
	  
	  	  
	 11,056
	  

	 	  	
	
	
	  	
	
	

	 Income (loss) from operations
	  	  
	 (1,014
	 )
	  	  
	 (149
	 )

	 Gain (loss) on sale of assets
	  	  
	 12
	  
	  	  
	 (88
	 )

	 	  	
	
	
	  	
	
	

	 Income (loss) from discontinued operations
	  	 $
	 (1,002
	 )
	  	 $
	 (237
	 )

	 	  	
	
	
	  	
	
	

 
During
the 2001 Period, an extraordinary gain on reorganization of $79.5 million was recorded in accordance with the implementation of the Plan (See Note 1 to the consolidated financial statements included elsewhere herein). 
 

26 

 
Liquidity and Capital
Resources 
 
At December 31, 2002, we had a
working capital deficit of $2.9 million and unrestricted cash and equivalents of $7.2 million. 
 
Net cash provided by operating activities was $4.4 million during the year ended December 31, 2002. The primary source of cash was from operating income (rents less resident operating expenses, general
and administrative, and building rents) of $16.0 million. Interest payments of $10.9 million offset this source of cash. 
 
Net cash used in investing activities totaled $4.1 million during the year ended December 31, 2002. The primary use of cash was $2.6
million related to purchases of property and equipment. Restricted cash increased by $1.5 million due to workers compensation deposits required by our insurance carrier (funds will be withdrawn from this account as workers compensation claims are
paid) and due to the segregation of cash restricted for tenant security deposits. 
 
Net cash provided by financing activities was $808,000 during the year ended December 31, 2002. We received gross proceeds of $3.5 million in draws on the GE Capital line of credit during the year
ended December 31, 2002. Principal payments on long term debt and capital lease obligations were $2.6 million for the year ended December 31, 2002. 
 
On March 2, 2001, we entered into an agreement with GE Capital for a line of credit facility up to $45.0 million (the “Existing
Facility”). This line was scheduled to mature on August 31, 2002. This line carried an interest rate of 3.85% over the three-month LIBOR rate floating monthly and required monthly interest-only payments until maturity. 
 
On June 27, 2001, we amended the Existing Facility, reducing
the aggregate line of credit available from $45.0 million to $20.0 million. The Existing Facility was scheduled to mature on September 28, 2001, which maturity was extended to October 12, 2001. 
 
On October 4, 2001, in connection with our bankruptcy
petition, we entered into a debtor-in-possession facility with GE Capital in an amount of up to $4.4 million (the “DIP Facility”). The DIP Facility carried an interest rate calculated at 5.0% over three month LIBOR, floating monthly, and
was payable monthly in arrears. We had $1.0 million outstanding under this DIP Facility on the Effective Date which was refinanced in the “Exit Facility” as defined below. 
 
Concurrent with the closing of the DIP Facility, we entered into a further amendment of the Existing
Facility, which amendment, among other things, extended the maturity of the Existing Facility to be coterminous with the DIP Facility, amended the interest to be calculated at 5.0% over three month LIBOR, floating monthly, payable monthly in
arrears, increased the aggregate line of credit available from $20.0 million to $39.6 million and permitted the financing of the acquisition by Texas ALC Partners, L.P. (“Texas ALC”) of sixteen properties previously leased by Texas ALC
from the current lessor thereunder, T and F Properties, L.P. (the “Meditrust Properties” and the acquisition by Texas ALC, the “Meditrust Acquisition”). The purchase of the Meditrust Properties was completed on October 24, 2001.
The DIP Collateral and the collateral for the Existing Facility (including the Meditrust Properties when acquired) cross-collateralized both the DIP Facility and the Existing Facility, as amended. We had $39.5 million outstanding under the Existing
Facility which was refinanced under the “Exit Facility,” as defined below. 
 
The DIP Facility was refinanced through the Existing Facility, as amended by the second amendment in connection with the exit from bankruptcy (the “Exit Facility”). The principal amount of
the Exit Facility will not exceed $44.0 million and will mature on January 1, 2005. Principal is payable monthly in a monthly amount of $50,000 for the first year, $65,000 for the second year and $80,000 for the last year of the Exit Facility
term. Interest is at 4.5% over three month LIBOR, floating monthly (not to be less than 8%), and payable monthly in arrears. The Exit Facility is secured by 31 properties. At December 31, 2002, we had $43.5 million outstanding under the Exit
Facility. 
 
The Company has a series of
Reimbursement Agreements with U.S. Bank for Letters of Credit that support certain of our Revenue Bonds Payable, which total approximately $23.2 million as of December 31, 

 

27 

2002. Our credit agreements with U.S. Bank contain restrictive covenants which include compliance with certain ratios. The agreements also
require us to deposit $500,000 in cash collateral with U.S. Bank in the event certain regulatory actions are commenced with respect to the properties securing our obligations to U.S. Bank. U.S. Bank is required to release such deposits upon
satisfactory resolution of the regulatory action. As of the date of this filing, no such deposits have been required. 
 
In May 2002, we amended our existing agreement with U.S. Bank, establishing new covenants, with which we were in compliance as of December
31, 2002. Failure to comply with these covenants would constitute an event of default, which would allow U.S. Bank to declare any amounts outstanding under the loan documents to be due and payable. 
 
Approximately $25.2 million of our indebtedness was secured by
letters of credit held by U.S. Bank as of December 31, 2002 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. 
 
Certain of our leases, loan agreements, and debt instruments
contain covenants and cross-default provisions such that a default on one of those agreements could cause us to be in default on one or more other agreements, which would have a material adverse effect on the Company. 
 
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 facility with GE Capital 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 and cash flow from operations are sufficient to meet our liquidity needs for at least the next fiscal year. However, the Company is highly dependent on its ability to generate cash from its operations and does
not currently have immediate access to large resources of additional available credit to meet its unanticipated liquidity needs. 
 
There can be no assurance, however, that our business will generate sufficient cash flow from operations to enable us to pay our
indebtedness, to satisfy our lease obligations and to fund our other liquidity needs. As a result, we may need to refinance all or a portion of our indebtedness, on or before maturity. There can be no assurance that we will be able to refinance any
of our indebtedness, on commercially reasonable terms or at all. 
 
Seasonality 
 
We are
subject to modest effects of seasonality. During the calendar fourth quarter holiday periods assisted living residents sometimes move out to join family celebrations and move-ins are often deferred. The first quarter of each calendar year usually
coincides with increased illness among assisted living residents which can result in increased costs or increases in move-outs due to death or move-outs to skilled nursing facilities. As a result of these factors, assisted living operations
sometimes produce greater earnings in the second and third quarters of a calendar year and lesser earnings in the first and fourth quarters. We do not believe that this seasonality will cause fluctuations in our revenues or operating cash flows to
such an extent that we will have difficulty paying our expenses, including rent, which does not fluctuate seasonally. 
 
Inflation 
 
We do not believe that inflation has materially adversely affected our operations. We expect, however, that salary and wage increases for
our skilled staff will continue to be higher than average salary and wage increases, as is common in the health care industry. We expect that we will be able to offset the effects of inflation on salaries and other operating expenses by increases in
rental and service rates, subject to applicable restrictions, with respect to services that are provided to residents eligible for Medicaid reimbursement. 
 

28 

 
Recent Accounting
Pronouncements 
 
In April 2002, the FASB
issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Upon adoption of SFAS No. 145, companies will be required to apply the criteria in APB Opinion No. 30, Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, in determining the classification of gains and losses resulting from the extinguishment of debt. Additionally, SFAS
No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 will be effective for fiscal
years beginning after May 15, 2002 with early adoption of the provisions related to the rescission of SFAS No. 4 encouraged. The adoption of SFAS No. 145 had no impact on the consolidated financial statements of the Company. 
 
In July 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, which changes the way a company will report the expenses related to restructuring. SFAS No. 146 is required to be adopted for exit or disposal activities initiated after December 31, 2002. Under
SFAS No. 146, a liability for the cost associated with an exit or disposal activity is recognized when the liability is incurred. Under prior guidance, a liability for such costs could be recognized at the date of commitment to an exit plan. The
effect of adoption of SFAS No. 146 is dependent on our related activities subsequent to the date of adoption. 
 
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147 addresses financial
accounting and reporting for the acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. SFAS No. 147 also provides guidance on the accounting for the impairment or disposal of acquired
long-term customer-relationship intangible assets of financial institutions, including those acquired in transactions between two or more mutual enterprises. The provisions of the statement will be effective for acquisitions on or after October 1,
2002. Since SFAS No. 147 is not relevant to the Company’s business this statement will have no impact on the Company’s financial position or results of operations. 
 
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition
and Disclosure which amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and requires more prominent and more frequent disclosures in the financial statements of the effects of stock-based compensation. The provisions of SFAS No. 148 are effective for fiscal
years ending after December 15, 2002 and the interim disclosure provisions are effective for interim periods beginning after December 15, 2002. 
 
Forward-looking statements and factors affecting our business and prospects. 
 
This report on Form 10-K, including the risks discussed below, contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements contain language such as believe, expect, anticipate, will, estimates, intends, should, could and words of similar
import. Investors are cautioned that all forward-looking statements involve 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, (iv) the degree to which our future operating
results and financial condition may be affected by a reduction in Medicaid reimbursement rates and (v) the risk factors discussed below. In light of such risks and uncertainties, our actual results could differ materially from such forward-looking
statements. Except as may be required by law, we do not undertake any obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events. 
 

29 

 
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 $163.7 million (principal amount) and shareholders’ equity of $28.4 million as of December 31, 2002. We obtained some relief through the
implementation of our Plan but will continue to be highly leveraged (see Notes 1 and 7 of the condensed consolidated financial statements included elsewhere herein). The degree to which we are leveraged could have important consequences, including
making it difficult to satisfy our debt or lease obligations; increasing our vulnerability to general adverse economic and industry conditions; limiting our ability to obtain additional financing; requiring dedication of a substantial portion of our
cash flow from operations to the payment of principal and interest on our debt and leases, thereby reducing the availability of such cash flow to fund working capital, capital expenditures or other general corporate purposes; limiting our
flexibility in planning for, or reacting to, changes in our business or industry; and placing us at a competitive disadvantage to less leveraged competitors. 
 
In May 2002, we amended our existing agreement with U.S. Bank, establishing new covenants, with which we were in compliance as of December
31, 2002. Failure to comply with these covenants would constitute an event of default, which would allow U.S. Bank to declare any amounts outstanding under the loan documents to be due and payable. We cannot provide assurance that we will comply in
the future with the modified financial covenants included in the agreement, or with the financial covenants set forth in our other debt agreements and leases. If we fail to comply with one or more of the U.S. Bank covenants or any other debt or
lease covenants (after giving effect to any applicable cure period), the lender or lessor may declare us in default of the underlying obligation and exercise any available remedies, which may include in the case of debt, declaring the entire amount
of the debt immediately due and payable; foreclosing on any residences or other collateral securing the obligation; and in the case of a lease, terminating the lease and suing for damages. 
 
Many of our debt instruments and leases contain “cross-default” provisions pursuant to which a
default under one obligation can cause a default under one or more other obligations. Accordingly, if enforced, we could experience a material adverse effect on our financial condition. 
 
If an active trading market does not develop for our securities, holders may not be able to resell those securities.

 
Our common stock currently trades on the
over-the-counter bulletin board (“OTC.BB”) under the symbol “ASLC”. At this time there can be no assurances that our securities will ever be listed on any exchange, or that there will be an active trading market for our common
stock. NASDAQ has announced that it intends to close the OTC.BB sometime after NASDAQ establishes the new Bulletin Board Exchange (“BBX”), which is expected sometime during the latter part of 2003 or early 2004. We expect to apply to list
our common stock on the BBX or another exchange, but no assurance can be given that we will meet the requirements for listing on any exchange. 
 
We are party to 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 a result of an increase in concentrated ownership in our common stock and upon
occurrence of other events. 
 
Certain of our
leases with 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 

 

30 

if the stockholders approve a plan of liquidation or the stockholders approve of a merger or consolidation that meets certain conditions.

 
We may be liable for losses not covered by or in excess of
our insurance. 
 
In order to protect
ourselves against the lawsuits and claims made against us, we currently maintain insurance policies in amounts and covering risks that are consistent with industry practice. However, as a result of poor loss experience, a number of insurance
carriers have stopped providing insurance coverage to the long-term care industry, and those remaining have increased premiums and deductibles substantially. While nursing homes have been primarily affected, assisted living companies, including us,
have experienced premium and deductible increases. Beginning January 1, 2003 we have a retention level of $500,000 per incident. Our professional liability insurance is on a claims-made basis. Assisted living 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. If a lawsuit or claim arises which ultimately results in an uninsured loss or a loss in excess of
insured limits, such an outcome could have a material adverse effect on the Company. 
 
Our current insurance policies expire on December 31, 2003 and there can be no assurance that the Company will be able to renew its current policies with comparable rates and terms, if at all, which
could have a material adverse effect on our operations, cash flows and liquidity. 
 
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 $5,000, respectively, in the aggregate for the years ended December 31, 2001 and 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; 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 considered license revocation procedures. This matter was settled in 2002. 
 
The operation of our residences is subject to state and federal laws prohibiting fraud by health care providers, including criminal
provisions, which prohibit filing false claims or making false statements to receive payment or certification under Medicaid, or failing to refund overpayments or improper payments. Violation of these criminal provisions is a felony punishable by
imprisonment and/or fines. We may be subject 

 

31 

to fines and treble damage claims if we violate the civil provisions which prohibit the knowing filing of a false claim or the knowing use of
false statements to obtain payment. 
 
State and
federal governments are devoting increasing attention and resources to anti-fraud initiatives against health care providers. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the Balanced Budget Act of 1997
expanded the penalties for health care fraud, including broader provisions for the exclusion of providers from the Medicaid program. We have established policies and procedures that we believe are sufficient to ensure that our facilities will
operate in substantial compliance with these anti-fraud and abuse requirements. While we believe that our business practices are consistent with Medicaid criteria, those criteria are often vague and subject to change and interpretation. Aggressive
anti-fraud actions, however, could have an adverse effect on our financial position, results of operations or cash flows. 
 
We must comply with laws and regulations regarding the confidentiality of medical information. 
 
In 1996, the HIPAA law created comprehensive new requirements
regarding the confidentiality of medical information that is or has been electronically transmitted or maintained. The Department of Health and Human Services has enacted regulations implementing the law, and we may have to significantly change the
way we maintain and transmit healthcare information for our residents to comply with these regulations. 
 
Although HIPAA was intended ultimately to reduce administrative expenses and burdens faced within the health care industry, we believe the
law could initially bring about significant and, in some cases, costly changes. HHS has released two rules to date mandating the use of new standards with respect to certain health care transactions and health information. The first rule requires
the use of uniform standards for common health care transactions, including health care claims information, plan eligibility, referral certification and authorization, claims status, plan enrollment and disenrollment, payment and remittance advice,
plan premium payments and coordination of benefits. 
 
Second, HHS has released new standards relating to the privacy of individually identifiable health information. These standards not only require our operators’ compliance with rules governing the use and disclosure of protected
health information, but they also require entities to impose those rules, by contract, on any business associate to whom such information is disclosed. Rules governing the security of health information have been proposed but have not yet been
issued in final form. 
 
HHS finalized the new
transaction standards on August 17, 2000, and covered entities were to comply with them by October 16, 2002. Congress passed legislation in December 2001 that delays for one year (October 16, 2003) the compliance date, but only for entities that
submit a compliance plan to HHS by the original implementation deadline. The privacy standards were issued on December 28, 2000, and, after certain delays, became effective April 14, 2001, with a compliance date of April 14, 2003. The Bush
Administration and Congress are taking a careful look at the existing regulations, but it is uncertain whether there will be additional changes to the privacy standards or their compliance date. With respect to the security regulation, once they are
issued in final form, affected parties will have approximately two years to be fully compliant. Sanctions for failing to comply with HIPAA include criminal penalties and civil sanctions. 
 
We must comply with restrictions imposed by laws benefiting disabled persons. 
 
Under the Americans with Disabilities Act of 1990, all places
of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws exist that also may require us to modify existing residences to allow
disabled persons to access the residences. We believe that our 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. 
 

32 

 
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 we 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 or our property, or to borrow using our property as collateral. 
 
Many assisted living markets have been overbuilt. 
 
Many assisted living markets have been overbuilt, including certain markets in which we currently operate. In addition, the barriers to entry into the assisted living industry are not substantial. The
effects of overbuilding include significantly longer fill up periods for our residences; newly opened competitor facilities may attract residents from some or all of our current facilities; pressure to lower or not increase rates paid by residents
in our residences; increased competition for workers in already tight labor markets; and lower profit margins until vacant units in our residences are filled. 
 
If we are unable to compete effectively in markets as a result of overbuilding, we will suffer lower revenue and may suffer a loss of
market share and/or cash. 
 
Due to market
conditions facing one location in Indiana, we closed the facility, effective March 15, 2002. Sale of this facility is expected to be completed in the Second Quarter of 2003. 
 
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 

 

33 

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 December 31, 2002, 22.4% of our properties were located in Texas, 11.8% in Indiana, 10.1% in Oregon, 10.1% in Ohio and 9.0% 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. In addition, there can be no assurance that the economy in any of these markets will continue to grow. 
 
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. The approval is preliminary and we have not yet quantified the financial impact of such legislation. Additionally, the state of New Jersey currently
has a hold on additional beds for Medicaid residences. This hold may impact our ability to move new Medicaid tenants into our facilities. 
 
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 Tenant Paid
Portion.” 
 

	 	  	 Twelve Months Ended
 December 31, 2001

	 	  	 Twelve Months Ended
 December 31, 2002

	 
	 	  	 Medicaid

	 	  	 Private

	 	  	 Medicaid

	 	  	 Private

	 
	 	  	 State
 Paid
 Portion

	 	  	 Tenant
 Paid
 Portion

	 	  	 Tenant
 Paid
 Portion

	 	  	 State
 Paid
 Portion

	 	  	 Tenant
 Paid
 Portion

	 	  	 Tenant
 Paid
 Portion

	 
	 Oregon
	  	 27.6
	 %
	  	 16.2
	 %
	  	 56.2
	 %
	  	 25.9
	 %
	  	 15.7
	 %
	  	 58.4
	 %

	 Washington
	  	 29.4
	 %
	  	 17.4
	 %
	  	 53.2
	 %
	  	 30.6
	 %
	  	 19.8
	 %
	  	 49.6
	 %

	 Idaho
	  	 15.8
	 %
	  	 9.7
	 %
	  	 74.5
	 %
	  	 14.8
	 %
	  	 13.1
	 %
	  	 72.1
	 %

	 Arizona
	  	 16.4
	 %
	  	 13.7
	 %
	  	 69.9
	 %
	  	 21.8
	 %
	  	 15.5
	 %
	  	 62.6
	 %

	 New Jersey
	  	 22.3
	 %
	  	 5.6
	 %
	  	 72.1
	 %
	  	 19.5
	 %
	  	 9.9
	 %
	  	 70.6
	 %

	 Texas
	  	 15.2
	 %
	  	 7.6
	 %
	  	 77.2
	 %
	  	 16.2
	 %
	  	 9.1
	 %
	  	 74.8
	 %

	 Nebraska
	  	 9.4
	 %
	  	 5.5
	 %
	  	 85.1
	 %
	  	 10.4
	 %
	  	 5.6
	 %
	  	 84.0
	 %

 
In
addition, although we manage the mix of private paying tenants and Medicaid paying tenants 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 the states operating these programs continue to limit, or more aggressively seek limits on, reimbursement rates. 
 

34 

 
Item
7A.    Quantitative and Qualitative Disclosure Regarding Market risk and Risk Sensitive Instruments 
 
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 earnings and cash flows. 
 
For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings 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 earnings or cash flows until we
decide, or are required, to refinance such debt. 
 
For variable rate debt, changes in interest rates generally do not impact the fair market value of the debt instrument, but do affect our future earnings and cash flows. We had variable rate debt of $68.7 million outstanding at
December 31, 2002 with a weighted average interest rate of 5.7%, of which $43.4 million has an interest rate floor of 8.0%. Assuming that our balance of variable rate debt, excluding $43.4 million which has an interest rate floor of 8.0%, remains
constant at $25.3 million, each one-percent increase in interest rates would result in an annual increase in interest expense, and a corresponding decrease in net cash flows, of $253,000. Conversely, each one-percent decrease in interest rates would
result in an annual decrease in interest expense, and a corresponding increase in net cash flows, of $253,000. For our $43.4 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 net cash flows, of $434,000. 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 net cash flows, of $434,000. 
 
The table below presents principal cash flows and related weighted average interest rates by expected maturity dates of our long-term debt (in thousands). 
 

35 

 

	 	 	 December 31, Expected Maturity Date

	 	 	 December 31,
 2001
 Fair Value

	 	 December 31,
 2002
 Fair Value

	 	 	 2003

	 	 	 2004

	 	 	 2005

	 	 	 2006

	 	 	 2007

	 	 	 Thereafter

	 	 	 Total

	 	 	 
	 Long-term debt:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Fixed rate
	 	 $
	 779
	  
	 	 $
	 841
	  
	 	 $
	 909
	  
	 	 $
	 981
	  
	 	 $
	 834
	  
	 	 $
	 42,294
	  
	 	 $
	 46,638
	  
	 	 $
	 46,033
	 	 $
	 45,417

	 Average interest rate
	 	  
	 7.77
	 %
	 	  
	 7.77
	 %
	 	  
	 7.77
	 %
	 	  
	 7.77
	 %
	 	  
	 7.79
	 %
	 	  
	 7.77
	 %
	 	  
	 7.77
	 %
	 	 	 	 	 	 
	 Variable rate
	 	 $
	 1,860
	  
	 	 $
	 2,100
	  
	 	 $
	 39,328
	  
	 	 $
	 1,275
	  
	 	 $
	 1,345
	  
	 	 $
	 22,823
	  
	 	 $
	 68,731
	  
	 	 $
	 65,172
	 	 $
	 71,632

	 Average interest rate
	 	  
	 6.07
	 %
	 	  
	 6.07
	 %
	 	  
	 6.07
	 %
	 	  
	 6.07
	 %
	 	  
	 6.07
	 %
	 	  
	 6.07
	 %
	 	  
	 6.07
	 %
	 	 	 	 	 	 
	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	 	
	

	 Total
long-term debt
	 	 $
	 2,639
	  
	 	 $
	 2,941
	  
	 	 $
	 40,237
	  
	 	 $
	 2,256
	  
	 	 $
	 2,179
	  
	 	 $
	 65,117
	  
	 	 $
	 115,369
	  
	 	 $
	 111,205
	 	 $
	 117,049

	 Reorganization Notes:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Senior Notes
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	 35,750
	  
	 	 $
	 35,750
	  
	 	 $
	 40,250
	 	 $
	 35,571

	 Average interest rate
	 	  
	 10.0 
	 %
	 	  
	 10.0
	 %
	 	  
	 10.0
	 %
	 	  
	 10.0
	 %
	 	  
	 10.0
	 %
	 	  
	 10.0
	 %
	 	  
	 10.0
	 %
	 	 	 	 	 	 
	 Junior Notes(1)
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	 12,628
	  
	 	 $
	 12,628
	  
	 	 $
	 12,628
	 	 $
	 11,849

	 Average interest rate
	 	  
	 8.0
	 %
	 	  
	 8.0
	 %
	 	  
	 12.0
	 %
	 	  
	 12.0
	 %
	 	  
	 12.0
	 %
	 	  
	 12.0
	 %
	 	  
	 12.0
	 %
	 	 	 	 	 	 
	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	 	
	

	 Total Notes
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	  —  
	  
	 	 $
	 48,378
	  
	 	 $
	 48,378
	  
	 	 $
	 52,878
	 	 $
	 47,420

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	 	
	

	 Total long-term debt and Notes
	 	 $
	 2,639
	  
	 	 $
	 2,941
	  
	 	 $
	 40,237
	  
	 	 $
	 2,256
	  
	 	 $
	 2,179
	  
	 	 $
	 113,495
	  
	 	 $
	 163,747
	  
	 	 $
	 164,083
	 	 $
	 164,469

	 	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	
	 	
	
	 	
	

	(1)	 	The Junior Notes were issued at a discount. The face amount of these notes is $15.25 million and the notes bear interest at 8.0% for the first three years, payable
in kind, and thereafter bear interest at 12.0% for the remaining term of the loan, payable semi-annually. 

 
We are also exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on market values of our cash
equivalents and short-term investments. These investments generally consist of overnight investments that are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of
interest income earned and cash flow from these investments. 
 
We do not have any derivative financial instruments in place to manage interest costs, but that does not mean we will not use them as a means to manage interest rate risk in the future. 
 
We do not use foreign currency exchange forward contracts or
commodity contracts and do not have foreign currency exposure. 
 
Item 8.    Financial Statements and Supplementary Data 
 

36 

 
ASSISTED
LIVING CONCEPTS, INC. AND SUBSIDIARIES 
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
AND FINANCIAL STATEMENT SCHEDULE 
 

	 	  	 	  	 Page

	 1.
	  	 Financial Statements:
	  	 
	 	  	 Independent Auditors’ Report
	  	 38

	 	  	 Consolidated Balance Sheets, December 31, 2001 and 2002 (Successor
Company)
	  	 39

	 	  	 Consolidated Statements of Operations and Consolidated Statements of Comprehensive
Loss, Years Ended December 31, 2000 and 2001 (Predecessor Company) and 2002 (Successor Company)
	  	 40

	 	  	 Consolidated Statements of Shareholders’ Equity, Years Ended December 31, 2000
and 2001 (Predecessor Company) and 2002 (Successor Company)
	  	 41

	 	  	 Consolidated Statements of Cash Flows, Years Ended December 31, 2000 and 2001
(Predecessor Company) and 2002 (Successor Company)
	  	 42

	 	  	 Notes to Consolidated Financial Statements
	  	 43

	 2.
	  	 Financial Statement Schedule
	  	 
	 	  	 Schedule II—Valuation and Qualifying Accounts
	  	 78

 
 

37 

 
INDEPENDENT
AUDITORS’ REPORT 
 
To
the Board of Directors and Shareholders 
of Assisted Living Concepts, Inc. and Subsidiaries: 
 
We have audited the accompanying consolidated balance sheet of
Assisted Living Concepts, Inc. and subsidiaries as of December 31, 2001 and 2002 (Successor Company) and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for the years ended December
31, 2000 and 2001 (Predecessor Company) and the year ended December 31, 2002 (Successor Company). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. 
 
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Assisted Living Concepts Inc. and subsidiaries as of December 31, 2001 and 2002, and the results of the Predecessor Company’s operations and cash flows for the years ended December 31, 2000, 2001, and for the
Successor Company for the year ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. 
 
As described in Note 1 to the consolidated financial statements, on January 1, 2002 the Company consummated a Joint Plan of Reorganization
(the Plan) which had been confirmed by the United States Bankruptcy Court. The Plan resulted in a change of ownership of the Predecessor Company and, accordingly, effective December 31, 2001 the Company accounted for the change in ownership through
fresh-start reporting. As a result, the consolidated information prior to December 31, 2001 is presented on a different cost basis than that as of December 31, 2001 and, therefore, is not comparable. 
 
/s/    KPMG LLP

 
Dallas, Texas 
February 28, 2003 
 

38 

 
ASSISTED
LIVING CONCEPTS, INC. 
 
CONSOLIDATED
BALANCE SHEETS 
(In thousands, except share amounts) 
 

	 	  	 Successor Company

	 
	 	  	 December 31,

	 
	 	  	 2001

	  	 2002

	 
	 ASSETS
	  	 	 	  	 	 	 
	 Current assets:
	  	 	 	  	 	 	 
	 Cash and cash equivalents
	  	 $
	 6,077
	  	 $
	 7,165
	  

	 Cash restricted for tenant security deposits
	  	  
	 2,415
	  	  
	 1,929
	  

	 Accounts receivable, net of allowance for doubtful accounts of $230 at
2002
	  	  
	 2,328
	  	  
	 2,715
	  

	 Prepaid insurance
	  	  
	 160
	  	  
	 343
	  

	 Prepaid expenses
	  	  
	 823
	  	  
	 991
	  

	 Assets held for sale
	  	  
	 —  
	  	  
	 9,727
	  

	 Cash restricted for workers compensation claims
	  	  
	 2,825
	  	  
	 4,696
	  

	 Other current assets
	  	  
	 3,862
	  	  
	 3,193
	  

	 	  	
	
	  	
	
	

	 Total current assets
	  	  
	 18,490
	  	  
	 30,759
	  

	 Restricted cash
	  	  
	 5,349
	  	  
	 5,315
	  

	 Property and equipment, net
	  	  
	 196,548
	  	  
	 177,930
	  

	 Other assets, net
	  	  
	 1,866
	  	  
	 2,036
	  

	 	  	
	
	  	
	
	

	 Total assets
	  	 $
	 222,253
	  	 $
	 216,040
	  

	 	  	
	
	  	
	
	

	 LIABILITIES AND SHAREHOLDERS’ EQUITY
	  	 	 	  	 	 	 
	 Current liabilities:
	  	 	 	  	 	 	 
	 Accounts payable
	  	 $
	 1,450
	  	 $
	 769
	  

	 Accrued real estate taxes
	  	  
	 4,523
	  	  
	 4,836
	  

	 Accrued interest expense
	  	  
	 666
	  	  
	 2,174
	  

	 Accrued payroll expense
	  	  
	 4,561
	  	  
	 5,021
	  

	 Other accrued expenses
	  	  
	 7,163
	  	  
	 5,718
	  

	 Tenant security deposits
	  	  
	 2,471
	  	  
	 1,991
	  

	 Other current liabilities
	  	  
	 652
	  	  
	 976
	  

	 Current portion of unfavorable lease adjustment
	  	  
	 681
	  	  
	 607
	  

	 Current portion of long-term debt and capital lease obligation
	  	  
	 2,622
	  	  
	 11,521
	  

	 	  	
	
	  	
	
	

	 Total current liabilities
	  	  
	 24,789
	  	  
	 33,613
	  

	 Other liabilities
	  	  
	 89
	  	  
	 463
	  

	 Unfavorable lease adjustment
	  	  
	 3,115
	  	  
	 2,508
	  

	 Long-term debt and capital lease obligations, net of current portion
	  	  
	 108,583
	  	  
	 109,078
	  

	 Senior and Junior Secured note
	  	  
	 52,878
	  	  
	 41,993
	  

	 	  	
	
	  	
	
	

	 Total liabilities
	  	  
	 189,454
	  	  
	 187,655
	  

	 	  	
	
	  	
	
	

	 Commitments and contingencies
	  	 	 	  	 	 	 
	 Shareholders’ equity:
	  	 	 	  	 	 	 
	 Preferred stock, $.01 par value; 3,250,000 shares authorized;
	  	  
	 —  
	  	  
	 —  
	  

	 Common Stock, $.01 par value; 20,000,000 shares authorized; issued and outstanding
6,431,759 shares at December 31, 2001 and 2002 (68,241 shares to be issued upon settlement of pending claims)
	  	  
	 65
	  	  
	 65
	  

	 Additional paid-in capital
	  	  
	 32,734
	  	  
	 32,734
	  

	 Accumulated deficit
	  	  
	 —  
	  	  
	 (4,414
	 )

	 	  	
	
	  	
	
	

	 Total shareholders’ equity
	  	  
	 32,799
	  	  
	 28,385
	  

	 	  	
	
	  	
	
	

	 Total liabilities and shareholders’ equity
	  	 $
	 222,253
	  	 $
	 216,040
	  

	 	  	
	
	  	
	
	

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

39 

 
ASSISTED
LIVING CONCEPTS, INC. 
 
CONSOLIDATED
STATEMENTS OF OPERATIONS 
(In thousands, except per share amounts) 
 

	 	  	 Predecessor Company

	 	  	 Successor Company

	 
	 	  	 Years Ended December 31,

	 
	 	  	 2000

	 	  	 2001

	 	  	 2002

	 
	 Revenue
	  	 $
	 130,318
	  
	  	 $
	 139,771
	  
	  	 $
	 146,269
	  

	 Operating expenses:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Residence operating expenses
	  	  
	 87,086
	  
	  	  
	 94,689
	  
	  	  
	 100,351
	  

	 Corporate general and administrative
	  	  
	 18,365
	  
	  	  
	 17,119
	  
	  	  
	 18,140
	  

	 Building rentals
	  	  
	 15,237
	  
	  	  
	 15,234
	  
	  	  
	 11,823
	  

	 Depreciation and amortization
	  	  
	 8,797
	  
	  	  
	 9,212
	  
	  	  
	 6,369
	  

	 Class action litigation settlement
	  	  
	 10,020
	  
	  	  
	 —  
	  
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Total operating expenses
	  	  
	 139,505
	  
	  	  
	 136,254
	  
	  	  
	 136,683
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Operating income (loss)
	  	  
	 (9,187
	 )
	  	  
	 3,517
	  
	  	  
	 9,586
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Other income (expense):
	  	 	 	 	  	 	 	 	  	 	 	 
	 Interest expense
	  	  
	 (16,070
	 )
	  	  
	 (19,465
	 )
	  	  
	 (14,148
	 )

	 Interest income
	  	  
	 786
	  
	  	  
	 650
	  
	  	  
	 213
	  

	 Loss on sale of marketable securities
	  	  
	 (368
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  

	 Other income, net
	  	  
	 55
	  
	  	  
	 30
	  
	  	  
	 64
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Total other expense
	  	  
	 (15,597
	 )
	  	  
	 (18,785
	 )
	  	  
	 (13,871
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Loss before debt restructure and reorganization cost, fresh start adjustments,
discontinued operations and extraordinary item
	  	  
	 (24,784
	 )
	  	  
	 (15,268
	 )
	  	  
	 (4,285
	 )

	 Debt restructure and reorganization cost
	  	  
	 —  
	  
	  	  
	 (8,581
	 )
	  	  
	 (708
	 )

	 Fresh start adjustments
	  	  
	 —  
	  
	  	  
	 (119,320
	 )
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Loss from continuing operations
	  	  
	 (24,784
	 )
	  	  
	 (143,169
	 )
	  	  
	 (4,993
	 )

	 Discontinued operations:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Gain (loss) on sale of assets
	  	  
	 12
	  
	  	  
	 (88
	 )
	  	  
	 (552
	 )

	 Income (loss) from operations
	  	  
	 (1,014
	 )
	  	  
	 (149
	 )
	  	  
	 1,131
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Income (loss) from discontinued operations
	  	  
	 (1,002
	 )
	  	  
	 (237
	 )
	  	  
	 579
	  

	 Loss before extraordinary item
	  	  
	 (25,786
	 )
	  	  
	 (143,406
	 )
	  	  
	 (4,414
	 )

	 Extraordinary item—gain on reorganization
	  	  
	 —  
	  
	  	  
	 79,520
	  
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Net loss
	  	 $
	 (25,786
	 )
	  	 $
	 (63,886
	 )
	  	 $
	 (4,414
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Basic and diluted net loss per common share:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Loss from continuing operations
	  	 $
	 (1.45
	 )
	  	 $
	 (8.36
	 )
	  	 $
	 (0.77
	 )

	 Income (loss) from discontinued operations
	  	  
	 (0.06
	 )
	  	  
	 (0.01
	 )
	  	  
	 0.09
	  

	 Extraordinary item
	  	  
	 —  
	  
	  	  
	 4.64
	  
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Basic and diluted net loss per common share
	  	 $
	 (1.51
	 )
	  	 $
	 (3.73
	 )
	  	 $
	 (.68
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Basic and diluted weighted average common shares outstanding
	  	  
	 17,121
	  
	  	  
	 17,121
	  
	  	  
	 6,500
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS 
(In thousands) 
 

	 	  	 Predecessor Company

	 	  	 Successor
 Company

	 
	 	  	 Years Ended December 31,

	 
	 	  	 2000

	 	  	 2001

	 	  	 2002

	 
	 Net loss
	  	 $
	 (25,786
	 )
	  	 $
	 (63,886
	 )
	  	 $
	 (4,414
	 )

	 Other comprehensive loss:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Reclassification adjustment for loss on sale of marketable securities included in net
loss
	  	  
	 320
	  
	  	  
	 —  
	  
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Comprehensive loss
	  	 $
	 (25,466
	 )
	  	 $
	 (63,886
	 )
	  	 $
	 (4,414
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	

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

40 

 
ASSISTED
LIVING CONCEPTS, INC. 
 
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY 
(In thousands) 
 

	 	 	 Common Stock

	 	 	 Additional
 Paid-In
 Capital

	 	  	 Fair Market
 Value In
 Excess of
 Historical
 Cost

	 	    	 Accumulated
 Other
 Comprehensive
 Loss

	 	 	 Accumulated
 Deficit

	 	  	 Total
 Shareholders’
 Equity

	 
	 	 Shares

	 	 	 Amount

	 	 	  	    	 	  
	 Balance at December 31, 1999, Predecessor Company
	 	 17,121
	  
	 	  
	 171
	  
	 	  
	 144,443
	  
	  	  
	 (239
	 )
	    	  
	 (320
	 )
	 	  
	 (54,711
	 )
	  	  
	 89,344
	  

	 Compensation expense on issuance of consultant options
	 	 —  
	  
	 	  
	 —  
	  
	 	  
	 8
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	 	  
	 —  
	  
	  	  
	 8
	  

	 Reclassification adjustment for loss included in net loss
	 	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 320
	  
	 	  
	 —  
	  
	  	  
	 320
	  

	 Net loss
	 	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	 	  
	 (25,786
	 )
	  	  
	 (25,786
	 )

	 	 	
	
	 	
	
	
	 	
	
	
	  	
	
	
	    	
	
	
	 	
	
	
	  	
	
	

	 Balance at December 31, 2000, Predecessor Company
	 	 17,121
	  
	 	  
	 171
	  
	 	  
	 144,451
	  
	  	  
	 (239
	 )
	    	  
	 —  
	  
	 	  
	 (80,497
	 )
	  	  
	 63,886
	  

	 Net loss
	 	 —  
	  
	 	  
	 —  
	  
	 	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	 	  
	 (63,886
	 )
	  	  
	 (63,886
	 )

	 	 	
	
	 	
	
	
	 	
	
	
	  	
	
	
	    	
	
	
	 	
	
	
	  	
	
	

	 Balance at December 31, 2001, Predecessor Company
	 	 17,121
	  
	 	  
	 171
	  
	 	  
	 144,451
	  
	  	  
	 (239
	 )
	    	  
	 —  
	  
	 	  
	 (144,383
	 )
	  	  
	 —  
	  

	 Fresh start reclassifications
	 	 (17,121
	 )
	 	  
	 (171
	 )
	 	  
	 (144,451
	 )
	  	  
	 239
	  
	    	  
	 —  
	  
	 	  
	 144,383
	  
	  	  
	 —  
	  

	 Issuance of common stock
	 	 6,500
	  
	 	  
	 65
	  
	 	  
	 32,734
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	 	  
	 —  
	  
	  	  
	 32,799
	  

	 	 	
	
	 	
	
	
	 	
	
	
	  	
	
	
	    	
	
	
	 	
	
	
	  	
	
	

	 Balance at December 31, 2001, Successor Company
	 	 6,500
	  
	 	 $
	 65
	  
	 	 $
	 32,734
	  
	  	 $
	  —  
	  
	    	 $
	  —  
	  
	 	 $
	  —  
	  
	  	 $
	 32,799
	  

	 Net Loss
	 	 —  
	  
	 	  
	 —  
	  
	 	 $
	  —  
	  
	  	 $
	  —  
	  
	    	 $
	  —  
	  
	 	 $
	 (4,414
	 )
	  	 $
	 (4,414
	 )

	 	 	
	
	 	
	
	
	 	
	
	
	  	
	
	
	    	
	
	
	 	
	
	
	  	
	
	

	 Balance at December 31, 2002, Successor Company
	 	 6,500
	  
	 	 $
	 65
	  
	 	 $
	 32,734
	  
	  	 $
	  —  
	  
	    	 $
	  —  
	  
	 	 $
	 (4,414
	 )
	  	 $
	 28,385
	  

	 	 	
	
	 	
	
	
	 	
	
	
	  	
	
	
	    	
	
	
	 	
	
	
	  	
	
	

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

41 

 
ASSISTED
LIVING CONCEPTS, INC. 
 
CONSOLIDATED
STATEMENTS OF CASH FLOWS 
(In thousands) 
 

	 	  	 Predecessor Company

	 	  	 Successor
 Company

	 
	 	  	 Years Ended December 31,

	 
	 	  	 2000

	 	  	 2001

	 	  	 2002

	 
	 Operating activities:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Net loss
	  	 $
	 (25,786
	 )
	  	 $
	 (63,886
	 )
	  	 $
	 (4,414
	 )

	 Adjustment to reconcile net loss to net cash provided by (used in) operating
activities:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Depreciation and amortization
	  	  
	 9,923
	  
	  	  
	 10,349
	  
	  	  
	 6,761
	  

	 Provision for doubtful accounts
	  	  
	 1,932
	  
	  	  
	 (61
	 )
	  	  
	 340
	  

	 Amortization of deferred financing fees
	  	  
	 1,613
	  
	  	  
	 3,708
	  
	  	  
	 106
	  

	 Extraordinary gain on reorganization
	  	  
	 —  
	  
	  	  
	 (79,520
	 )
	  	  
	 —  
	  

	 Fresh start adjustments
	  	  
	 —  
	  
	  	  
	 119,320
	  
	  	  
	 —  
	  

	 Loss on the sale of marketable securities
	  	  
	 368
	  
	  	  
	 —  
	  
	  	  
	 —  
	  

	 Loss (gain) on sale of discontinued and other assets
	  	  
	 (13
	 )
	  	  
	 88
	  
	  	  
	 728
	  

	 Amortization of fair market value adjustments to building rentals
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (681
	 )

	 PIK Interest
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 1,244
	  

	 Amortization of fair value adjustment of debt
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 427
	  

	 Amortization of note discount
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 451
	  

	 Straight-line adjustment to building rental
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 374
	  

	 Compensation expense on issuance of consultant options
	  	  
	 8
	  
	  	  
	 —  
	  
	  	  
	 —  
	  

	 Changes in assets and liabilities:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Accounts receivable
	  	  
	 (311
	 )
	  	  
	 181
	  
	  	  
	 (727
	 )

	 Prepaid expenses
	  	  
	 (1,859
	 )
	  	  
	 1,815
	  
	  	  
	 (351
	 )

	 Other current assets
	  	  
	 690
	  
	  	  
	 1,252
	  
	  	  
	 363
	  

	 Other assets
	  	  
	 (17
	 )
	  	  
	 3,193
	  
	  	  
	 (197
	 )

	 Accounts payable
	  	  
	 1,390
	  
	  	  
	 (1,258
	 )
	  	  
	 (681
	 )

	 Accrued expenses
	  	  
	 3,809
	  
	  	  
	 5,846
	  
	  	  
	 836
	  

	 Other current liabilities
	  	  
	 8,854
	  
	  	  
	 (8,165
	 )
	  	  
	 (156
	 )

	 Other liabilities
	  	  
	 99
	  
	  	  
	 (589
	 )
	  	  
	 0
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Net cash provided by (used in) operating activities
	  	  
	 700
	  
	  	  
	 (7,727
	 )
	  	  
	 4,423
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Investing activities:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Sale of marketable securities, available for sale
	  	  
	 1,632
	  
	  	  
	 —  
	  
	  	  
	 —  
	  

	 Restricted cash
	  	  
	 1,089
	  
	  	  
	 (4,123
	 )
	  	  
	 (1,522
	 )

	 Proceeds from sale of property and equipment
	  	  
	 14
	  
	  	  
	 —  
	  
	  	  
	 4,751
	  

	 Purchases of property and equipment
	  	  
	 (3,543
	 )
	  	  
	 (2,094
	 )
	  	  
	 (2,621
	 )

	 Acquisition of properties
	  	  
	 —  
	  
	  	  
	 (23,500
	 )
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Net cash used in investing activities
	  	  
	 (808
	 )
	  	  
	 (29,717
	 )
	  	  
	 608
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Financing activities:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Proceeds from (payments on) bridge loan
	  	  
	 4,000
	  
	  	  
	 (4,000
	 )
	  	  
	 —  
	  

	 Proceeds from long-term debt
	  	  
	 —  
	  
	  	  
	 49,924
	  
	  	  
	 3,508
	  

	 Proceeds from DIP facility
	  	  
	 —  
	  
	  	  
	 1,000
	  
	  	  
	 —  
	  

	 Payments on long-term debt and capital lease obligation
	  	  
	 (1,609
	 )
	  	  
	 (4,692
	 )
	  	  
	 (7,372
	 )

	 Debt issuance costs of offerings and long-term debt
	  	  
	 —  
	  
	  	  
	 (6,155
	 )
	  	  
	 (79
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Net cash provided by financing activities
	  	  
	 2,391
	  
	  	  
	 36,077
	  
	  	  
	 (3,943
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Net (decrease) increase in cash and cash equivalents
	  	  
	 2,283
	  
	  	  
	 (1,367
	 )
	  	  
	 1,088
	  

	 Cash and cash equivalents, beginning of year
	  	  
	 5,161
	  
	  	  
	 7,444
	  
	  	  
	 6,077
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Cash and cash equivalents, end of year
	  	 $
	 7,444
	  
	  	 $
	 6,077
	  
	  	 $
	 7,165
	  

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Supplemental disclosure of cash flow information:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Cash payments for interest
	  	 $
	 14,945
	  
	  	 $
	 11,181
	  
	  	 $
	 10,864
	  

	 Non-cash transactions:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Decrease in construction payable & property & equipment
	  	 $
	 (1,078
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  

	 Purchase of equipment with capital lease obligation
	  	  
	 263
	  
	  	  
	 —  
	  
	  	  
	 —  
	  

	 Elimination of deferred gain on purchase of leased properties
	  	  
	 —  
	  
	  	 $
	 1,786
	  
	  	  
	 —  
	  

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

42 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 
1. Nature of Business
and Summary of Significant Accounting Policies 
 
The
Company 
 
Assisted Living Concepts, Inc.
(“the Company”) owns, leases and operates assisted living residences which provide housing to older persons who need help with the activities of daily living such as bathing and dressing. The Company provides personal care and support
services and makes available routine health care services, as permitted by applicable law, designed to meet the needs of its residents. 
 
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 were 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 Debtors emerged from the proceedings under Chapter 11 of the Bankruptcy Code. 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: Leonard Tannenbaum, Andre Dimitriadis, W. Andrew Adams (Chairman), Matthew Patrick, Mark Holliday, Richard Ladd 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. 
 
The Company held back from the initial issuance of New Common Stock and New Notes on the Effective Date, $440,178 of New Senior Secured
Notes, $166,775 of New Junior Secured Notes and 68,241 shares of New Common Stock (collectively, the “Reserve”) to be issued to holders of general unsecured claims at a later date. The total amount of, and the identities of all of the
holders of, the general unsecured claims were not known as of the Effective Date, either because they were disputed or they were not made by their holders prior to December 19, 2001, the cutoff date for calculating the Reserve (the “Cutoff
Date”). Once the total amount and the identities of the holders of those claims are determined and the claims agreed, 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 

 

43 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

claims allowed prior to the Cutoff Date will receive distributions of securities both on the Effective Date and on the Subsequent
Distribution Date. 
 
As a result of the
consummation of the Plan, the Company recognized an extraordinary gain on reorganization as follows (in thousands): 
 

	 	  	 Year Ended
 December 31,
 2001

	 Liabilities subject to compromise:
	  	 	 
	 Subordinated convertible debentures
	  	 $
	 161,250

	 Accrued interest on subordinated convertible debentures
	  	  
	 3,914

	 Employee separation agreement
	  	  
	 152

	 Accrued interest on mortgage loans discharged
	  	  
	 43

	 Discharge of two mortgage loans
	  	  
	 5,855

	 	  	
	

	 Total liabilities subject to compromise
	  	 $
	 171,214

	 Less:
	  	 	 
	 Value of new Senior Secured Notes
	  	  
	 40,250

	 Value of new Junior Secured Notes
	  	  
	 12,628

	 Carrying value of deferred financing fees of discharged debts
	  	  
	 1,026

	 Carrying value of property conveyed in satisfaction of debt
	  	  
	 4,957

	 Carrying value of assets related to rejected lease
	  	  
	 34

	 Value of Successor Company’s common stock
	  	  
	 32,799

	 	  	
	

	 Extraordinary gain on reorganization
	  	 $
	 79,520

	 	  	
	

 
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 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. 
 
The following reconciliation of the Predecessor Company’s consolidated balance sheet as of December 31, 2001 to that of the Successor Company was prepared to present the adjustments that give
effect to the reorganization and fresh-start reporting. 
 
The adjustments entitled Reorganization reflect the consummation of the Plan, including the elimination of existing liabilities subject to compromise, assets conveyed to a lender and reflect the reorganization value of the Successor
Company. 
 

44 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The adjustments entitled Fresh-Start Adjustments reflect the adoption of fresh start
reporting, including the elimination of goodwill and adjustments to record property, plant and equipment and other long-term assets and liabilities, at their fair values. Management estimated the fair value of its assets and liabilities by utilizing
commonly used discounted cash flow valuation methods. 
 

	 	  	 Predecessor
 Company

	 	  	 Reorganization

	 	  	 Fresh-Start
 Adjustments

	 	  	 Reclassifications

	 	  	 Successor
 Company

	 	  	 (In thousands)

	 Assets:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 
	 Cash and cash equivalents
	  	 $
	 6,077
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 6,077

	 Cash restricted for tenant security deposits
	  	  
	 2,415
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 2,415

	 Accounts receivable, net
	  	  
	 2,328
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 2,328

	 Prepaid insurance
	  	  
	 160
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 160

	 Prepaid expenses
	  	  
	 832
	  
	  	  
	 (9
	 )
	  	 	 	 	  	  
	 —  
	  
	  	  
	 823

	 Cash restricted for workers’ compensation claims
	  	  
	 2,825
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 2,825

	 Other current assets
	  	  
	 3,870
	  
	  	  
	 (8
	 )
	  	 	 	 	  	  
	 —  
	  
	  	  
	 3,862

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	

	 Total current assets
	  	  
	 18,507
	  
	  	  
	 (17
	 )
	  	 	 	 	  	 	 	 	  	  
	 18,490

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	

	 Restricted cash
	  	  
	 5,349
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 5,349

	 Property and equipment, net
	  	  
	 312,459
	  
	  	  
	 (4,980
	 )
	  	  
	 (110,931
	 )
	  	  
	 —  
	  
	  	  
	 196,548

	 Goodwill, net
	  	  
	 4,493
	  
	  	  
	 —  
	  
	  	  
	 (4,493
	 )
	  	  
	 —  
	  
	  	  
	 —  

	 Other assets, net
	  	  
	 8,030
	  
	  	  
	 (1,026
	 )
	  	  
	 (5,138
	 )
	  	  
	 —  
	  
	  	  
	 1,866

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	

	 Total assets
	  	 $
	 348,838
	  
	  	 $
	 (6,023
	 )
	  	 $
	 (120,562
	 )
	  	 $
	 —  
	  
	  	 $
	 222,253

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	

	 Current liabilities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 
	 Accounts payable
	  	 $
	 1,450
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 1,450

	 Accrued real estate taxes
	  	  
	 4,517
	  
	  	  
	 (6
	 )
	  	  
	 12
	  
	  	  
	 —  
	  
	  	  
	 4,523

	 Accrued interest expense
	  	  
	 4,623
	  
	  	  
	 (3,957
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 666

	 Accrued payroll expense
	  	  
	 4,561
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 4,561

	 Other accrued expenses
	  	  
	 7,163
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 7,163

	 Tenant security deposits
	  	  
	 2,471
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 2,471

	 Other current liabilities
	  	  
	 804
	  
	  	  
	 (152
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 652

	 Current portion of unfavorable lease adjustment
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 681
	  
	  	  
	 —  
	  
	  	  
	 681

	 Current portion of long-term debt and capital lease obligations
	  	  
	 2,622
	  
	  	 	 	 	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 2,622

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	

	 Total current liabilities
	  	  
	 28,211
	  
	  	  
	 (4,115
	 )
	  	  
	 693
	  
	  	  
	 —  
	  
	  	  
	 24,789

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	

	 Other liabilities
	  	  
	 3,684
	  
	  	 	 	 	  	  
	 (3,595
	 )
	  	  
	 —  
	  
	  	  
	 89

	 Unfavorable lease adjustment
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 3,115
	  
	  	  
	 —  
	  
	  	  
	 3,115

	 Long-term debt and capital lease obligations, net of current portion
	  	  
	 115,893
	  
	  	  
	 47,023
	  
	  	  
	 (1,455
	 )
	  	  
	 —  
	  
	  	  
	 161,461

	 Convertible subordinated debentures
	  	  
	 161,250
	  
	  	  
	 (161,250
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	

	 Total liabilities
	  	  
	 309,038
	  
	  	  
	 (118,342
	 )
	  	  
	 (1,242
	 )
	  	  
	 —  
	  
	  	  
	 184,454

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	

	 Commitments and contingencies Shareholders’ equity:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 
	 Preferred Stock,
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —

	 Common Stock,
	  	  
	 171
	  
	  	  
	 65
	  
	  	  
	 —  
	  
	  	  
	 (171
	 )
	  	  
	 65

	 Additional paid-in capital
	  	  
	 144,451
	  
	  	  
	 32,734
	  
	  	  
	 —  
	  
	  	  
	 (144,451
	 )
	  	  
	 32,734

	 Fair market value in excess of historical cost of acquired net assets
	  	  
	 (239
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 239
	  
	  	  
	 —  

	 Accumulated deficit
	  	  
	 (104,583
	 )
	  	  
	 79,520
	  
	  	  
	 (119,320
	 )
	  	  
	 144,383
	  
	  	  
	 —  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	

	 Total shareholders’ equity
	  	  
	 39,800
	  
	  	  
	 112,319
	  
	  	  
	 (119,320
	 )
	  	  
	 —  
	  
	  	  
	 32,799

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	

	 Total liabilities and shareholders’ equity
	  	 $
	 348,838
	  
	  	 $
	 (6,023
	 )
	  	 $
	 (120,562
	 )
	  	 $
	 —  
	  
	  	 $
	 222,253

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	

 

45 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 
Principles of
Consolidation 
 
The accompanying consolidated
financial statements include the accounts of the Predecessor Company for the two years ended December 31, 2001, and the Successor Company as of December 31, 2001 and 2002 and the year ended December 31, 2002. All significant intercompany balances
and transactions have been eliminated in consolidation. 
 
Factors Affecting Comparability of Financial Information 
 
The amounts recorded in the consolidated balance sheet of the Predecessor Company were materially changed with the implementation of fresh-start reporting. Consequently, the consolidated balance sheet
of the Successor Company is generally not comparable to that of the Predecessor Company, principally due to the adjustment of property, plant and equipment, deferred financing costs, deferred gains, goodwill, long-term debt and leases to estimated
fair value, the discharge of liabilities subject to compromise and the recapitalization of the Company. The Company recorded an extraordinary gain of $79.5 million from the restructuring of its debt in accordance with the provisions of the Plan.
Fresh-start valuation adjustments of $119.3 million were made to reduce the net assets and liabilities of the Successor Company to fair value as of December 31, 2001. 
 
Cash Equivalents and Marketable Securities 
 
Cash equivalents of $1.1 million and $6.4 million at December 31, 2001 and 2002, respectively, consist of
highly liquid investments with maturities of three months or less at the date of purchase. Any investments in marketable securities are stated at fair value with any unrealized gains or losses included as accumulated other comprehensive loss in
shareholders’ equity. Interest income is recognized when earned. 
 
Leases 
 
The Company
determines the classification of its leases as either operating or capital at their inception. The Company re-evaluates such classification whenever circumstances or events occur that require the reevaluation of the leases. 
 
The Predecessor Company accounted for arrangements entered
into under sale and leaseback agreements pursuant to Statement of Financial Accounting Standards (SFAS) No. 98, “Accounting for Leases.” For transactions that qualify as sales and operating leases, a sale is recognized and the asset is
removed from the books. For transactions that qualify as sales and capital leases, the sale is recognized, but the asset remains on the books and a capital lease obligation is recorded. Transactions that do not qualify for sales treatment are
treated as financing transactions. In the case of financing transactions, the asset remains on the books and a finance obligation is recorded as part of long-term debt. Losses on sale and leaseback agreements are recognized at the time of the
transaction absent indication that the sales price is not representative of fair value. Gains are deferred and recognized on a straight-line basis over the initial term of the lease. In accordance with fresh-start reporting, such gains were
eliminated from the Predecessor Company’s books as of the Effective date. 
 
All of the Company’s leases contain various provisions for annual increases in rent, or rent escalators. Certain of these leases contain rent escalators with future minimum annual rent increases
that are not considered contingent rents. The total amount of the rent payments under such leases with non-contingent rent escalators is being charged to expense on the straight-line method over the term of the leases. The Company records a deferred
credit, included in other liabilities, to reflect the excess of rent expense over cash payments. This deferred credit is reduced in the later years of the lease term as the cash payments exceed the rent expense. Other liabilities of the Successor
Company includes $384,000 of such deferred credits at December 31, 2002. In accordance with fresh-start reporting, the Predecessor Company’s deferred credit was eliminated as of the Effective Date. However, lease expense for those leases with
non-contingent rent 

 

46 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

escalators from the Effective Date forward will continue to be charged to expense on the straight-line method over the remaining term of the
leases. (See Note 5). 
 
Property and Equipment

 
Property and equipment are recorded at cost
and depreciation is computed over the assets’ estimated useful lives on the straight-line basis as follows: 
 

	 	  	 Predecessor
 Company

	  	 Successor
 Company

	 Buildings and building improvements
	  	 40 years
	  	 35 to 40 years

	 Furniture and equipment
	  	 3 to 7 years
	  	 3 to 7 years

 
Equipment under capital lease is recorded at the net present value of the future minimum lease payments at the inception of the lease. Amortization of equipment under capital lease is provided using the straight-line method over the
shorter of the life of the lease or the estimated useful life. 
 
As of the Effective Date, the Successor Company adjusted its property, plant and equipment to estimated fair value in conjunction with the implementation of fresh-start reporting. The Successor Company maintains the same policies
concerning transactions affecting property and equipment. 
 
The Company evaluates long-lived assets for impairment whenever facts and circumstances indicate an asset’s carrying value may not be recoverable on an undiscounted cash flow basis. If an impairment is determined to have
occurred, an impairment loss is recognized to the extent the asset’s carrying amount exceeds its fair value. Assets the Company intends to dispose of are reported at the lower of (i) carrying amount or (ii) fair value less the cost to sell. The
Successor Company has not recognized any impairment losses on property. 
 
Maintenance and repairs are charged to expense as incurred, and significant betterments and improvements are capitalized. 
 
Goodwill 
 
Goodwill of the Predecessor Company consisted of costs in excess of the fair value of the net assets acquired in purchase transactions as
of the date of acquisition and was being amortized over periods ranging between 15 and 20 years on a straight-line basis. In accordance with fresh-start reporting, the Predecessor Company’s goodwill was eliminated as of the Effective Date.

 
Deferred Financing Costs 
 
Financing costs related to the issuance of debt are
capitalized as other assets and amortized to interest expense over the term of the related debt using a method which approximates the effective interest method. As of the Effective Date, approximately $3.8 million of net deferred financing fees
associated with the debts that were discharged as a result of the Plan were eliminated as reorganization and fresh-start adjustments. 
 
Income Taxes 
 
The Company uses the asset and liability method of accounting for income taxes under which deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of the existing assets and liabilities and their respective tax bases (temporary differences). Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. 
 

47 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 
Unfavorable Leases

 
As of the Effective Date, the Successor
Company revalued its leases in conjunction with the implementation of fresh-start reporting. Amortization of unfavorable leases is computed using the straight-line method over the life of the respective leases. 
 
Revenue Recognition 
 
Revenue is recognized when services are rendered and consists
of residents’ fees for basic housing and support services and fees associated with additional services such as routine health care and personalized assistance on a fee for service basis. The collectibility of the accounts receivable is assessed
periodically and a provision for doubtful accounts is recorded as considered necessary. 
 
Classification of Expenses 
 
Residence operating expenses exclude all expenses associated with the Company’s corporate home office or support functions, which have been classified as corporate general and administrative expense. 
 
Net Loss Per Common Share 
 
Basic earnings per share (EPS) is calculated using net loss
attributable to common shares divided by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated in periods with net income using income attributable to common shares considering the effects of dilutive
potential common shares divided by the weighted average number of common shares and dilutive potential common shares outstanding for the period. 
 
Pursuant to fresh-start accounting, common stock was adjusted to reflect the capitalization of the Successor Company in accordance with
the Plan. 
 
Vested options to purchase 477,000 and
880,000 shares of common stock were outstanding during the years ended December 31, 2000 and 2001, respectively. These options were excluded from the respective computations of diluted loss per share, as their inclusion would be antidilutive. All
outstanding options were cancelled upon the Effective Date of the Plan. Vested options at year-end December 31, 2002 were immaterial. 
 
Also excluded from the computations of diluted loss per share, for the years ended December 31, 2000 and 2001 were, 6,685,789 shares of
common stock issuable upon conversion of the Company’s convertible subordinated debentures (see Note 1) as their inclusion would be antidilutive. These convertible subordinated debentures were eliminated upon the Effective Date of the Plan.

 
Segment Reporting 
 
Financial Accounting Standards Board Statement (FASB) of
Financial Accounting Standards (SFAS) No. 131, Disclosure about Segments of an Enterprise and Related Information requires public enterprises to report certain information about their operating segments in a complete set of financial
statements to shareholders. It also requires reporting of certain enterprise-wide information about the Company’s products and services, its activities in different geographic areas, and its reliance on major customers. The basis for
determining the Company’s operating segments is the manner in which management operates the business. The Company has no foreign operations and no customers which provide over 10 percent of gross revenue. The Company reviews operating results
at the residence level; it also meets the aggregation criteria in order to report the results as one business segment. 
 

48 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 
Use of Estimates

 
The Company has made certain estimates and
assumptions relating to the reporting of assets and liabilities, and the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period to prepare these financial statements in
conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. Significant estimates include professional liability, workers’ compensation, fresh start accounting
adjustments, the evaluation of long-lived assets for impairment, and allowance for doubtful accounts. 
 
Workers Compensation and Professional Liability 
 
The Company utilizes third-party insurance for losses and liabilities associated with workers compensation and professional liability
claims subject to deductible levels. Losses up to the deductible level are accrued based upon the Company’s estimates of the aggregate liability for claims incurred based on Company experience. 
 
Reclassifications 
 
Certain reclassifications have been made in the prior
years’ financial statements to conform to the current year’s presentation. Such reclassifications had no effect on previously reported net loss or shareholders’ equity. 
 
Fair Value of Financial Instruments 
 
The following methods and assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value: 
 
Cash and cash equivalents—The carrying amount approximates fair value because of the short maturity of those instruments. 
 
Long=-term debt—The fair value of the Company’s long term debt is estimated based on 1) terms for same or similar debt
instruments, or 2) terms of recently completed transactions of similar nature or terms offered to the Company, or 3) quoted market rates. 
 
The estimated fair values of the Company’s long-term debt is as follows: 
 

	 	  	 December 31,
 2001

	  	 December 31,
 2002

	 Carrying value
	  	 $
	 164,083
	  	 $
	 162,592

	 Fair value
	  	 $
	 164,083
	  	 $
	 164,469

 
Stock-based
Compensation 
 
The Company’s stock-based
compensation plans are described in Note 10. The company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. 
 

49 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

	 	  	 Predecessor Company

	 	  	 Successor
 Company

	 
	 	  	 Years Ended December 31,

	 
	 	  	 2000

	 	  	 2001

	 	  	 2002

	 
	 Net loss as reported
	  	 $
	 (25,786
	 )
	  	 $
	 (63,886
	 )
	  	 $
	 (4,414
	 )

	 Deduct: Total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects
	  	  
	 (1,800
	 )
	  	  
	 —  
	  
	  	  
	 (103
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Pro forma net loss
	  	 $
	 (27,586
	 )
	  	 $
	 (63,886
	 )
	  	 $
	 (4,517
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	

	 Earnings per share:
	  	 	 	 	  	 	 	 	  	 	 	 
	 Basic 2nd diluted—as reported
	  	 $
	 (1.51
	 )
	  	 $
	 (3.73
	 )
	  	 $
	 (.68
	 )

	 Basic 2nd diluted—pro forma
	  	 $
	 (1.61
	 )
	  	 $
	 (3.73
	 )
	  	 $
	 (.69
	 )

 
Concentration of
Credit Risk 
 
The Company depends on the
economies of Texas, Indiana, Oregon, Ohio and Washington and to some extent, on the continued funding of State Medicaid waiver programs in some of those states. As of December 31, 2002, 22.4% of the Company’s properties were in Texas, 11.2% in
Indiana, 10.1% in Oregon, 10.1% in Ohio and 9.0% in Washington. Adverse changes in general economic factors affecting the respective health care industries or laws and regulator environment in each of these states, including Medicaid reimbursement
rates, could have a material adverse effect on the Company’s financial condition and results of operations. 
 
State Medicaid reimbursement programs constitute a significant source of revenue for the Company. During the years ended December 31,
2000, 2001, and 2002 direct payments received from state Medicaid agencies accounted for approximately 11.1%, 12.5%, and 12.8% respectively, of the Company’s revenue while the tenant paid portion received from Medicaid residents accounted for
approximately 6.2%, 6.8%, and 7.5% respectively, of the Company’s revenue during these periods. The Company expects in the future that State Medicaid reimbursement programs will constitute a significant source of revenue for the Company.

 
2. Cash 
 
The Company’s cash and cash equivalents consist of the
following as of December 31 (in thousands): 
 

	 	    	 December 31,
 2001

	    	 December 31,
 2002

	 Cash
	    	 $
	 5,022
	    	 $
	 718

	 Cash equivalents
	    	  
	 1,055
	    	  
	 6,447

	 	    	
	
	    	
	

	 Total cash and cash equivalents
	    	 $
	 6,077
	    	 $
	 7,165

	 	    	
	
	    	
	

 
3. Long-Term
Restricted Cash 
 
Long-term restricted cash
consists of the following as of December 31 (in thousands): 
 

	 	    	 December 31,
 2001

	    	 December 31,
 2002

	 Cash held for loan agreements with U.S. Bank National Association (“U.S.
Bank”)
	    	 $
	 4,338
	    	 $
	 4,339

	 Cash held in accordance with lease agreements
	    	  
	 970
	    	  
	 976

	 State regulated restricted tenant security deposits
	    	  
	 41
	    	  
	 —

	 	    	
	
	    	
	

	 Total long-term restricted cash
	    	 $
	 5,349
	    	 $
	 5,315

	 	    	
	
	    	
	

 

50 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 
4. Cash Restricted for
Tenant Security Deposits 
 
During 2001, the
Company borrowed $2.5 million on its credit facility with GE Capital (formerly Heller Healthcare Finance, Inc.), and, in accordance with the agreement, established a restricted cash account for funds held for tenant security deposits with such
proceeds. (See note 7). The amount of cash restricted for tenant security deposits was $1,929,000 at December 31, 2002, and is subject to quarterly adjustment to actual amount of security deposits held. 
 
5. Leases 
 
A summary of leases that the Company has entered into is as follows: 
 

	 	    	 Number
 of Leased
 Residences
 (“Oregon
 Leases”)

	 	    	 Number of
 Sale and
 Leaseback
 Residences
 Accounted for
 as Operating
 Leases

	 	    	 Total
 Number of
 Operating
 Leases

	 	  	 Units Under
 Operating
 Leases

	 
	 Leases at December 31, 1999
	    	 6
	  
	    	 64
	  
	    	 70
	  
	  	 2,633
	  

	 Lease expansions during 2000
	    	 —  
	  
	    	 —  
	  
	    	 —  
	  
	  	 1
	  

	 	    	
	
	    	
	
	    	
	
	  	
	

	 Leases at December 31, 2000
	    	 6
	  
	    	 64
	  
	    	 70
	  
	  	 2,634
	  

	 Leases entered into in during 2001
	    	 —  
	  
	    	 2
	  
	    	 2
	  
	  	 78
	  

	 Lease terminations during 2001
	    	 (1
	 )
	    	 —  
	  
	    	 (1
	 )
	  	 (34
	 )

	 Leased facilities purchased during 2001
	    	 	 	    	 (16
	 )
	    	 (16
	 )
	  	 (573
	 )

	 	    	
	
	    	
	
	    	
	
	  	
	

	 Leases at December 31, 2001 and 2002
	    	 5
	  
	    	 50
	  
	    	 55
	  
	  	 2,105
	  

	 	    	
	
	    	
	
	    	
	
	  	
	

 
The
Company has five Oregon leases (the “Oregon Leases”) where the lessor in each case obtained funding through the sale of bonds issued by the state of Oregon, Housing and Community Services Department (“OHCS”). In connection with
the Oregon Leases, the Company entered into “Lease Approval Agreements” with OHCS and the lessor, pursuant to which the Company is obligated to comply with the terms and conditions of certain regulatory agreements to which the lessor is a
party (See Note 7). The leases, which have fixed terms of 10 years, have been accounted for as operating leases. Aggregate deposits on these residences as of December 31, 2000, 2001, and 2002 were $126,000, $90,000, and $136,039, respectively, which
are reflected in other assets. The Company previously had six Oregon Leases and terminated one of these leases effective December 1, 2001 in accordance with the Plan. The lessor of this property filed a claim against the Company in the bankruptcy
proceedings regarding the early termination of this lease. The claim was approved by the Court and resulted in the issuance of $90,502 of Senior Notes, $34,290 of Junior Notes and 14,031 shares of common stock to this lessor. 
 
In June 1999, the Company amended all of its 37 leases with
LTC. These amendments included provisions to eliminate future minimum annual rent increases, or “rent escalators,” that were not deemed to be contingent rents. Because of the rent escalators, prior to the amendments, the Company accounted
for rent expense related to such leases on a straight-line basis. From the date of the amendment forward, the Company has accounted for the amended leases on a contractual cash payment basis and amortizes the deferred rent balance, at the date of
the amendment, over the remaining initial term of the lease. Those amendments also redefined the lease renewal option with respect to certain leases and provided the lessor with the option to declare an event of default in the event of a change of
control under certain circumstances. In addition, the amendments also provide the Company with the ability, subject to certain conditions, to sublease or assign its leases with respect to two Washington residences. (See Note 9). 
 
In accordance with the Company’s Plan, effective January
1, 2002, the Company entered into a Master Lease Agreement with LTC under which 16 leases were consolidated. This Master Lease Agreement provides 

 

51 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

for aggregate rent reductions of $875,000 per year and restructures the provision related to minimum rent increases for the 16 properties for
the initial remaining term. As a result of the change in future annual rent increases as to the 16 properties under the Master Lease Agreement, the Company is required to account for rent expense on a straight-line basis. In exchange for the rent
reduction, LTC filed a claim in the bankruptcy proceeding (to which the Company did not object) in the amount of $2,500,000. The claim was approved by the Court and entitled LTC to $590,694 of Senior Secured Notes, $223,803 of Junior Secured Notes
and 91,576 shares of common stock. Prior to the issuance of any common stock to LTC, LTC entered into an agreement with Healthcare Holdings, Inc., a wholly owned subsidiary of CLC Healthcare, Inc. to allow it to purchase LTC’s right to receive
the common stock. The Master Lease Agreement also provides LTC with the option to exercise certain remedies, including the termination of the Master Lease Agreement and certain other LTC leases due to cross-default rights, upon a change of control
under which at least 30% ownership of the Company’s 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 a merger
or consolidation meeting certain conditions. At the same time that the Company entered into the Master Lease Agreement, they also amended 16 other leases with LTC under which the renewal rights of certain of those leases are tied together
differently than previously with certain other leases. 
 
Certain of the Company’s leases and loan agreements contain covenants and cross-default provisions such that a default on one of those instruments could cause the Company to be in default on one or more other instruments.
Pursuant to certain lease agreements, the Company restricted $1.0 million of cash balances as additional collateral (see Note 3). 
 
In October 2001, the Company repurchased 16 previously leased properties from one lessor. These properties were purchased with funds
borrowed from GE Capital (formerly Heller Healthcare Finance, Inc.) (see Notes 1 and 7). 
 
On January 1, 2002 the Company emerged from the proceedings under Chapter 11 of the Bankruptcy Code. The Company’s Plan of reorganization included the Company conveying two facilities to one
lender in satisfaction of $5.9 million of debt. The Company then leased these two properties, one in South Carolina and one in Pennsylvania, from this lender under a new Master Lease, incorporating two existing leases as well. Terms under the Master
Lease on the South Carolina facility conveyed to the lender effective January 1, 2002, include monthly payments in the amount of $19,000, $20,000, $21,000 and $21,667 for the years ended December 31, 2002, 2003, 2004 and all years thereafter until
the end of the lease term, respectively. Terms under the Master Lease for the Pennsylvania facility conveyed effective January 1, 2002, include monthly payments of $22,330 increasing to $23,780 over the next four years, expiring in 2006. The
Company’s Plan of reorganization also included the amendment of two existing leases with the same lender. Such leases were amended under the Master Lease to provide base rental rates of $2,000 per month with rent escalation clauses based upon
revenue levels with rental rates not to exceed $22,000 per month, expiring in 2006. 
 
As of December 31, 2002, future minimum annual lease payments under operating leases are as follows (in thousands): 
 

	 2003
	  	 $
	 13,134

	 2004
	  	  
	 13,267

	 2005
	  	  
	 12,867

	 2006
	  	  
	 13,119

	 2007
	  	  
	 12,771

	 Thereafter
	  	  
	 38,341

	 	  	
	

	 	  	 $
	 103,499

	 	  	
	

 

52 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 
6. Property and
Equipment 
 
As of December 31, 2001 and 2002,
property and equipment, stated at fair value, consist of the following (in thousands): 
 

	 	  	 Predecessor
 Company
 2001

	  	 Successor
 Company
 2002

	 Land
	  	 $
	 22,997
	  	 $
	 20,169

	 Buildings and building improvements
	  	  
	 168,845
	  	  
	 154,931

	 Equipment
	  	  
	 2,053
	  	  
	 5,426

	 Furniture
	  	  
	 2,653
	  	  
	 3,607

	 Vehicles
	  	  
	 —  
	  	  
	 166

	 	  	
	
	  	
	

	 Total property and equipment
	  	  
	 196,548
	  	  
	 184,299

	 Less accumulated depreciation and amortization
	  	  
	 —  
	  	  
	 6,369

	 	  	
	
	  	
	

	 Property and equipment—net
	  	 $
	 196,548
	  	 $
	 177,930

	 	  	
	
	  	
	

 
As of
the Effective Date, the Successor Company adjusted its property, plant and equipment to estimated fair value in conjunction with the implementation of fresh-start reporting. The Successor Company maintains the same policies concerning transactions
affecting property and equipment. 
 
Land,
buildings and certain furniture and equipment relating to 40 residences serve as collateral for long-term debt, 52 residences serve as collateral for the Senior and Junior Secured Notes (See Note 7) and 31 residences serve as collateral for GE
Capital financings (See Note 7). 
 
Depreciation
and amortization expense was $8.8 million, $9.2 million, and $6.4 million for the years ended December 31, 2000, 2001, and 2002 respectively. 
 

53 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 
7. Long-Term Debt

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

	 	  	 Carrying
 Amount
 2001

	  	 Principal
 Amount
 2001

	  	 Carrying
 Amount
 2002

	  	 Principal
 Amount
 2002

	 Trust Deed Notes, payable to the State of Oregon Housing and Community Services
Department (OHCS) through 2028
	  	 $
	 9,849
	  	 $
	 9,741
	  	 $
	 9,688
	  	 $
	 9,585

	 Variable Rate Multifamily Revenue Bonds, payable to the Washington State Housing Finance
Commission Department through 2028
	  	  
	 7,521
	  	  
	 7,605
	  	  
	 7,217
	  	  
	 7,295

	 Variable Rate Demand Revenue Bonds, Series 1997 payable to the Idaho Housing and Finance
Association through 2017
	  	  
	 6,542
	  	  
	 6,615
	  	  
	 6,277
	  	  
	 6,345

	 Variable Rate Demand Revenue Bonds, Series A-1 and A-2 payable to the State of Ohio
Housing Finance Agency through 2018
	  	  
	 11,888
	  	  
	 12,020
	  	  
	 11,451
	  	  
	 11,575

	 Housing and Urban Development Insured Mortgages due 2036
	  	  
	 7,374
	  	  
	 7,457
	  	  
	 7,329
	  	  
	 7,410

	 Senior Secured Notes due 2009
	  	  
	 40,250
	  	  
	 40,250
	  	  
	 35,750
	  	  
	 35,750

	 Junior Secured Notes due 2012
	  	  
	 12,628
	  	  
	 12,628
	  	  
	 13,925
	  	  
	 14,054

	 Mortgages payable due 2008
	  	  
	 28,513
	  	  
	 28,463
	  	  
	 27,995
	  	  
	 27,948

	 GE Capital Credit Facility due 2005
	  	  
	 39,222
	  	  
	 40,458
	  	  
	 42,691
	  	  
	 43,516

	 Capital lease obligations
	  	  
	 296
	  	  
	 301
	  	  
	 269
	  	  
	 269

	 	  	
	
	  	
	
	  	
	
	  	
	

	 Total long-term debt
	  	  
	 164,083
	  	 $
	 165,538
	  	  
	 162,592
	  	 $
	 163,747

	 	  	 	 	  	
	
	  	 	 	  	
	

	 Less current portion
	  	  
	 2,622
	  	 	 	  	  
	 11,521
	  	 	 
	 	  	
	
	  	 	 	  	
	
	  	 	 
	 Long-term debt
	  	 $
	 161,461
	  	 	 	  	 $
	 151,071
	  	 	 
	 	  	
	
	  	 	 	  	
	
	  	 	 

 
The
Trust Deed Notes payable to OHCS are secured by buildings, land, furniture and fixtures of six Oregon residences. The notes are payable in monthly installments including interest at effective rates ranging from 7.375% to 9.0%. 
 
The Variable Rate Multifamily Revenue Bonds are payable to the
Washington State Housing Finance Commission Department and at December 31, 2002 were secured by an $8.7 million letter of credit and by buildings, land, furniture and fixtures of the five Washington residences. The letter of credit expires in 2003.
The Company has received a commitment from U.S. Bank to extend the term of the letter of credit to January 2, 2004 upon the Company’s request. The bonds had a weighted average interest rate of 1.67% during 2002. 
 
The Variable Rate Demand Housing Revenue Bonds, Series 1997
are payable to the State of Idaho Housing and Finance Association and at December 31, 2002 were secured by a $7.5 million letter of credit and by buildings, land, furniture and fixtures of four Idaho residences. The letter of credit expires in 2004.
The bonds had a weighted average interest rate of 1.67% during 2002. 
 
The Variable Rate Demand Housing Revenue Bonds with the State of Ohio Housing Finance Agency (“OHFA”) are due July 2018 and are secured by a $13.5 million letter of credit and by buildings, land, furniture and
fixtures of seven Ohio residences. The letter of credit expires in 2005. The bonds had a weighted average interest rate of 1.52% during 2002. 
 

54 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 
At
December 31, 2002, mortgage loans include three fixed rate loans secured by seven Texas residences, three Oregon residences and three New Jersey residences. These loans collectively require monthly principal and interest payments of $230,000, with
balloon payments of $11.8 million, $5.3 million and $7.2 million due at maturity in May 2008, August 2008 and September 2008, respectively. These loans bear fixed annual interest rates between 7.58% to 8.79%. 
 
Prior to the Company’s Plan of Reorganization, mortgage
loans also included a $5.9 million mortgage loan at a fixed annual interest rate of 8.79%, secured by one Pennsylvania residence and one South Carolina residence. In accordance with the Company’s Plan of Reorganization, the Company conveyed two
facilities to this lender in satisfaction of the $5.9 million of debt. The Company continues to operate these residences under operating leases with the same lender. (See Notes 1 and 5). 
 
Housing and Urban Development (“HUD”) Insured mortgages include three separate loan agreements
entered into in 2001. These are fixed rate mortgages, each of which is secured by one facility in Texas. These loans mature between July 1, 2036 and August 1, 2036 and collectively require monthly principal and interest payments of $47,493. The
loans bear fixed annual interest rates between 7.40% and 7.55%. 
 
GE Capital credit facility is a secured line of credit up to $44.0 million. This is a variable rate credit facility, secured by 31 facilities. This credit facility matures in January 2005, required monthly principal payments of
$50,000 for 2002, and requires monthly principal payments of $65,000 for 2003 and $80,000 for 2004. The interest on the credit facility is calculated at LIBOR plus 4.5%, floating monthly (not to be less than 8%) and is payable monthly in arrears.

 
On January 1, 2002 the Debtors emerged from the
proceedings under Chapter 11 of the Bankruptcy Code. The Company’s Plan of reorganization included the issuance of $40.25 million aggregate principal amount of seven-year secured notes (the “New Senior Secured Notes”), bearing
interest at 10% per annum, payable semi-annually in arrears, and $15.25 million aggregate principal amount of ten-year secured notes (the “New Junior Secured Notes” and collectively with the New Senior Secured Notes, the “New
Notes”), bearing interest payable in additional New Junior Secured Notes for three years at 8% per annum and thereafter payable in cash at 12% per annum, payable semi-annually in arrears. The New Junior Secured Notes were issued at a discount
of $2.6 million. The discount will be amortized over the life of the New Junior Secured Notes using the effective interest method. The New Notes are secured by 52 properties. (See Note 1). 
 
Of the $50.1 million outstanding in New Notes, $20.0 million is payable to related parties. (See Note 9).

 
As of the Effective Date, the Successor Company
revalued its long-term debt in conjunction with the implementation of fresh-start reporting. At December 31, 2001, an adjustment of $3.1 million was recorded to reduce long-term debt to its fair market value. Amortization of this adjustment is
computed using the straight-line method over the individual loan life. 
 
As of December 31, 2002, the following annual principal payments are required (in thousands): 
 

	 2003
	 	 $
	 2,639

	 2004
	 	  
	 2,941

	 2005
	 	  
	 40,237

	 2006
	 	  
	 2,256

	 2007
	 	  
	 2,179

	 Thereafter
	 	  
	 113,495

	 	 	
	

	 Total
	 	 $
	 163,747

	 	 	
	

 
Current
portion of long-term debt on the balance sheet includes $8.9 million at December 31, 2002 related to assets held for sale. This amount reflects a portion of scheduled maturities after December 31, 2003, 

 

55 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

that the Company believes will be paid out of the proceeds of future facility sales transactions. The amount classified as current maturities
is equal to the net book value of the assets classified as held for sale, based on the Company’s estimate that net proceeds will equal or exceed such amount. The ultimate amount of debt repayment related to facility sale transactions, when
completed, may be higher. 
 
The Company has a
series of reimbursement agreements with U.S. Bank for letters of credit that support certain of our Revenue bonds payable, which total approximately $23.2 million as of December 31, 2002. The Company’s credit agreements with U.S. Bank contain
restrictive covenants which include compliance with certain financial ratios. Pursuant to amendments to these credit agreements, the Company provided additional cash collateral in exchange for the waiver of certain possible defaults related to the
delivery of financial statements and compliance with financial covenants, including an amendment to certain financial covenants. The amendments also provides for the release of the additional collateral upon the achievement of specified performance
targets, provided that the Company is in compliance with the other terms of the loan agreements. The Predecessor Company achieved certain of these specified targets during previous years. The Company has $4.3 million in additional cash collateral
deposited with U.S. Bank. 
 
In May 2002, we
amended our existing agreement with U.S. Bank, establishing new covenants, with which we were in compliance as of December 31, 2002. Failure to comply with these covenants would constitute an event of default, which would allow U.S. Bank to declare
any amounts outstanding under the loan documents to be due and payable. 
 
In addition to the debt agreements with OHCS related to the six owned residences in Oregon, the Company has entered into Lease Approval Agreements with OHCS and the lessor of the Oregon Leases, which obligates the Company to
comply with the terms and conditions of the underlying trust deed relating to the leased buildings. Under the terms of the OHCS debt agreements, the Company is required to maintain a capital replacement escrow account to cover expected capital
expenditure requirements for the Oregon Leases and the six OHCS loans, which as of December 31, 2000, 2001, and 2002 was $422,000, $363,000, and $417,000, respectively, and is reflected in other assets in the accompanying financial statements. In
addition, for the six OHCS loans in the Company’s name, a contingency escrow account is required. This account had a balance of $136,000, and $136,000, respectively, as of December 31, 2001, and 2002, and is reflected in other current assets.
Distribution of any assets or income of any kind by the Company is limited to once per year after all reserve and loan payments have been made, and only after receipt of written authorization from OHCS. 
 
As of December 31, 2000 and 2001, the Company was restricted
from distributing $278,000 and $322,000 respectively, of income, in accordance with the terms of the loan agreements and Lease Approval Agreements with OHCS. 
 
As a further condition of the debt agreements, the Company is required to comply with the terms of certain regulatory agreements which
provide, among other things, that in order to preserve the federal income tax exempt status of the bonds, the Company is required to lease at least 20% of the units of the projects to low or moderate income persons as defined in Section 142(d) of
the Internal Revenue Code. There are additional requirements as to the age and physical condition of the residents with which the Company must also comply. Non-compliance with these restrictions may result in an event of default and cause
acceleration of the scheduled repayment. 
 
8. Income Taxes

 
The Company incurred a loss for both
financial reporting and tax return purposes for the years ended December 31, 2000, 2001 and 2002, and as such, there was no current or deferred tax provision allocated to the loss from continuing operations, discontinued operations or to the
extraordinary gain on reorganization. 
 

56 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 
The
provision for income taxes differs from the amount of loss determined by applying the applicable U.S. statutory federal rate to loss from continuing operations as a result of the following items at December 31: 
 

	 	  	 Predecessor
 Company

	 	  	 Successor
 Company

	 
	 	  	 2000

	 	  	 2001

	 	  	 2002

	 
	 Statutory federal tax rate
	  	 (34.0
	 )%
	  	 (34.0
	 )%
	  	 (34.0
	 )%

	 Non-deductible goodwill
	  	 0.3 
	 %
	  	 1.0 
	 %
	  	 —
	 %

	 Losses for which no benefit is provided
	  	 26.9 
	 %
	  	 30.9 
	 %
	  	 28.6 
	 %

	 Class action litigation settlement
	  	 6.6 
	 %
	  	 —
	 %
	  	 —
	 %

	 Reorganization cost
	  	 —
	 %
	  	 2.1 
	 %
	  	 5.4 
	 %

	 Other
	  	 0.2 
	 %
	  	 —
	 %
	  	 —
	 %

	 	  	
	
	  	
	
	  	
	

	 Effective tax rate
	  	 —
	 %
	  	 —
	 %
	  	 —
	 %

	 	  	
	
	  	
	
	  	
	

 
An
analysis of the significant components of deferred tax assets and liabilities consists of the following as of December 31, 2001 and 2002 (in thousands): 
 

	 	  	 Predecessor
 Company

	 	  	 Successor
 Company

	 
	 	  	 2001

	 	  	 2002

	 
	 Deferred tax assets:
	  	 	 	 	  	 	 	 
	 Property and equipment, primarily due to depreciation and fresh start
adjustments
	  	 $
	 31,953
	  
	  	 $
	 28,912
	  

	 Net operating loss carryforward
	  	  
	 5,597
	  
	  	  
	 8,440
	  

	 Investment in joint venture operations
	  	  
	 1,608
	  
	  	  
	 1,475
	  

	 Other
	  	  
	 5,648
	  
	  	  
	 7,229
	  

	 	  	
	
	
	  	
	
	

	 Total deferred tax assets
	  	  
	 44,806
	  
	  	  
	 46,056
	  

	 Valuation allowance
	  	  
	 (43,606
	 )
	  	  
	 (44,956
	 )

	 Deferred tax liabilities:
	  	 	 	 	  	 	 	 
	 Other
	  	  
	 (1,200
	 )
	  	  
	 (1,100
	 )

	 	  	
	
	
	  	
	
	

	 Total deferred tax liabilities
	  	  
	 (1,200
	 )
	  	  
	 (1,100
	 )

	 	  	
	
	
	  	
	
	

	 Net deferred tax asset (liability)
	  	 $
	 —  
	  
	  	 $
	 —  
	  

	 	  	
	
	
	  	
	
	

 
The
valuation allowance for deferred tax assets as of December 31, 2001 and 2002 was $43.6 million and $45.0 million, respectively. The increase in the total valuation allowance for the years ended December 31, 2000, 2001 and 2002 was $6.1 million,
$18.1 million, and $1.4 million, respectively. 
 
At December 31, 2002, the Company has approximately $101.4 million of net operating loss (NOL) carryforwards which will expire between 2009 and 2022. These NOLs have been reduced to $22.3 million as a result of the discharge and
cancellation of various prepetition liabilities under the Plan. The reduction of the NOLs will be effective on January 1, 2003. 
 
The NOLs remaining after the application of the cancellation of indebtedness provisions are subject to certain provisions of the Internal
Revenue Code which restricts the utilization of the losses. In addition, any net unrealized built-in losses resulting from the excess of tax basis over the carrying value of the Company’s assets (primarily property and equipment) as of the
Effective Date, which are recognized within five years are also subject to these provisions. Section 382 of the Internal Revenue Code imposes limitations on the utilization of the loss carryforwards and built-in losses after certain changes of
ownership of a loss company. The Company is deemed to be a loss company for these purposes. Under these provisions, the Company’s 

 

57 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

ability to utilize these loss carryforwards and built-in losses in the future will generally be subject to an annual limitation of
approximately $1.6 million. 
 
There can be no
assurances that the Company will be able to utilize these NOLs or built-in losses and therefore management has established a 100 percent valuation allowance to offset the associated net deferred tax asset. 
 
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 recorded as an adjustment to additional paid-in capital. 
 
9. Related Party Transactions 
 
National Health Investors, Inc. 
 
W. Andrew Adams, has been a member of the Company’s
Board of Directors and its Chair since January 2nd, 2002, is the President, Chief Executive Officer and Chairman of the Board of Directors of National Health Investors, Inc. (“NHI”). NHI currently owns 557,214 shares of the Company’s
common stock and $5.1 million of the Company’s New Notes. 
 
LTC Properties, Inc. and CLC Healthcare, Inc. 
 
Andre Dimitriadis, has been a member of the Company’s Board of Directors and was the Chair of its Audit Committee from January 2002 to November 2nd, 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 owns $11.4 million of the Company’s New Notes and CLC Healthcare, Inc.
owns 22.4% of the Company’s common stock and $2.0 million of the Company’s New Notes (see Note 7). The Company currently leases 37 properties (1,426 units) from LTC. (See Note 5). Mr. Dimitriadis owns $1 million of the Company’s New
Note. 
 
The Company incurred annual lease expense
of $8.9 million, $8.8 million and $9.0 million for the years ended December 31, 1999, 2000 and 2001, respectively, pursuant to these leases. 
 
In June 1999, the Company amended all of its 37 LTC leases. These amendments eliminated provisions related to future minimum annual rent
increases, or “rent escalators,” which prior to the amendments required the Company to account for rent expense related to such leases on a straight-line basis. From the date of the amendment forward, the Company is accounting for the
amended leases on a contractual cash payment basis and amortizing the deferred rent balance as of the date of the amendment over the remaining initial term of the leases. Those amendments also redefined the lease renewal option with respect to
certain leases and provided the lessor with the option to declare an event of default in the event of a change of control under certain circumstances. In addition, the amendments provide the Company with the ability, subject to certain conditions,
to sublease or assign its leases with respect to two Washington residences. 
 
In accordance with our Plan, effective January 1, 2002, we entered into a Master Lease Agreement with LTC under which 16 leases were consolidated. This Master Lease Agreement provides for aggregate
rent reductions of $875,000 per year and restructures the provision related to minimum rent increases for the 16 properties for the initial remaining term. As a result of the change in future annual rent increases as to the 16 properties under the
Master Lease Agreement, we are required to account for rent expense on a straight-line basis. In exchange for the rent reduction, LTC filed a claim in the bankruptcy proceeding (to which we did not object) in the amount of $2,500,000. The claim was
approved by the Court and entitled LTC to $590,694 of Senior Secured Notes, $223,803 of Junior Secured Notes and 91,576 shares of common stock. Prior to the issuance of any common stock to LTC, LTC entered into an agreement with Healthcare Holdings,
Inc., a wholly owned subsidiary of CLC Healthcare, Inc. to allow it to purchase LTC’s right to receive the 

 

58 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

common stock. The Master Lease Agreement also provides LTC with the option to exercise certain remedies, including the termination of the
Master Lease Agreement and certain other LTC leases due to cross-default rights, 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 a merger or consolidation meeting certain conditions. At the same time that we entered into the Master Lease Agreement, we also amended 16 other leases with LTC
under which the renewal rights of certain of those leases are tied together differently than previously with certain other leases. 
 
MYFM Capital, LLC and BET Associates 
 
In December 2000, the Company entered into an agreement with MYFM Capital, LLC (“MYFM”) under which the Company could establish
a line of credit with BET Associates LP (“BET”) as lender, providing for loans of up to $10.0 million. Subsequent to December 31, 2001, the Company terminated the agreement and paid MYFM $50,000 in connection with such termination. Bruce
E. Toll, who was the beneficial owner of 3.1 million of the Predecessor Company’s common shares and currently owns beneficially 1.1 million of the Successor Company’s common shares, and who was a member of the Company’s Board of
Directors from January 16, 2001 to January 1, 2002, is the sole member of BRU Holdings Company, Inc., LLC, which is the sole general partner of BET. Leonard Tannenbaum is the Managing Partner of MYFM Capital, LLC, the son-in-law of Mr. Toll, a 10%
limited partner of BET, and is a current member of the Company’s Board of Directors. In addition, Mr. Tannenbaum currently owns $725,501 of the Company’s New Notes and 50,028 shares of the Company’s common stock. 
 
Agreement with Richard C. Ladd 
 
In 2001, the Company entered into an agreement with Richard
C. Ladd, who is currently a member of the Company’s Board of Directors. The agreement provides for Mr. Ladd to provide consultation services to the Company on the advisability of establishing a committee on quality improvement, its membership
and charter. The initial contract was for a period of 4 months, which was amended to provide services on a month-to-month basis. The Company or Mr. Ladd may terminate the contract at any time by the terminating party providing at least 30-days prior
written notice to the other party of their intention to terminate the contract. Mr. Ladd is reimbursed at the rate of $150 per hour, not to exceed $2,500 for any one month. The Company paid Mr. Ladd $8,090 and $12,500 for such services for the year
ended December 31, 2001 and 2002, respectively. This contract was terminated by mutual consent of the Company and Mr. Ladd, effective October 1, 2002. Additionally, the Company has allowed Mr. Ladd and his spouse to participate in its health
insurance programs. The Company paid premiums on their behalf of $7,900 and $8,600 during the years ended December 31, 2001 and 2002, respectively. Mr. Ladd owns 2,500 shares of the Company’s common stock. 
 
Assisted Living Facilities, Inc. 
 
The Company leases five residences from Assisted Living
Facilities, Inc. The spouse of the Company’s former president and chief executive officer owns a 25% interest in Assisted Living Facilities, Inc. For the year ended December 31, 2000, the Company incurred lease rental expense of $1.3 million.
Assisted Living Facilities, Inc., is no longer considered a related party since the resignation of the former president and chief executive officer on October 19, 2000. 
 
10. Stock Option Plans and Restricted Stock 
 
Predecessor Company 
 
Prior to January 1, 2002, the effective date of the Company’s Plan of reorganization, the Company had
two Stock Option Plans (the “Option Plans”) which provided for the issuance of incentive and non-qualified stock options and restricted stock. Except for the Board of Directors administering the options of the non- 

 

59 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

employee Directors, the Option Plans were administered by the Compensation Committee of the Board of Directors which established the terms
and provisions of options granted under the Option Plans, not otherwise provided under the Option Plans. Incentive options could be granted only to officers or other full-time employees of the Company, while non-qualified options could be granted to
directors, officers or other employees of the Company, or consultants who provide services to the Company. 
 
The Amended and Restated 1994 Stock Option Plan combined an incentive and nonqualified stock option plan, a stock appreciation rights
(“SAR”) plan and a stock award plan (including restricted stock). The 1994 Plan was a long-term incentive compensation plan and was designed to provide a competitive and balanced incentive and reward program for participants. This plan was
cancelled with the emergence of the Company from bankruptcy on January 1, 2002. 
 
Under the Amended and Restated 1994 Stock Option Plan (the “1994 Plan”), the Company could grant options or award restricted stock to its employees, consultants and other key persons for up
to 2,208,000 shares of common stock. The exercise price of each option equaled the market price of the Company’s stock on the date of grant. Each option expired on the date specified in the option agreement, but not later than the tenth
anniversary of the date on which the option was granted. Options typically vested three years from the date of issuance and typically were exercisable within seven years from the date of vesting. Each option was exercisable in equal installments as
designated by the Compensation Committee or the Board at the option price designated by the Compensation Committee or the Board, as applicable; however, incentive options could not be less than the fair market value of the common stock on the date
of grant. All options were nontransferable and subject to adjustment upon changes in the Company’s capitalization. The Board of Directors, at its option, could discontinue or amend the 1994 Plan at any time, provided that certain conditions
were satisfied. 
 
Under the Non-Executive Employee
Equity Participation Plan of Assisted Living Concepts, Inc. (the “Non-Officer Plan”) the Company could grant consultants and non-executives up to 1,000,000 shares of Common Stock pursuant to non-qualified options granted under the
Non-Officer Plan. Officers, directors and significant employees of the Company were not eligible to participate in the Non-Officer Plan. 
 
Following is the per share weighted-average fair value of each option grant as estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions. There were no options granted during 2001 and all options were cancelled effective December 31, 2001 in accordance with the Company’s Plan of reorganization, therefore the
following table excludes any data related to 2001. These plans were cancelled when the company emerged from bankruptcy. 
 

	 	    	 Predecessor
 Company

	 
	 	    	 December 31,

	 
	 	    	 2000

	 
	 Expected dividend yield
	    	 —  
	  

	 Expected volatility
	    	 98.57
	 %

	 Risk-free interest rate
	    	 5.26
	 %

	 Expected life (in years)
	    	 3
	  

 
A
summary of the status of the Company’s stock options as of December 31, 2000 and changes during the year then ended is presented below. There were no options granted during 2001 and all options were cancelled 

 

60 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

effective December 31, 2001 in accordance with the Company’s Plan of reorganization, therefore the following table excludes any data
related to 2001. 
 

	 	  	 Predecessor Company

	 	  	 2000

	 	  	 2000
 Number of
 Shares

	 	  	 Weighted-
 Average
 Exercise
 Price

	 Options at beginning of the year
	  	  
	 1,744,420
	  
	  	 $
	 9.78

	 Granted
	  	  
	 1,038,850
	  
	  	  
	 1.34

	 Exercised
	  	  
	 —  
	  
	  	  
	 —  

	 Canceled
	  	  
	 (1,309,372
	 )
	  	  
	 10.21

	 	  	
	
	
	  	 	 
	 Options at end of the year
	  	  
	 1,473,898
	  
	  	 $
	 3.38

	 	  	
	
	
	  	 	 
	 Options exercisable at end of year
	  	  
	 476,686
	  
	  	 	 
	 Weighted-average fair value of options granted during the year
	  	 $
	 1.32
	  
	  	 	 

 
At
December 31, 2001 the Predecessor Company cancelled 1,473,898 options with a weighted-average exercise price of $3.38 each. 
 
Successor Company 
 
The Successor Company had no options outstanding at December 31, 2001. 
 
On May 8, 2002, the shareholders approved a new Stock Option Plan. The Stock Option Plan consists of two
plans, one pertaining solely to the grant of incentive stock options and one pertaining to the grant of other incentive awards, including non-qualified stock options. The Stock Option Plan is intended to obtain, retain services of, and provide
incentive for, directors, key employees and consultants. The Stock Option Plan allows for grants or awards of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance awards, dividend
equivalents, deferred stock and stock payments. 
 
Under the Stock Option Plan, the aggregate number of shares which may be issued upon exercise of options or other awards shall not exceed 650,000. Except for non-employee directors, the exercise price and vesting period of each
option is to be set by the Company’s Compensation Committee of its Board of Directors, but the exercise price may not be less than the deemed fair value of the Company’s stock on the date of grant. Each option will expire on the date
specified in the option agreement, but not later than the tenth anniversary of the date on which the option was granted. The Board of Directors, at its option, may discontinue or amend the Stock Option Plan at any time, provided that certain
conditions are satisfied. 
 
Following is the per
share weighted-average fair value of each option grant as estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions. 
 

	 	    	 Successor
 Company

	 
	 	    	 December 31,

	 
	 	    	 2002

	 
	 Expected dividend yield
	    	 —  
	  

	 Expected volatility
	    	 46.07
	 %

	 Risk-free interest rate
	    	 3.44
	 %

	 Expected life (in years)
	    	 7
	  

 
A
summary of the status of the Company’s stock options as of December 31, 2002 and changes during the years ended December 31, 2002 is presented below. 
 

61 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

	 	  	 Successor Company

	 	  	 2002

	 	  	 2002
 Number of
 Shares

	 	  	 Weighted-
 Average
 Exercise
 Price

	 Options at beginning of the year
	  	  
	 -0-
	  
	  	 $
	 —  

	 Granted
	  	  
	 253,000
	  
	  	  
	 3.18

	 Exercised
	  	  
	 —  
	  
	  	  
	 —  

	 Canceled
	  	  
	 (11,500
	 )
	  	  
	 3.30

	 	  	
	
	
	  	 	 
	 Options at end of the year
	  	  
	 241,500
	  
	  	 $
	 3.18

	 	  	
	
	
	  	 	 
	 Options exercisable at end of year
	  	  
	 28,853
	  
	  	 	 
	 Weighted-average fair value of options granted during the year
	  	 $
	 1.66
	  
	  	 	 

 
11. Workers
Compensation 
 
The Company utilizes
third-party insurance for losses and liabilities associated with workers compensation claims subject to deductible levels of $250,000 per occurrence for all claims incurred beginning January 1, 2000. Claims incurred prior to January 1, 2000 were
fully insured. Losses up to this deductible level are accrued based upon the Company’s estimates of the aggregate liability for claims incurred based on Company experience. At December 31, 2001 and 2002, other current liabilities includes
reserves for workers compensation claims payable of approximately $2.5 million and $2.7 million, respectively. 
 
In addition, the Company maintains cash deposits as required by the insurance carrier. At December 31, 2001 and 2002, such deposits were
$2.8 million and $4.7 million, respectively. These deposits are utilized to pay claims as costs are incurred. 
 
12. Professional Liability 
 
The Company utilizes third-party insurance for losses and liabilities associated with professional liability claims subject to deductible levels of $100,000 per occurrence for the year ended December
31, 2000 and retention levels of $250,000 for all states except Florida and Texas, where the retention levels were $500,000 per occurrence, for the year ended December 31, 2001 and 2002. If a lawsuit or claim arises which ultimately results in an
uninsured loss or a loss in excess of insured limits, such an outcome could have a material adverse effect on the Company. 
 
Losses up to these deductible and retention levels are accrued based upon the Company’s estimates of the aggregate liability for
claims incurred based on Company experience. At December 31, 2001 and 2002, other current liabilities includes reserves for professional liability claims payable of approximately $1.0 million, and $1.6 million respectively. 
 
13. 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 arose with the Company’s corporate liability insurance 

 

62 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

carriers. 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 the Company 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 the Company’s complaint for declaratory relief in the arbitration based upon having filed for bankruptcy protection. An objection was filed to the Company’s motion, and one of the Company’s insurance
carriers filed a proof of claim in the amount of $4.0 million in the bankruptcy proceeding. The Company disputed that claim. In January 2003, the Company and the insurance carrier agreed to settle all outstanding claims and provide mutual releases
from the matters arising from the class action litigation. Upon approval by the bankruptcy court of the stipulated settlement, which approval was received March 12, 2003, the insurance carrier has agreed to withdraw its claim against the Company.

 
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. 
 
14. Employee Benefit Plans 
 
The Company has a 401(k) Savings Plan (“the Savings Plan”) which is a defined contribution plan covering employees of Assisted Living Concepts, Inc. who have one year of service and are age 21 or older. Each year
participants may contribute up to 15% of pre-tax annual compensation and 100% of any Employer paid cash bonus (not to exceed $10,500), as defined in the Savings Plan. ALC may provide matching contributions as determined annually by ALC’s Board
of Directors. Contributions are subject to certain limitations. The Company has not made any contributions to this Savings Plan. 
 
15. Subsidiary Guarantee of New Notes 
 
The New Notes, issued by the Company, are publicly traded and the repayment of these notes is guaranteed by three wholly-owned
subsidiaries of the Company. ALC Indiana, Inc., Home and Community Care, Inc. (“HCI”) and Carriage House Assisted Living, Inc. (“Carriage House”). The following information is presented as required under the Securities and
Exchange Commission Financial Reporting Release No. 55 in connection with the guarantee of the New Notes by the Company’s wholly owned subsidiaries. The Operating and investing activities of the separate legal entities included in the
consolidating financial statements are fully interdependent and integrated with the Company and each other. One of the Company’s residences in Indiana was closed effective March 15, 2002. The sale of such residence is expected to be completed
in 2003. 
 

63 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 
Successor Company 
 
Consolidating Balance Sheet 
 
December 31, 2002 
 
(In
thousands) 
 

	 	  	 	 	  	 Wholly-Owned Subsidiaries

	 	  	 	 	  	 	 
	 	  	 ALC, Inc.

	 	  	 ALC
 Indiana, Inc.

	  	 Carriage
 House

	 	  	 HCI

	 	    	 Non-participating
 Subsidiaries

	 	  	 Consolidating
 Adjustments

	 	  	 Consolidated
 Total

	 
	 ASSETS
	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 
	 Current assets:
	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 
	 Cash and cash equivalents
	  	 $
	 7,165
	  
	  	 $
	 —  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	    	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 7,165
	  

	 Cash restricted for resident security deposits
	  	  
	 1,929
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 1,929
	  

	 Accounts receivable, net
	  	  
	 2,446
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 3
	  
	    	  
	 266
	  
	  	  
	 —  
	  
	  	  
	 2,715
	  

	 Prepaid insurance
	  	  
	 343
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 343
	  

	 Prepaid expenses
	  	  
	 946
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 45
	  
	  	  
	 —  
	  
	  	  
	 991
	  

	 Assets held for sale
	  	  
	 9,727
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —
	  
	  	  
	 —  
	  
	  	  
	 9,727
	  

	 Cash restricted for workers compensation claims
	  	  
	 4,696
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 4,696
	  

	 Other current assets
	  	  
	 1,199
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 3
	  
	    	  
	 1,991
	  
	  	  
	 —  
	  
	  	  
	 3,193
	  

	 	  	
	
	
	  	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	
	  	
	
	

	 Total current assets
	  	  
	 28,451
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 6
	  
	    	  
	 2,302
	  
	  	  
	 —  
	  
	  	  
	 30,759
	  

	 	  	
	
	
	  	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	
	  	
	
	

	 Restricted Cash
	  	  
	 5,315
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 5,315
	  

	 Receivable from subsidiaries/parent
	  	  
	 9,745
	  
	  	  
	 6,454
	  	  
	 —  
	  
	  	  
	 2,780
	  
	    	  
	 —  
	  
	  	  
	 (18,979
	 )
	  	  
	 —  
	  

	 Property and equipment, net
	  	  
	 81,328
	  
	  	  
	 12,565
	  	  
	 3,558
	  
	  	  
	 4,176
	  
	    	  
	 76,303
	  
	  	  
	 —  
	  
	  	  
	 177,930
	  

	 Investment in subsidiaries
	  	  
	 27,632
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 (27,632
	 )
	  	  
	 —  
	  

	 Other assets, net
	  	  
	 1,635
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 401
	  
	  	  
	 —  
	  
	  	  
	 2,036
	  

	 	  	
	
	
	  	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	
	  	
	
	

	 Total assets
	  	 $
	 154,106
	  
	  	 $
	 19,019
	  	 $
	 3,558
	  
	  	 $
	 6,962
	  
	    	 $
	 79,006
	  
	  	 $
	 (46,611
	 )
	  	 $
	 216,040
	  

	 	  	
	
	
	  	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	
	  	
	
	

	 Current liabilities:
	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 
	 Accounts payable
	  	 $
	 234
	  
	  	 $
	 —  
	  	 $
	 —  
	  
	  	 $
	 1
	  
	    	 $
	 534
	  
	  	 $
	 —  
	  
	  	 $
	 769
	  

	 Accrued real estate taxes
	  	  
	 2,830
	  
	  	  
	 285
	  	  
	 234
	  
	  	  
	 71
	  
	    	  
	 1,416
	  
	  	  
	 —  
	  
	  	  
	 4,836
	  

	 Accrued interest
	  	  
	 2,147
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 27
	  
	  	  
	 —  
	  
	  	  
	 2,174
	  

	 Accrued payroll expense
	  	  
	 4,960
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 61
	  
	  	  
	 —  
	  
	  	  
	 5,021
	  

	 Other accrued expenses
	  	  
	 5,669
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 49
	  
	  	  
	 —  
	  
	  	  
	 5,718
	  

	 Tenant security deposits
	  	  
	 1,779
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 (1
	 )
	    	  
	 213
	  
	  	  
	 —  
	  
	  	  
	 1,991
	  

	 Other current liabilities
	  	  
	 976
	  
	  	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	  
	 976
	  

	 Current portion of unfavorable lease adjustment
	  	  
	 525
	  
	  	 	 	  	  
	 82
	  
	  	 	 	 	    	 	 	 	  	 	 	 	  	  
	 607
	  

	 Current portion of long-term debt and capital lease obligation, net of current
portion
	  	  
	 8,817
	  
	  	  
	 —  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 2,704
	  
	  	  
	 —  
	  
	  	  
	 11,521
	  

	 	  	
	
	
	  	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	
	  	
	
	

	 Total current liabilities
	  	  
	 27,937
	  
	  	  
	 285
	  	  
	 316
	  
	  	  
	 71
	  
	    	  
	 5,004
	  
	  	  
	 —  
	  
	  	  
	 33,613
	  

	 	  	
	
	
	  	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	
	  	
	
	

	 Other Liabilities
	  	  
	 430
	  
	  	 	 	  	  
	 33
	  
	  	 	 	 	    	  
	 —  
	  
	  	 	 	 	  	  
	 463
	  

	 Unfavorable lease adjustment
	  	  
	 2,095
	  
	  	 	 	  	  
	 347
	  
	  	 	 	 	    	  
	 66
	  
	  	 	 	 	  	  
	 2,508
	  

	 Long-term debt and capital lease obligation
	  	  
	 78,852
	  
	  	 	 	  	 	 	 	  	 	 	 	    	  
	 72,219
	  
	  	 	 	 	  	  
	 151,071
	  

	 Payable to subsidiaries/parent
	  	  
	 16,234
	  
	  	  
	 —  
	  	  
	 1,236
	  
	  	  
	 —  
	  
	    	  
	 1,509
	  
	  	  
	 (18,979
	 )
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	
	  	
	
	

	 Total liabilities
	  	  
	 125,548
	  
	  	  
	 285
	  	  
	 1,932
	  
	  	  
	 71
	  
	    	  
	 78,798
	  
	  	  
	 (18,979
	 )
	  	  
	 187,655
	  

	 	  	
	
	
	  	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	
	  	
	
	

	 Shareholder’s equity
	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 
	 Common stock
	  	  
	 65
	  
	  	  
	 16,342
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 (16,342
	 )
	  	  
	 65
	  

	 Additional paid-in capital
	  	  
	 32,907
	  
	  	  
	 —  
	  	  
	 2,548
	  
	  	  
	 7,365
	  
	    	  
	 5,667
	  
	  	  
	 (15,753
	 )
	  	  
	 32,734
	  

	 Accumulated deficit
	  	  
	 (4,414
	 )
	  	  
	 2,392
	  	  
	 (922
	 )
	  	  
	 (474
	 )
	    	  
	 (5,459
	 )
	  	  
	 4,463
	  
	  	  
	 (4,414
	 )

	 	  	
	
	
	  	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	
	  	
	
	

	 Total shareholders’ equity
	  	  
	 28,558
	  
	  	  
	 18,734
	  	  
	 1,626
	  
	  	  
	 6,891
	  
	    	  
	 208
	  
	  	  
	 (27,632
	 )
	  	  
	 28,385
	  

	 	  	
	
	
	  	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	
	  	
	
	

	 Total liability and shareholders’ equity
	  	 $
	 154,106
	  
	  	 $
	 19,019
	  	 $
	 3,558
	  
	  	 $
	 6,962
	  
	    	 $
	 79,006
	  
	  	 $
	 (46,611
	 )
	  	 $
	 216,040
	  

	 	  	
	
	
	  	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	
	  	
	
	

 

64 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 
Successor Company 
 
Consolidating Balance Sheet 
 
December 31, 2001 
 
(In
thousands) 
 

	 	  	 	  	 Wholly-Owned Subsidiaries

	  	 	 	  	 
	 	  	 ALC, Inc.

	  	 ALC
 Indiana, Inc.

	  	 Carriage
 House

	  	 HCI

	    	 Non-participating
 Subsidiaries

	  	 Consolidating
 Adjustments

	 	  	 Consolidated
 Total

	 ASSETS
	  	 	 	  	 	 	  	 	 	  	 	 	    	 	 	  	 	 	 	  	 	 
	 Current assets:
	  	 	 	  	 	 	  	 	 	  	 	 	    	 	 	  	 	 	 	  	 	 
	 Cash and cash equivalents
	  	 $
	 6,077
	  	 $
	 —  
	  	 $
	 —  
	  	 $
	 —  
	    	 $
	 —  
	  	 $
	 —  
	  
	  	 $
	 6,077

	 Cash restricted for resident security deposits
	  	  
	 2,415
	  	  
	 —  
	  	  
	 —  
	  	  
	 —  
	    	  
	 —  
	  	  
	 —  
	  
	  	  
	 2,415

	 Accounts receivable, net
	  	  
	 2,086
	  	  
	 —  
	  	  
	 —  
	  	  
	 15
	    	  
	 227
	  	  
	 —  
	  
	  	  
	 2,328

	 Prepaid insurance
	  	  
	 160
	  	  
	 —  
	  	  
	 —  
	  	  
	 —  
	    	  
	 —  
	  	  
	 —  
	  
	  	  
	 160

	 Prepaid expenses
	  	  
	 780
	  	  
	 —  
	  	  
	 —  
	  	  
	 —  
	    	  
	 43
	  	  
	 —  
	  
	  	  
	 823

	 Cash restricted for workers compensation claims
	  	  
	 2,825
	  	  
	 —  
	  	  
	 —  
	  	  
	 —  
	    	  
	 —  
	  	  
	 —  
	  
	  	  
	 2,825

	 Other current assets
	  	  
	 2,209
	  	  
	 —  
	  	  
	 —  
	  	  
	 24
	    	  
	 1,629
	  	  
	 —  
	  
	  	  
	 3,862

	 	  	
	
	  	
	
	  	
	
	  	
	
	    	
	
	  	
	
	
	  	
	

	 Total current assets
	  	  
	 16,552
	  	  
	 —  
	  	  
	 —  
	  	  
	 39
	    	  
	 1,899
	  	  
	 —  
	  
	  	  
	 18,490

	 	  	
	
	  	
	
	  	
	
	  	
	
	    	
	
	  	
	
	
	  	
	

	 Restricted Cash
	  	  
	 5,349
	  	  
	 —  
	  	  
	 —  
	  	  
	 —  
	    	  
	 —  
	  	  
	 —  
	  
	  	  
	 5,349

	 Receivable from subsidiaries/parent
	  	  
	 3,432
	  	  
	 3,553
	  	  
	 —  
	  	  
	 846
	    	  
	 —  
	  	  
	 (7,831
	 )
	  	  
	 —  

	 Property and equipment, net
	  	  
	 95,509
	  	  
	 12,917
	  	  
	 3,576
	  	  
	 6,610
	    	  
	 77,936
	  	  
	 —  
	  
	  	  
	 196,548

	 Investment in subsidiaries
	  	  
	 32,095
	  	  
	 —  
	  	  
	 —  
	  	  
	 —  
	    	  
	 —  
	  	  
	 (32,095
	 )
	  	  
	 —  

	 Other assets, net
	  	  
	 1,294
	  	  
	 217
	  	  
	 —  
	  	  
	 —  
	    	  
	 355
	  	  
	 —  
	  
	  	  
	 1,866

	 	  	
	
	  	
	
	  	
	
	  	
	
	    	
	
	  	
	
	
	  	
	

	 Total assets
	  	 $
	 154,231
	  	 $
	 16,687
	  	 $
	 3,576
	  	 $
	 7,495
	    	 $
	 80,190
	  	 $
	 (39,926
	 )
	  	 $
	 222,253

	 	  	
	
	  	
	
	  	
	
	  	
	
	    	
	
	  	
	
	
	  	
	

	 Current liabilities:
	  	 	 	  	 	 	  	 	 	  	 	 	    	 	 	  	 	 	 	  	 	 
	 Accounts payable
	  	 $
	 933
	  	 $
	 —  
	  	 $
	 —  
	  	 $
	 5
	    	 $
	 512
	  	 $
	 —  
	  
	  	 $
	 1,450

	 Accrued real estate taxes
	  	  
	 2,451
	  	  
	 315
	  	  
	 240
	  	  
	 90
	    	  
	 1,427
	  	  
	 —  
	  
	  	  
	 4,523

	 Accrued interest
	  	  
	 412
	  	  
	 30
	  	  
	 —  
	  	  
	 —  
	    	  
	 224
	  	  
	 —  
	  
	  	  
	 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, net of current
portion
	  	  
	 2,079
	  	  
	 —  
	  	  
	 —  
	  	  
	 —  
	    	  
	 543
	  	  
	 —  
	  
	  	  
	 2,622

	 	  	
	
	  	
	
	  	
	
	  	
	
	    	
	
	  	
	
	
	  	
	

	 Total current liabilities
	  	  
	 20,813
	  	  
	 345
	  	  
	 332
	  	  
	 130
	    	  
	 3,169
	  	  
	 —  
	  
	  	  
	 24,789

	 	  	
	
	  	
	
	  	
	
	  	
	
	    	
	
	  	
	
	
	  	
	

	 Other Liabilities
	  	  
	 11
	  	  
	 —  
	  	  
	 —  
	  	  
	 —  
	    	  
	 78
	  	  
	 —  
	  
	  	  
	 89

	 Unfavorable lease adjustment
	  	  
	 2,686
	  	  
	 —  
	  	  
	 429
	  	  
	 —  
	    	  
	 —  
	  	  
	 —  
	  
	  	  
	 3,115

	 Long-term debt and capital lease obligation
	  	  
	 90,859
	  	  
	 —  
	  	  
	 —  
	  	  
	 —  
	    	  
	 70,602
	  	  
	 —  
	  
	  	  
	 161,461

	 Payable to subsidiaries/parent
	  	  
	 6,890
	  	  
	 —  
	  	  
	 267
	  	  
	 —  
	    	  
	 674
	  	  
	 (7,831
	 )
	  	  
	 —  

	 	  	
	
	  	
	
	  	
	
	  	
	
	    	
	
	  	
	
	
	  	
	

	 Total liabilities
	  	  
	 121,259
	  	  
	 345
	  	  
	 1,028
	  	  
	 130
	    	  
	 74,523
	  	  
	 (7,831
	 )
	  	  
	 189,454

	 	  	
	
	  	
	
	  	
	
	  	
	
	    	
	
	  	
	
	
	  	
	

	 Shareholder’s equity
	  	 	 	  	 	 	  	 	 	  	 	 	    	 	 	  	 	 	 	  	 	 
	 Common stock
	  	  
	 65
	  	  
	 16,342
	  	  
	 —  
	  	  
	 —  
	    	  
	 —  
	  	  
	 (16,342
	 )
	  	  
	 65

	 Additional paid-in capital
	  	  
	 32,907
	  	  
	 —  
	  	  
	 2,548
	  	  
	 7,365
	    	  
	 5,667
	  	  
	 (15,753
	 )
	  	  
	 32,734

	 	  	
	
	  	
	
	  	
	
	  	
	
	    	
	
	  	
	
	
	  	
	

	 Total shareholders’ equity
	  	  
	 32,972
	  	  
	 16,342
	  	  
	 2,548
	  	  
	 7,365
	    	  
	 5,667
	  	  
	 (32,095
	 )
	  	  
	 32,799

	 	  	
	
	  	
	
	  	
	
	  	
	
	    	
	
	  	
	
	
	  	
	

	 Total liability and shareholders’ equity
	  	 $
	 154,231
	  	 $
	 16,687
	  	 $
	 3,576
	  	 $
	 7,495
	    	 $
	 80,190
	  	 $
	 (39,926
	 )
	  	 $
	 222,253

	 	  	
	
	  	
	
	  	
	
	  	
	
	    	
	
	  	
	
	
	  	
	

 

65 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 
Successor Company 
 
Consolidating Statement of Operations 
 
Year Ended December 31, 2002 
 
(In thousands) 
 
Wholly-Owned Subsidiaries 
 

	 	  	 ALC, Inc.

	 	  	 ALC
 Indiana, Inc.

	 	  	 Carriage
 House

	 	  	 HCI

	 	    	 Non-Participating
 Subsidiaries

	 	  	 Consolidated
 Total

	 
	 Revenue
	  	 $
	 131,923
	  
	  	 $
	 6,049
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	    	 $
	 8,297
	  
	  	 $
	 146,269
	  

	 Operating expenses:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 
	 Residence operating expenses
	  	  
	 89,497
	  
	  	  
	 4,235
	  
	  	  
	 227
	  
	  	  
	 —  
	  
	    	  
	 6,392
	  
	  	  
	 100,351
	  

	 Corporate general and administrative
	  	  
	 18,140
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 18,140
	  

	 Building rentals
	  	  
	 10,948
	  
	  	  
	 —  
	  
	  	  
	 875
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 11,823
	  

	 Depreciation and amortization
	  	  
	 3,661
	  
	  	  
	 400
	  
	  	  
	 131
	  
	  	  
	 —  
	  
	    	  
	 2,177
	  
	  	  
	 6,369
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Total operating expenses
	  	  
	 122,246
	  
	  	  
	 4,635
	  
	  	  
	 1,233
	  
	  	  
	 —  
	  
	    	  
	 8,569
	  
	  	  
	 136,683
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Operating income (loss)
	  	  
	 9,677
	  
	  	  
	 1,414
	  
	  	  
	 (1,233
	 )
	  	  
	 —  
	  
	    	  
	 (272
	 )
	  	  
	 9,586
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Other income (expense):
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 
	 Interest expense
	  	  
	 (7,858
	 )
	  	  
	 (880
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 (5,410
	 )
	  	  
	 (14,148
	 )

	 Interest income
	  	  
	 213
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 213
	  

	 Management fee income (expense)
	  	  
	 58
	  
	  	  
	 (302
	 )
	  	  
	 311
	  
	  	  
	 —  
	  
	    	  
	 (67
	 )
	  	  
	 —  
	  

	 Lease income (expense)
	  	  
	 (2,160
	 )
	  	  
	 2,160
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 —  
	  

	 Other income net
	  	  
	 64
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 64
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Total other income (expense), net
	  	  
	 (9,683
	 )
	  	  
	 978
	  
	  	  
	 311
	  
	  	  
	 —  
	  
	    	  
	 (5,477
	 )
	  	  
	 (13,871
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Loss before debt restructure and reorganization cost and discontinued
operations
	  	  
	 (6
	 )
	  	  
	 2,392
	  
	  	  
	 (922
	 )
	  	  
	 —  
	  
	    	  
	 (5,749
	 )
	  	  
	 (4,285
	 )

	 Debt Restructure and reorganization cost
	  	  
	 (708
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 (708
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Loss from continuing operations
	  	  
	 (714
	 )
	  	  
	 2,392
	  
	  	  
	 (922
	 )
	  	  
	 —  
	  
	    	  
	 (5,749
	 )
	  	  
	 (4,993
	 )

	 Income (loss) from discontinued operations
	  	  
	 763
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (474
	 )
	    	  
	 290
	  
	  	  
	 579
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Net income (loss)
	  	 $
	 49
	  
	  	 $
	 2,392
	  
	  	 $
	 (922
	 )
	  	 $
	 (474
	 )
	    	 $
	 (5,459
	 )
	  	 $
	 (4,414
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

 

66 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 
Predecessor Company 
 
Consolidating Statement of Operations 
 
Year Ended December 31, 2001 
 
(in thousands) 
 
Wholly-Owned Subsidiaries 
 

	 	  	 ALC, Inc.

	 	  	 ALC
 Indiana, Inc.

	 	  	 Carriage
 House

	 	  	 HCI

	 	    	 Non-participating
 Subsidiaries

	 	  	 Consolidated
 Total

	 
	 Consolidated Statements of Operations Data:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 
	 Revenue
	  	 $
	 128,908
	  
	  	 $
	 3,350
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	    	 $
	 7,513
	  
	  	 $
	 139,771
	  

	 Operating expenses:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 
	 Residence operating expenses
	  	  
	 86,484
	  
	  	  
	 2,220
	  
	  	  
	 148
	  
	  	  
	 —  
	  
	    	  
	 5,837
	  
	  	  
	 94,689
	  

	 Corporate general and administrative
	  	  
	 17,119
	  
	  	 	 	 	  	 	 	 	  	  
	 —  
	  
	    	 	 	 	  	  
	 17,119
	  

	 Building rentals
	  	  
	 11,272
	  
	  	 	 	 	  	  
	 1,013
	  
	  	  
	 —  
	  
	    	  
	 2,949
	  
	  	  
	 15,234
	  

	 Depreciation and amortization
	  	  
	 6,511
	  
	  	  
	 621
	  
	  	  
	 221
	  
	  	  
	 —  
	  
	    	  
	 1,859
	  
	  	  
	 9,212
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Total operating expenses
	  	  
	 121,386
	  
	  	  
	 2,841
	  
	  	  
	 1,382
	  
	  	  
	 —  
	  
	    	  
	 10,645
	  
	  	  
	 136,254
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Operating income (loss)
	  	  
	 7,522
	  
	  	  
	 509
	  
	  	  
	 (1,382
	 )
	  	  
	 —  
	  
	    	  
	 (3,132
	 )
	  	  
	 3,517
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Other income (expense):
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 
	 Interest expense
	  	  
	 (16,178
	 )
	  	  
	 (138
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 (3,149
	 )
	  	  
	 (19,465
	 )

	 Interest income
	  	  
	 458
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 192
	  
	  	  
	 650
	  

	 Management fee income (expense)
	  	  
	 (209
	 )
	  	  
	 (169
	 )
	  	  
	 282
	  
	  	  
	 —  
	  
	    	  
	 96
	  
	  	  
	 —  
	  

	 Lease income (expense)
	  	  
	 (1,080
	 )
	  	  
	 1,080
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 —  
	  

	 Other income net
	  	  
	 30
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 30
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Total other income (expense), net
	  	  
	 (16,979
	 )
	  	  
	 773
	  
	  	  
	 282
	  
	  	  
	 —  
	  
	    	  
	 (2,861
	 )
	  	  
	 (18,785
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Loss before debt restructure and reorganization cost, fresh-start adjustments,
discontinued operations and extraordinary items
	  	  
	 (9,457
	 )
	  	  
	 1,282
	  
	  	  
	 (1,100
	 )
	  	  
	 —  
	  
	    	  
	 (5,993
	 )
	  	  
	 (15,268
	 )

	 Debt Restructure and reorganization cost
	  	  
	 (8,581
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 (8,581
	 )

	 Fresh Start Adjustments
	  	  
	 (97,202
	 )
	  	  
	 (7,460
	 )
	  	  
	 (3,176
	 )
	  	  
	 (8,864
	 )
	    	  
	 (2,618
	 )
	  	  
	 (119,320
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Loss from continuing operations
	  	  
	 (115,240
	 )
	  	  
	 (6,178
	 )
	  	  
	 (4,276
	 )
	  	  
	 (8,864
	 )
	    	  
	 (8,611
	 )
	  	  
	 (143,169
	 )

	 Income (loss) from discontinued operations
	  	  
	 320
	  
	  	  
	 (1
	 )
	  	  
	 —  
	  
	  	  
	 (332
	 )
	    	  
	 (226
	 )
	  	  
	 (237
	 )

	 Income tax (expense) benefit
	  	  
	 47
	  
	  	  
	 (47
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 —  
	  

	 Loss before extraordinary item
	  	  
	 (114,873
	 )
	  	  
	 (6,226
	 )
	  	  
	 (4,276
	 )
	  	  
	 (9,196
	 )
	    	  
	 (8,837
	 )
	  	  
	 (143,406
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Extraordinary item —Gain on reorganization
	  	  
	 79,520
	  
	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	  
	 79,520
	  

	 Net income (loss)
	  	 $
	 (35,353
	 )
	  	 $
	 (6,226
	 )
	  	 $
	 (4,276
	 )
	  	 $
	 (9,196
	 )
	    	 $
	 (8,837
	 )
	  	 $
	 (63,886
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

 

67 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 
Predecessor Company 
 
Consolidating Statement of Operations 
 
Year Ended December 31, 2000 
 
(In thousands) 
 

	 	  	 Wholly-Owned Subsidiaries

	 
	 	  	 ALC, Inc.

	 	  	 ALC
 Indiana, Inc.

	 	  	 Carriage
 House

	 	  	 HCI

	 	    	 Non-Participating
 Subsidiaries

	 	  	 Consolidated
 Total

	 
	 Consolidated Statements of Operations Data:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 
	 Revenue
	  	 $
	 98,347
	  
	  	 $
	 6,126
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	    	 $
	 25,845
	  
	  	 $
	 130,318
	  

	 Operating expenses:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 
	 Residence operating expenses
	  	  
	 65,586
	  
	  	  
	 4,156
	  
	  	  
	 288
	  
	  	  
	 —  
	  
	    	  
	 16,786
	  
	  	  
	 87,086
	  

	 Corporate general and administrative
	  	  
	 18,365
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 18,365
	  

	 Building rentals
	  	  
	 11,069
	  
	  	  
	 —  
	  
	  	  
	 988
	  
	  	  
	 —  
	  
	    	  
	 3,180
	  
	  	  
	 15,237
	  

	 Depreciation and amortization
	  	  
	 5,720
	  
	  	  
	 620
	  
	  	  
	 216
	  
	  	  
	 —  
	  
	    	  
	 2,241
	  
	  	  
	 8,797
	  

	 Class action litigation settlement
	  	  
	 10,020
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 10,020
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Total operating expenses
	  	  
	 111,030
	  
	  	  
	 4,776
	  
	  	  
	 1,492
	  
	  	  
	 —  
	  
	    	  
	 22,207
	  
	  	  
	 139,505
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Operating income (loss)
	  	  
	 (12,683
	 )
	  	  
	 1,350
	  
	  	  
	 (1,492
	 )
	  	  
	 —  
	  
	    	  
	 3,638
	  
	  	  
	 (9,187
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Other income (expense):
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 
	 Interest expense
	  	  
	 (13,592
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 (2,478
	 )
	  	  
	 (16,070
	 )

	 Interest income
	  	  
	 786
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 786
	  

	 Loss on sale of marketable securities
	  	  
	 (368
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 (368
	 )

	 Management fee income (expense)
	  	  
	 1,315
	  
	  	  
	 (297
	 )
	  	  
	 256
	  
	  	  
	 —  
	  
	    	  
	 (1,274
	 )
	  	  
	 —  
	  

	 Other income net
	  	  
	 55
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 55
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Total other income (expense), net
	  	  
	 (11,804
	 )
	  	  
	 (297
	 )
	  	  
	 256
	  
	  	  
	 —  
	  
	    	  
	 (3,752
	 )
	  	  
	 (15,597
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Loss from continuing operations
	  	  
	 (24,487
	 )
	  	  
	 1,053
	  
	  	  
	 (1,236
	 )
	  	  
	 —  
	  
	    	  
	 (114
	 )
	  	  
	 (24,784
	 )

	 Income (loss) from discontinued operations
	  	  
	 (619
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (383
	 )
	    	  
	 —  
	  
	  	  
	 (1,002
	 )

	 Income tax (expense) benefit
	  	  
	 358
	  
	  	  
	 (358
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

	 Net income (loss)
	  	 $
	 (24,748
	 )
	  	 $
	 695
	  
	  	 $
	 (1,236
	 )
	  	 $
	 (383
	 )
	    	 $
	 (114
	 )
	  	 $
	 (25,786
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	
	  	
	
	

 

68 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 
Successor Company 
 
Consolidating Statement of Cash Flows 
 
Year Ended December 31, 2002 
 

	 	  	 Wholly-Owned Subsidiaries

	 
	 	  	 ALC, Inc.

	 	  	 ALC
 Indiana, Inc.

	 	  	 Carriage
 House

	 	  	 HCI

	 	  	 Non-
 Participating
 Subsidiaries

	 	  	 Consolidated
 Total

	 
	 Operating Activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
	 Net loss
	  	 $
	 49
	  
	  	 $
	 2,392
	  
	  	 $
	 (922
	 )
	  	 $
	 (474
	 )
	  	 $
	 (5,459
	 )
	  	 $
	 (4,414
	 )

	 Adjustment to reconcile net loss to net cash provided by (used in) operating
activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
	 Depreciation and amortization
	  	  
	 3,884
	  
	  	  
	 400
	  
	  	  
	 131
	  
	  	  
	 169
	  
	  	  
	 2,177
	  
	  	  
	 6,761
	  

	 Provision for doubtful accounts
	  	  
	 321
	  
	  	  
	 7
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 12
	  
	  	  
	 340
	  

	 Amortization of deferred financing fees
	  	  
	 94
	  
	  	  
	 12
	  
	  	  
	 —  
	  
	  	  
	 472
	  
	  	  
	 —  
	  
	  	  
	 106
	  

	 Loss (gain) on sale of assets
	  	  
	 466
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (210
	 )
	  	  
	 728
	  

	 Amortization of fair value adjustments to building rentals
	  	  
	 (577
	 )
	  	  
	 —  
	  
	  	  
	 (92
	 )
	  	  
	 —  
	  
	  	  
	 (12
	 )
	  	  
	 (681
	 )

	 PIK interest
	  	  
	 1,244
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 1,244
	  

	 Amortization of fair value adjustment of debt
	  	  
	 427
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 427
	  

	 Amortization of note discount
	  	  
	 451
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 451
	  

	 Straight-line adjustment to building rental
	  	  
	 341
	  
	  	  
	 —  
	  
	  	  
	 33
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 374
	  

	 Changes in assets and liabilities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
	 Receivable (payable) from subsidiaries/parent
	  	  
	 3,027
	  
	  	  
	 (2,919
	 )
	  	  
	 978
	  
	  	  
	 (1,934
	 )
	  	  
	 848
	  
	  	  
	 —  
	  

	 Accounts receivable
	  	  
	 (700
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 12
	  
	  	  
	 (39
	 )
	  	  
	 (727
	 )

	 Prepaid expenses
	  	  
	 (439
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 88
	  
	  	  
	 (351
	 )

	 Other current assets
	  	  
	 704
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 21
	  
	  	  
	 (362
	 )
	  	  
	 363
	  

	 Other assets
	  	  
	 (1,170
	 )
	  	  
	 217
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 756
	  
	  	  
	 (197
	 )

	 Accounts payable
	  	  
	 (699
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (4
	 )
	  	  
	 22
	  
	  	  
	 (681
	 )

	 Accrued expenses
	  	  
	 1,304
	  
	  	  
	 (60
	 )
	  	  
	 (6
	 )
	  	  
	 (55
	 )
	  	  
	 (347
	 )
	  	  
	 836
	  

	 Other current liabilities
	  	  
	 (156
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (156
	 )

	 Other liabilities
	  	  
	 88
	  
	  	  
	 —  
	  
	  	  
	 (10
	 )
	  	  
	 —  
	  
	  	  
	 (78
	 )
	  	  
	 —  
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Net cash provided by (used in) operating activities
	  	  
	 8,659
	  
	  	  
	 49
	  
	  	  
	 112
	  
	  	  
	 (1,793
	 )
	  	  
	 (2,604
	 )
	  	  
	 4,423
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Investing Activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
	 Increase in restricted cash
	  	  
	 (1,522
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (1,522
	 )

	 Proceeds from sale of property and equipment
	  	  
	 4,751
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 1,825
	  
	  	  
	 —  
	  
	  	  
	 4,751
	  

	 Purchases of property and equipment
	  	  
	 (1,524
	 )
	  	  
	 (49
	 )
	  	  
	 (112
	 )
	  	  
	 (32
	 )
	  	  
	 (904
	 )
	  	  
	 (2,621
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Net cash used in investing activities
	  	  
	 (120
	 )
	  	  
	 (49
	 )
	  	  
	 (112
	 )
	  	  
	 1,793
	  
	  	  
	 (904
	 )
	  	  
	 608
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Financing Activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
	 Proceeds from long-term debt
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 3,508
	  
	  	  
	 3,508
	  

	 Payments on long-term debt and capital lease obligation
	  	  
	 (7,372
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (7,372
	 )

	 Debt issuance costs of offerings and long-term debt
	  	  
	 (79
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (79
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Net cash provided by used in financing activities
	  	  
	 (7,451
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 3,508
	  
	  	  
	 (3,943
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Net decrease in cash and cash equivalents
	  	  
	 1,088
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 1,088
	  

	 Cash and cash equivalents, beginning of year
	  	  
	 6,077
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 6,077
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

	 Cash and cash equivalents, end of year
	  	 $
	 7,165
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 7,165
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	

 

69 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 
Predecessor Company 
 
Consolidating Statement of Cash Flows 
 
Year Ended December 31, 2001 
 

	 	  	 	 	  	 Wholly-Owned Subsidiaries

	 	    	 	  	 	 
	 	  	 ALC, Inc.

	 	  	 ALC
 Indiana, Inc.

	 	  	 Carriage
 House

	 	  	 HCI

	 	  	 Non-
 Participating
 Subsidiaries

	 	    	 Consolidating
 Adjustments

	  	 Consolidated
 Total

	 
	 Operating Activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	  	 	 	 
	 Net loss
	  	 $
	 (35,351
	 )
	  	 $
	 (6,226
	 )
	  	 $
	 (4,276
	 )
	  	 $
	 (9,196
	 )
	  	 $
	 (8,837
	 )
	    	 $
	 —  
	  	 $
	 (63,886
	 )

	 Adjustment to reconcile net loss to net cash provided by (used in) operating
activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	  	 	 	 
	 Depreciation and amortization
	  	  
	 7,018
	  
	  	  
	 621
	  
	  	  
	 221
	  
	  	  
	 455
	  
	  	  
	 2,034
	  
	    	  
	 —  
	  	  
	 10,349
	  

	 Income tax expense (benefit)
	  	  
	 (47
	 )
	  	  
	 47
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 —  
	  

	 Provision for doubtful accounts
	  	  
	 (61
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (61
	 )

	 Amortization of deferred financing fees
	  	  
	 3,708
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 3,708
	  

	 Extraordinary gain on reorganization
	  	  
	 (79,520
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (79,520
	 )

	 Fresh start adjustments
	  	  
	 97,202
	  
	  	  
	 7,460
	  
	  	  
	 3,176
	  
	  	  
	 8,864
	  
	  	  
	 2,618
	  
	    	  
	 —  
	  	  
	 119,320
	  

	 Loss (gain) on sale of assets
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 88
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 88
	  

	 Changes in assets and liabilities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	  	 	 	 
	 Receivable (payable) from subsidiaries/parent
	  	  
	 (2,770
	 )
	  	  
	 (1,753
	 )
	  	  
	 873
	  
	  	  
	 (15
	 )
	  	  
	 3,665
	  
	    	  
	 —  
	  	  
	 —  
	  

	 Accounts receivable
	  	  
	 16
	  
	  	  
	 4
	  
	  	  
	 —  
	  
	  	  
	 (12
	 )
	  	  
	 173
	  
	    	  
	 —  
	  	  
	 181
	  

	 Prepaid expenses
	  	  
	 1,790
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 1
	  
	  	  
	 24
	  
	    	  
	 —  
	  	  
	 1,815
	  

	 Other current assets
	  	  
	 1,841
	  
	  	  
	 60
	  
	  	  
	 —  
	  
	  	  
	 (5
	 )
	  	  
	 (644
	 )
	    	  
	 —  
	  	  
	 1,252
	  

	 Other assets
	  	  
	 431
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 2,762
	  
	    	  
	 —  
	  	  
	 3,193
	  

	 Accounts payable
	  	  
	 (1,685
	 )
	  	  
	 (28
	 )
	  	  
	 —  
	  
	  	  
	 5
	  
	  	  
	 450
	  
	    	  
	 —  
	  	  
	 (1,258
	 )

	 Accrued expenses
	  	  
	 6,100
	  
	  	  
	 (26
	 )
	  	  
	 (82
	 )
	  	  
	 (44
	 )
	  	  
	 (102
	 )
	    	  
	 —  
	  	  
	 5,846
	  

	 Other current liabilities
	  	  
	 (7,782
	 )
	  	  
	 (159
	 )
	  	  
	 —  
	  
	  	  
	 (1
	 )
	  	  
	 (223
	 )
	    	  
	 —  
	  	  
	 (8,165
	 )

	 Other liabilities
	  	  
	 1,331
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (1,920
	 )
	    	  
	 —  
	  	  
	 (589
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Net cash provided by (used in) operating activities
	  	  
	 (7,779
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 52
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (7,727
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Investing Activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	  	 	 	 
	 Increase in restricted cash
	  	  
	 (4,123
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (4,123
	 )

	 Purchases of property and equipment
	  	  
	 (2,042
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (52
	 )
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (2,094
	 )

	 Acquisition of properties
	  	  
	 (23,500
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (23,500
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Net cash used in investing activities
	  	  
	 (29,665
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (52
	 )
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (29,717
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Financing Activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	  	 	 	 
	 Payments on bridge loan
	  	  
	 (4,000
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (4,000
	 )

	 Proceeds from long-term debt
	  	  
	 49,924
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 49,924
	  

	 Proceeds from Debtor in Possession facility
	  	  
	 1,000
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 1,000
	  

	 Payments on long-term debt and capital lease obligation
	  	  
	 (4,692
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (4,692
	 )

	 Debt issuance costs of offerings and long-term debt
	  	  
	 (6,155
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (6,155
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Net cash provided by used in financing activities
	  	  
	 36,077
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 36,077
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Net decrease in cash and cash equivalents
	  	  
	 (1,367
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (1,367
	 )

	 Cash and cash equivalents, beginning of year
	  	  
	 7,444
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 7,444
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Cash and cash equivalents, end of year
	  	 $
	 6,077
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	    	 $
	 —  
	  	 $
	 6,077
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

 

70 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 
Predecessor Company 
 
Consolidating Statement of Cash Flows 
 
Year Ended December 31, 2000 
 

	 	  	 	 	  	 Wholly-Owned Subsidiaries

	 	    	 	  	 	 
	 	  	 ALC, Inc.

	 	  	 ALC
 Indiana, Inc.

	 	  	 Carriage
 House

	 	  	 HCI

	 	  	 Non-
 Participating
 Subsidiaries

	 	    	 Consolidating
 Adjustments

	  	 Consolidated
 Total

	 
	 Operating Activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	  	 	 	 
	 Net income (loss)
	  	 $
	 (24,748
	 )
	  	 $
	 695
	  
	  	 $
	 (1,236
	 )
	  	 $
	 (383
	 )
	  	 $
	 (114
	 )
	    	 $
	 —  
	  	 $
	 (25,786
	 )

	 Adjustment to reconcile net income (loss) to net cash provided by (used in) operating
activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	  	 	 	 
	 Depreciation and amortization
	  	  
	 6,403
	  
	  	  
	 620
	  
	  	  
	 216
	  
	  	  
	 443
	  
	  	  
	 2,241
	  
	    	  
	 —  
	  	  
	 9,923
	  

	 Deferred tax liability
	  	  
	 (39
	 )
	  	  
	 39
	  
	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	  	 	 	 
	 Provision for doubtful accounts
	  	  
	 1,932
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 1,932
	  

	 Amortization of deferred financing fees
	  	  
	 1,613
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 1,613
	  

	 Loss on the sale of marketable securities
	  	  
	 368
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 368
	  

	 Gain on sale of assets
	  	  
	 (13
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 (13
	 )

	 Compensation expense on issuance of consultant options
	  	  
	 8
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 8
	  

	 Changes in assets and liabilities:
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	 	 	 
	 Receivable (payable) from subsidiaries/parent
	  	  
	 2,232
	  
	  	  
	 (1,624
	 )
	  	  
	 998
	  
	  	  
	 (96
	 )
	  	  
	 (1,510
	 )
	    	  
	 —  
	  	  
	 —  
	  

	 Accounts receivable
	  	  
	 (568
	 )
	  	  
	 58
	  
	  	  
	 —  
	  
	  	  
	 (1
	 )
	  	  
	 200
	  
	    	  
	 —  
	  	  
	 (311
	 )

	 Prepaid expenses
	  	  
	 (1,804
	 )
	  	  
	 2
	  
	  	  
	 —  
	  
	  	  
	 (1
	 )
	  	  
	 (56
	 )
	    	  
	 —  
	  	  
	 (1,859
	 )

	 Other current assets
	  	  
	 819
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (4
	 )
	  	  
	 (125
	 )
	    	  
	 —  
	  	  
	 690
	  

	 Other assets
	  	  
	 (159
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 142
	  
	    	  
	 —  
	  	  
	 (17
	 )

	 Accounts payable
	  	  
	 1,447
	  
	  	  
	 3
	  
	  	  
	 —  
	  
	  	  
	 (2
	 )
	  	  
	 (58
	 )
	    	  
	 —  
	  	  
	 1,390
	  

	 Accrued expenses
	  	  
	 3,423
	  
	  	  
	 99
	  
	  	  
	 48
	  
	  	  
	 89
	  
	  	  
	 150
	  
	    	  
	 —  
	  	  
	 3,809
	  

	 Other current liabilities
	  	  
	 8,792
	  
	  	  
	 49
	  
	  	  
	 —  
	  
	  	  
	 2
	  
	  	  
	 11
	  
	    	  
	 —  
	  	  
	 8,854
	  

	 Other liabilities
	  	  
	 241
	  
	  	  
	 —  
	  
	  	  
	 (6
	 )
	  	  
	 —  
	  
	  	  
	 (136
	 )
	    	  
	 —  
	  	  
	 99
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Net cash provided by (used in) operating activities
	  	  
	 (53
	 )
	  	  
	 (59
	 )
	  	  
	 20
	  
	  	  
	 47
	  
	  	  
	 745
	  
	    	  
	 —  
	  	  
	 700
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Investing Activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	  	 	 	 
	 Sale of marketable securities, available for sale
	  	  
	 1,632
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 1,632
	  

	 Increase in restricted cash
	  	  
	 1,089
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 1,089
	  

	 Proceeds from sale of property and equipment
	  	  
	 (45
	 )
	  	  
	 59
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 14
	  

	 Purchases of property and equipment
	  	  
	 (3,174
	 )
	  	  
	 —  
	  
	  	  
	 (20
	 )
	  	  
	 (47
	 )
	  	  
	 (302
	 )
	    	  
	 —  
	  	  
	 (3,543
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Net cash provided by (used in) investing activities
	  	  
	 (498
	 )
	  	  
	 59
	  
	  	  
	 (20
	 )
	  	  
	 (47
	 )
	  	  
	 (302
	 )
	    	  
	 —  
	  	  
	 (808
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Financing Activities:
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	  	 	 	 
	 Proceeds from bridge loan
	  	  
	 4,000
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 4,000
	  

	 Payments on long-term debt and capital lease obligation
	  	  
	 (1,166
	 )
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (443
	 )
	    	  
	 —  
	  	  
	 (1,609
	 )

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Net cash provided by (used in) financing activities
	  	  
	 2,834
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 (443
	 )
	    	  
	 —  
	  	  
	 2,391
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Net decrease in cash and cash equivalents
	  	  
	 2,283
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 2,283
	  

	 Cash and cash equivalents, beginning of year
	  	  
	 5,161
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	  	  
	 —  
	  
	    	  
	 —  
	  	  
	 5,161
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

	 Cash and cash equivalents, end of year
	  	 $
	 7,444
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	  	 $
	 —  
	  
	    	 $
	 —  
	  	 $
	 7,444
	  

	 	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	  	
	
	
	    	
	
	  	
	
	

 

71 

ASSISTED LIVING CONCEPTS, INC. 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 
Item
9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
 
None. 
 
PART III 
 
Item 10.    Directors and Executive Officers of the Registrant 
 
Information required by this item is included under the captions Executive Officers, Section 16(a) Beneficial Ownership Reporting
Compliance and Nominees for Directors, in our Proxy Statement for our Annual Meeting of Shareholders and is incorporated herein by reference. 
 
Item 11.    Executive Compensation 
 
Information required by this item is included under the caption Executive Compensation in our Proxy Statement for our Annual
Meeting of Shareholders and is incorporated herein by reference. 
 
Item 12.    Security Ownership of Certain Beneficial Owners and Management and related Stockholder Matters 
 
Information required by this item is included under the caption Security Ownership of Certain Beneficial Owners and Management in
our Proxy Statement for our Annual Meeting of Shareholders and is incorporated herein by reference. 
 
Item 13.    Certain Relationships and Related Transactions 
 
Information required by this item is included under the caption Certain Relationships and Related Transactions in our Proxy
Statement for our Annual Meeting of Shareholders and is incorporated herein by reference. 
 
Item 14.    Controls and Procedures 
 
Evaluation of Disclosure Controls and Procedures 
 
Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (Exchange Act), as of a date within ninety days before the filing date of this annual report. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective for the purposes set forth in the definition of “disclosure controls and procedures” in Exchange Act Rule
15d-14(c). 
 
Changes in Internal Controls

 
Subsequent to the date of our most recent
evaluation, there were no significant changes in our internal controls or in other factors that could significantly affect internal controls and procedures including any corrective actions with regard to significant deficiencies and material
weaknesses. 
 

72 

PART IV 
 
Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K 
 
Financial Statements and Schedules 
 
(a) 1 and 2. Consolidated Financial Statements and
Financial Statement Schedules. 
 
The
Consolidated Financial Statements, together with the financial statement schedules listed in the accompanying index to financial statements and financial statement schedules are filed as a part of this Annual Report. 
 
3. Exhibits 
 
Those exhibits required to be filed by Item 601 of Regulation
S-K are listed on the accompanying index immediately following the signature page and are filed as part of this Annual Report. 
 
(b) Reports on Form 8-K 
 
No reports on Form 8-K were filed during the quarter ended December 31, 2002. 
 

73 

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

 
March 28, 2003 
 

	
	 By:
	 	 /s/    STEVEN
VICK

	 Name:
	 	 Steven Vick

	 Title:
	 	 Chief Executive Officer

	 	 	 President and Director

 
March 28, 2003 
 

	 By:
	 	 /s/    MATTHEW
PATRICK

	 Name:
	 	 Matthew Patrick

	 Title:
	 	 Vice President, Chief Financial

	 	 	 Officer, Secretary, Treasurer and
Director

 
March 28, 2003 
 

	 By:
	 	 /s/    STEPHAN M.
KEARNEY

	 Name:
	 	 Stephan M. Kearney

	 Title:
	 	 Vice President, Controller

	 	 	 and Chief Accounting Officer

 

74 

EXHIBIT 24.1 
 
POWER OF ATTORNEY 
 
KNOW ALL PERSONS BY THESE PRESENTS: 
 
That the undersigned officers and directors of Assisted Living
Concepts, Inc. do hereby constitute and appoint Steven L. Vick or Matthew Patrick, and each of them, the lawful attorney and agent or attorneys and agents with power and authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, determine may be necessary or advisable or required to enable to comply with the Securities and Exchange Act of 1934, as amended, and any rules or regulations or requirements of the
Securities and Exchange Commission in connection with this Annual Report on Form 10-K. Without limiting the generality of the foregoing power and authority, the powers granted include the power and authority to sign the names of the undersigned
officers and directors in the capacities indicated below to this Annual Report on Form 10-K or amendment or supplements thereto, and each of the undersigned hereby ratifies and confirms all that said attorneys and agent, or either of them, shall do
or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts. 
 
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the dated indicated opposite his or her name.

 
Pursuant to the requirements of the
Securities and Exchange Act of 1934, the Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. 
 

	 Signature

	  	 Title

	 	 Date

	
	 /s/    STEVEN L.
VICK        

 Steven
L. Vick
	  	 Director, President and Chief Executive Officer
	 	 March 28, 2003

	
	 /s/    MATTHEW
PATRICK        

 Matthew Patrick
	  	 Director, Senior Vice President, Chief Financial Officer, Secretary and
Treasurer
	 	 March 28, 2003

	
	 /s/    STEPHAN M.
KEARNEY        

 Stephan M. Kearney
	  	 Vice President, Controller and Chief Accounting Officer
	 	 March 28, 2003

	
	 /s/    W. ANDREW
ADAMS        

 W.
Andrew Adams
	  	 Director and Chairman of the Board
	 	 March 28, 2003

	
	 /s/    ANDRE C.
DIMITRIADIS        

 Andre C. Dimitriadis
	  	 Director
	 	 March 28, 2003

	
	 /s/    MARK
HOLLIDAY        

 Mark Holliday
	  	 Director
	 	 March 28, 2003

	
	 /s/    RICHARD C.
LADD        

 Richard
C. Ladd
	  	 Director
	 	 March 28, 2003

	
	 /s/    LEONARD
TANNENBAUM        

 Leonard Tannenbaum
	  	 Director
	 	 March 28, 2003

 

75 

CERTIFICATION PURSUANT TO 
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 
 
I, Steven Vick, certify that: 
 

	 	1.	 	I have reviewed this annual report on Form 10-K of Assisted Living Concepts, Inc.; 

 

	 	2.	 	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 

 

	 	3.	 	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 

 

	 	4.	 	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have: 

 

	 	a)	 	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared; 

 

	 	b)	 	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the “Evaluation Date”); and 

 

	 	c)	 	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

	 	5.	 	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee
of registrant’s board of directors (or persons performing the equivalent function): 

 

	 	a)	 	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize
and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and 

 

	 	b)	 	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

	 	6.	 	The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 

 
Date:  March 28, 2003

	 By:
	 	 /s/    STEVEN
VICK        

	 	 	 Steven Vick

	 	 	 President and Chief Executive Officer

 

76 

CERTIFICATION PURSUANT TO 
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 
 
I, Matthew G. Patrick, certify that: 
 

	1.	 	I have reviewed this annual report on Form 10-K of Assisted Living Concepts, Inc.; 

 

	2.	 	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 

 

	3.	 	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 

 

	4.	 	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have: 

 

	 	a)	 	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared; 

 

	 	b)	 	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the “Evaluation Date”); and 

 

	 	c)	 	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

	5.	 	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee
of registrant’s board of directors (or persons performing the equivalent function): 

 

	 	a)	 	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize
and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and 

 

	 	b)	 	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

	6.	 	The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 

 
Date:  March 28, 2003

	 By:
	 	 /s/    MATTHEW G.
PATRICK

	 	 	 MATTHEW G. PATRICK

	 	 	 Chief Financial Officer, Senior Vice President,

	 	 	 Secretary and Treasurer

 
 

77 

SCHEDULE II 
 
ASSISTED LIVING CONCEPTS, INC. 
 
VALUATION AND QUALIFYING ACCOUNTS 
Years Ended December 31, 2000, 2001, AND 2002 
(In thousands) 
 

	 Column A

	  	 Column B

	  	 Column C

	 	    	 Column D

	  	 Column E

	 Description

	  	 Balance at
 Beginning
 of Year

	  	 Additions

	 	    	 Deductions(1)

	  	 Balance at
 End
 of Year(2)

	 Year ended December 31, 2000:
	  	 	 	  	 	 	 	    	 	 	  	 	 
	 Valuation accounts deducted from assets:
	  	 	 	  	 	 	 	    	 	 	  	 	 
	 Allowance for doubtful receivables
	  	 $
	 1,062
	  	 $
	 1,932
	  
	    	 $
	 1,595
	  	 $
	 1,399

	 	  	
	
	  	
	
	
	    	
	
	  	
	

	 Year ended December 31, 2001:
	  	 	 	  	 	 	 	    	 	 	  	 	 
	 Valuation accounts deducted from assets:
	  	 	 	  	 	 	 	    	 	 	  	 	 
	 Allowance for doubtful receivables
	  	 $
	 1,399
	  	 $
	 (61
	 )
	    	 $
	 1,338
	  	 $
	 —  

	 	  	
	
	  	
	
	
	    	
	
	  	
	

	 Year ended December 31, 2002:
	  	 	 	  	 	 	 	    	 	 	  	 	 
	 Valuation accounts deducted from assets:
	  	 	 	  	 	 	 	    	 	 	  	 	 
	 Allowance for doubtful receivables
	  	 $
	 —  
	  	 $
	 340
	  
	    	 $
	 110
	  	 $
	 230

	(1)	 	Represents amounts written off. For the year ended December 31, 2001, the deductions also includes $193,000 of fresh start adjustments. 

	(2)	 	Balance at December 31, 2001 and 2002 is that of the Successor Company. 

 

78 

ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES 
 
INDEX TO EXHIBITS 
 

	 Exhibit
 No.

	  	 Description

	
	 2.1  
	  	 First Amended Joint Plan of Reorganization of the Debtors dated October 30, 2001
(Incorporated by reference to the same titled exhibit to the Company’s Report on Form 8-K dated October 30, 2001).

	
	 3.1  
	  	 Articles of Incorporation of the Company (Incorporated by reference to the same
titled exhibit to the Pursuant to NRS 78.207, filed on November 13, 2001 as Exhibit T3A-1 to the Company’s Application for Qualification of Indentures on Form T-3).

	
	 3.2  
	  	 Form of Amended and Restated Articles of Incorporation of the Company effective as of
January 1, 2002 Qualification of Indentures on Form T-3, filed on November 13, 2001). (Incorporated by reference to the same titled exhibit to the Company’s Application for Qualification of Indentures on Form T-3, filed on November 13,
2001).

	
	 3.3  
	  	 Certificate of Incorporation of Carriage House Assisted Living, Inc. (Incorporated by
reference to the same titled exhibit to the Company’s Application for Qualification of Indentures on Form T-3, filed on November 13, 2001).

	
	 3.4  
	  	 Form of Restated Certificate of Incorporation of Carriage House Assisted Living, Inc.
effective as January 1, 2002(Incorporated by reference to the same titled exhibit to the Company’s Application For Qualification of Indentures on Form T-3, filed on November 13, 2001).

	
	 3.5  
	  	 Certificate of Incorporation of Home and Community Care, Inc. (Incorporated by
reference to the same titled exhibit to the Company’s Application for Qualification of Indentures on Form T-3, filed on November 13, 2001).

	
	 3.6  
	  	 Articles of Incorporation of ALC Indiana, Inc. (Incorporated by reference to the same
titled exhibit to the Company’s Application for Qualification of Indentures on Form T-3, filed on November 13, 2001).

	
	 3.7  
	  	 Bylaws of the Company (Incorporated by reference to the same titled exhibit to the
Company’s Registration Statement on Form S-1, File No. 33-83938).

	
	 3.8  
	  	 Bylaws of Carriage House (Incorporated by reference to the same titled exhibit to the
Company’s Application for Qualification of Indentures on Form T-3, filed on November 13, 2001).

	
	 3.9  
	  	 Bylaws of Home and Community Care, Inc. (Incorporated by reference to the same titled
exhibit to the Company’s Application for Qualification of Indentures on Form T-3, filed on November 13, 2001).

	
	 3.10
	  	 Bylaws of ALC Indiana, Inc. (Incorporated by reference to the same titled exhibit to
the Company’s Application for Qualification of Indentures on Form T-3, filed on November 13, 2001).

	
	 4.1  
	  	 Form of Indenture, dated as of January 1, 2002, among the Company, Carriage House
Assisted Living, Inc., Home and Community Care, Inc., ALC Indiana, Inc. and BNY Midwest Trust Company, as Trustee, of the Senior Secured Notes of the Company, due 2009 (Incorporated by reference to Exhibit T3C to the Company’s Senior Secured
Notes Amended Application for Qualification of Indentures on Form T-3/ A, filed on December 19, 2001).

	
	 4.2  
	  	 Form of Indenture, dated as of January 1, 2002, among the Company, Carriage House
Assisted Living, Inc., Home and Community Care, Inc., ALC Indiana, Inc. and BNY Midwest Trust Company, as Trustee, of the Junior Secured Notes of the Company, due 2012 (Incorporated by reference to Exhibit T3C to the Company’s Junior Secured
Notes Amended Application for Qualification of Indentures on Form T-3/ A, filed on December 19, 2001).

	
	 4.3  
	  	 Registration Rights Agreement, dated as of January 1, 2002, by and among the Company,
LTC Healthcare, Inc., LTC Properties, Inc., National Health Investors, Inc., and Cerberus Capital Management, L.P. (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10-K for the fiscal year ended December 31,
2001.)

	
	 4.4  
	  	 2002 Incentive Award Plan of the Company (Incorporated by reference to the same
titled exhibit to the Company’s Report on Form 10-K for the fiscal year ended December 31, 2001.)

 

79 

	 Exhibit
 No.

	  	 Description

	
	 10.1  
	  	 Reimbursement Agreement, dated as of November 1, 1996, between the Company and U.S.
Bank of Washington, National Association (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10-K for the fiscal year ended December 31, 1998).

	
	 10.2  
	  	 Reimbursement Agreement, dated as of July 1, 1997, between the Company and United
States National Bank of Oregon (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10-K for the fiscal year ended December 31, 1998).

	
	 10.3  
	  	 Reimbursement Agreement, dated as of July 1, 1998, between the Company and U.S. Bank
National Association (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10-K for the fiscal year ended December 31,1998).

	
	 10.4  
	  	 Deed of Trust and Security Agreement, dated March 31, 1998, among DMG Texas ALC,
Partners, L.P., American Title Company of Houston and Transatlantic Capital Company (Incorporated by reference to Report on Form 10-K for the fiscal year ended December 31, the same titled exhibit to the Company’s 1998).

	
	 10.5  
	  	 Mortgage and Security Agreement, dated November 12, 1998, between DMG New Jersey ALC,
Inc. and Transatlantic Capital Company (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10-K for the fiscal year ended December 31, 1998).

	
	 10.6  
	  	 Deed of Trust and Security Agreement, dated July 10, 1998, among DMG Oregon ALC,
Inc., Chicago Title Company and Transatlantic Capital Company (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10-K for the fiscal year ended December 31, 1998).

	
	 10.7  
	  	 Amendment and Modification of Reimbursement Agreements, dated as of August 18, 1999,
by and between the Company and U.S. Bank National Association (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10-K for the fiscal year ended December 31, 1998).

	
	 10.8  
	  	 Loan Agreement, dated as of February 20, 2001, among Heller Healthcare Finance, Inc.,
as Agent and a Lender, the financial institutions who are or become parties thereto as Lenders, ALC Ohio, Inc. and ALC Pennsylvania, Inc., ALC Iowa, Inc., ALC Nebraska, Inc. and ALC New Jersey, Inc., as Borrowers, and the parties who are or become
Borrowers thereunder (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 8-K, dated May 9, 2001).

	
	 10.9  
	  	 Guaranty, dated as of February 20, 2001, by the Company for the benefit of Heller
Healthcare Finance, Inc. (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 8-K, dated May 9, 2001).

	
	 10.10
	  	 Guaranty, dated as of January 1, 2002, by the Company for the benefit of Heller
Healthcare Finance, Inc. (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10-K for the fiscal year ended December 31, 2001.)

	
	 10.11
	  	 Third Amendment and Modification of Reimbursement Agreement, dated as of March 12,
2001, between the Company and U.S. Bank National Association. (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10-K for the fiscal year ended December 31, 2000).

	
	 10.12
	  	 First Amendment to Loan Documents, as of June 27, 2001, between ALC Ohio, Inc., ALC
Pennsylvania, Inc., ALC Iowa, Inc., ALC Nebraska, Inc., ALC New Jersey, Inc., ALC Indiana, Inc., Assisted Living Concepts, Inc. and Heller Healthcare Finance, Inc. (Incorporated by reference to the same Titled exhibit to the Company’s Report on
Form 10-Q for the quarter ended June 30, 2001).

	
	 10.13
	  	 Second Amendment to Loan Documents between Assisted Living Concepts, Inc., ALC Ohio,
Inc., ALC Pennsylvania, Inc., ALC Iowa, Inc., ALC Nebraska, Inc., ALC New Jersey, Inc., ALC Indiana, Inc., and Heller Healthcare Finance, Inc., dated October 3, 2001 (Incorporated by reference to the same titled exhibit to the Company’s Report
on Form 10-Q for the quarter ended September 30, 2001).

	
	 10.14
	  	 Amended and Restated Employment Agreement, effective as of January 1, 2001, between
the Company and Wm. James Nicol (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 8-K dated June 29, 2001).

 

80 

 

	 Exhibit
 No.

	  	 Description

	
	 10.15
	  	 First Amendment to the Amended and Restated Employment Agreement, dated as of January
2, 2002, between the Company and Wm. James Nicol (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10K for the fiscal year ended December 31, 2001.)

	
	 10.16
	  	 First Amended Joint Disclosure Statement of the Debtors Pursuant to Section 1125 of
the Bankruptcy Code dated October 30, 2001 (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 8-K dated October 30, 2001).

	
	 10.17
	  	 Amended Findings of Fact, Conclusions of Law and Order Confirming the Joint Plan of
Reorganization dated December 28, 2001 (Incorporated by reference to the Company’s Report on Form 8-K dated December 28, 2001).

	
	 10.18
	  	 Employment Agreement, effective as of February 18, 2002, by and between the Company
and Steven Vick (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10K for the fiscal year ended December 31, 2001.)

	
	 10.19
	  	 Amended and Restated Employment Agreement, effective as of January 1, 2002, by and
between the Company and Sandra Campbell (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10K for the fiscal year ended December 31, 2001.)

	
	 10.20
	  	 Amended and Restated Employment Agreement, effective as of January 1, 2002, by and
between the Company and Nancy Inez Gorshe (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10K for the fiscal year ended December 31, 2001.)

	
	 10.21
	  	 Amended and Restated Employment Agreement, effective as of January 1, 2002, by and
between the Company and Drew Q. Miller (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10K for the fiscal year ended December 31, 2001.)

	
	 10.22
	  	 Employment Agreement, effective January 1, 2001, by and between the Company and Ron
W. Kerr (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10K for the fiscal year ended December 31, 2001.)

	
	 10.23
	  	 Amendment to Employment Agreement, effective January 1,2002, by and between the
Company and Ron W. Kerr (Incorporated by reference to the same titled exhibit to the Company’s Report on Form 10K for the fiscal year ended December 31, 2001.)

	
	 10.24
	  	 Fourth Amendment and Modification of Reimbursement Agreement, dated as of May 14,
2002, between the Company and U.S. Bank National Association. (Filed herewith.)

	
	 10.25
	  	 Employment Agreement, effective May 16, 2002, by and between the Company and Matthew
G. Patrick. (Filed herewith.)

	
	 10.26
	  	 Employment Agreement, effective August 12, 2002, by and between the Company and Linda
L. Martin. (Filed herewith.)

	
	 12.1
	  	 Computation of Ratio of Earnings to Fixed Charges. (Filed
herewith).

	
	 21.1
	  	 List of Subsidiaries of the Company. (Incorporated by reference to the same titled
exhibit to the Company’s Report on Form 10K for the fiscal year ended December 31, 2001.)

	
	 23.1
	  	 KPMG LLP Report on Schedule. (Filed herewith).

	
	 99.1
	  	 Certification of Steven L. Vick pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

	
	 99.2
	  	 Certification of Matthew G. Patrick pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

	
	 24.1
	  	 Power of Attorney (see page 75.)

 

81Amendment No. 1 to the Credit Agreement

 
Exhibit 10.33

 
AMENDMENT NO. 1 
 
THIS AMENDMENT NO. 1 dated as of May 2nd, 2003 (this
“Amendment”) of the Credit Agreement referenced below is by and among ICT GROUP, INC., a Pennsylvania corporation (the “Borrower”), the Guarantors and the Lenders identified on the signature pages hereto and BANK OF
AMERICA, N.A., as Administrative Agent. Capitalized terms used but not otherwise defined herein shall have the meanings provided in the Credit Agreement. 
 
W I T N E S S E T H 
 
WHEREAS, an $85 million revolving credit facility has been established in favor of the Borrower pursuant to the terms of that Credit
Agreement dated as of April 25, 2001 (as amended and modified, the “Credit Agreement”) among the Borrower, the Guarantors, the Lenders and the Administrative Agent; 
 
WHEREAS, the Borrower has requested certain modifications to the terms of the Credit Agreement; and

 
WHEREAS, the Required Lenders have agreed to the
requested modifications on the terms and conditions set forth herein; 
 
NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 
 
SECTION 1 Amendments to the Credit Agreement. The
Credit Agreement is hereby amended in the following respects: 
 
1.1 The definition of Consolidated EBITDA in Section 1.1 is amended to read as follows: 
 
“Consolidated EBITDA” means, for any period for the Consolidated Group, the sum of (i) Consolidated Net
Income, plus (ii) to the extent deducted in determining net income, (A) Consolidated Interest Expense, (B) taxes and (C) depreciation and amortization, in each case on a consolidated basis determined in accordance with GAAP; but
excluding, for purposes of determining compliance with the financial covenants hereunder, charges of up to $12.85 million, which charges were non-cash when recorded, related to the lawsuit pending against the Borrower in the Circuit Court of
Berkeley County, West Virginia and related tax effects thereon. Except as otherwise expressly provided, the applicable period shall be the four consecutive fiscal quarters ending as of the date of determination. 
 
1.2 Section 7.11(b) is amended to read as follows:

 
(a) Consolidated Fixed
Charge Coverage Ratio. As of the end of each fiscal quarter, the Consolidated Fixed Charge Coverage Ratio shall be not less than: 
 

	 Fiscal Quarter Ending

	  	 Consolidated Fixed Charge Coverage Ratio

	 From the Closing Date through March 31, 2003
	  	 1.75:1.0

	 From April 1, 2003 through September 30, 2003
	  	 1.5:1.0

	 Thereafter
	  	 1.75:1.0

 
SECTION 2
Conditions Precedent. 
 
2.1 This Amendment
shall be effective immediately upon receipt by the Administrative Agent, in form and substance satisfactory to the Administrative Agent, of each of the following: 
 
(a) Counterparts of this Amendment duly executed by each of the Credit Parties and the
Required Lenders; and 
 
(b) An
amendment fee, for the ratable benefit of each Lender (including Bank of America) that consents to this Amendment on or before May 2, 2003 (the “Consenting Lenders”), of 5 basis points on the aggregate amount of the Consenting
Lenders’ Revolving Commitments. 
 
SECTION
3 Miscellaneous. 
 
3.1 The Credit Parties
hereby affirm that, after giving effect to this Amendment, the representations and warranties set forth in the Credit Agreement and the other Credit Documents are true and correct in all material respects as of the date hereof (except those which
expressly relate to an earlier period). 
 
3.2
Except as modified hereby, all of the terms and provisions of the Credit Agreement and the other Credit Documents (including schedules and exhibits thereto) shall remain in full force and effect. 
 
3.3 The Borrower agrees to pay all reasonable costs and
expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment, including the reasonable fees and expenses of Moore & Van Allen, PLLC. 
 
3.4 This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an original, and it shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. Delivery by any party hereto of an
executed counterpart of this Amendment by facsimile shall be effective as such party’s original executed counterpart and shall constitute a representation that such party’s original executed counterpart will be delivered promptly.

 
3.5 This Amendment shall be deemed to be a
contract made under, and for all purposes shall be construed in accordance with, the laws of the State of New York. 
 
[remainder of page intentionally left blank] 
 
 

2 

 
IN WITNESS
WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. 
 

	 BORROWER:
	 	 	 	 ICT GROUP, INC.,
 a Pennsylvania corporation

	
	 	 	 	 	 	 	 By:
	 	 /s/    VINCENT A.
PACCAPANICCIA

	 	 	 	 	 	 	 Name:
	 	 Vincent A. Paccapaniccia

	 	 	 	 	 	 	 Title:
	 	 Executive Vice President & CFO

	
	 GUARANTORS:
	 	 	 	 YARDLEY ENTERPRISES, INC.,
 a Delaware corporation
 ICT CONNECTEDTOUCH.COM
LLC,
 a Pennsylvania limited liability company
 HARVEST RESOURCES, INC.,
 a Delaware corporation

	
	 	 	 	 	 	 	 By:
	 	 /s/    VINCENT A.
PACCAPANICCIA

	 	 	 	 	 	 	 Name:
	 	 Vincent A. Paccapaniccia

	 	 	 	 	 	 	 Title:
	 	 Director of each Guarantor

	
	 	 	 	 	 	 	 [signature pages continue]

 

 

	 ADMINISTRATIVE AGENT:
	 	 	 	 BANK OF AMERICA, N.A.,
 in its capacity as Administrative Agent

	
	 	 	 	 	 	 	 By:
	 	 /s/    MICHAEL
BRASHLER        

	 	 	 	 	 	 	 Name:
	 	 Michael Brashler

	 	 	 	 	 	 	 Title:
	 	 Vice President

	
	 LENDERS:
	 	 	 	 BANK OF AMERICA, N.A.,
 individually in its capacity as a Lender

	
	 	 	 	 	 	 	 By:
	 	 /s/    ROBERT S.
SEARSON        

	 	 	 	 	 	 	 Name:
	 	 Robert M. Searson

	 	 	 	 	 	 	 Title:
	 	 Senior Vice President

	
	 	 	 	 	 FLEET NATIONAL BANK:

	
	 	 	 	 	 	 	 By:
	 	 /s/    MARK MCLAUGHLIN
        

	 	 	 	 	 	 	 Name:
	 	 Mark McLaughlin

	 	 	 	 	 	 	 Title:
	 	 Senior Vice President

	
	 	 	 	 	 SOVEREIGN BANK

	
	 	 	 	 	 	 	 By:
	 	 /s/    MICHELE A. WALCOTT
        

	 	 	 	 	 	 	 Name:
	 	 Michele A. Walcott

	 	 	 	 	 	 	 Title:
	 	 Senior Vice President

	
	 	 	 	 	 LASALLE BANK NATIONAL ASSOCIATION

	
	 	 	 	 	 	 	 By:
	 	 /s/    ROBERT M.
WALKER        

	 	 	 	 	 	 	 Name:
	 	 Robert M. Walker

	 	 	 	 	 	 	 Title:
	 	 Vice President

	
	 	 	 	 	 BANK LEUMI USA

	
	 	 	 	 	 	 	 By:
	 	 /s/    JOHN
KOENIGSBERG        

	 	 	 	 	 	 	 Name:
	 	 John Koenigsberg

	 	 	 	 	 	 	 Title:
	 	 First Vice President

	
	 	 	 	 	 	 	 By:
	 	 /s/    PHYLLIS
ROSENFELD        

	 	 	 	 	 	 	 Name:
	 	 Phyllis Rosenfeld

	 	 	 	 	 	 	 Title:
	 	 Vice President

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00052-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00052-of-00352.parquet"}]]