ASSISTED LIVING CONCEPTS INC, S-1/A, 1996-06-20

ASSISTED LIVING CONCEPTS INC
S-1/A, 1996-06-20
SKILLED NURSING CARE FACILITIES

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1996

REGISTRATION NO. 333-6095

AMENDMENT NO. 1 TO

FORM S-1

REGISTRATION STATEMENT

UNDER
THE SECURITIES ACT OF 1933

ASSISTED LIVING CONCEPTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA 93-1148702
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)

9955 S.E. WASHINGTON
SUITE 201
PORTLAND, OREGON 97216
(503) 252-6233
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

STEPHEN GORDON
CHIEF FINANCIAL OFFICER
9955 S.E. WASHINGTON
SUITE 201
PORTLAND, OREGON 97216
(503) 252-6233
(NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)

COPIES TO:
GARY OLSON, ESQ.
SCOTT C. LEWIS, ESQ. RICHARD S. FORMAN, ESQ.

LATHAM & WATKINS GLENN D. SMITH, ESQ.
STROOCK & STROOCK & LAVAN
633 WEST FIFTH STREET--SUITE 4000 2029 CENTURY PARK EAST--SUITE 1800
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90067
(213) 485-1234 (310) 556-5800

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(C), MAY DETERMINE.

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- -------------------------------------------------------------------------------
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K

<TABLE>
<CAPTION>
ITEM NO. AND CAPTION IN FORM S 1 PROSPECTUS CAPTION
-------------------------------- ------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Facing Page; Cross-Reference Sheet;
Cover of Prospectus......... Outside Front Cover Page
2. Inside Front and Outside
Back Cover Pages of Prospec- Inside Front and Outside Back Cover
tus......................... Pages
3. Summary Information and Risk Prospectus Summary; Risk Factors;
Factors..................... Selected Financial Data
4. Use of Proceeds............. Use of Proceeds
5. Determination of Offering
Price....................... Risk Factors; Underwriting
6. Dilution.................... Dilution
7. Selling Security Holders.... Principal and Selling Stockholders
and Management Ownership
8. Plan of Distribution........ Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to
be Registered............... Description of Capital Stock
10. Interests of Named Experts
and Counsel................. Legal Matters; Experts
11. Information with Respect to Prospectus Summary; Risk Factors;
the Registrant.............. Capitalization; Price Range of
Common Stock; Dividend Policy;
Selected Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results
of Operations; Business; Management;
Description of Capital Stock; Legal
Matters; Experts; Available
Information
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................. *
</TABLE>
- --------
* Omitted from Prospectus because item is inapplicable or answer is in the
negative.
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED JUNE 20, 1996

PROSPECTUS

1,800,000 SHARES

[LOGO OF ASSISTED LIVING CONCEPTS, INC. APPEARS HERE]

COMMON STOCK

All of the shares of Common Stock, par value $0.01 per share (the "Common
Stock"), are being sold by Assisted Living Concepts, Inc. (The "Company"). Up
to 150,000 additional shares may be sold by certain stockholders of the Company
(the "Selling Stockholders") and up to 120,000 shares may be sold by the
Company if the Underwriters exercise their over-allotment option. See
"Principal and Selling Stockholders" and "Management Ownership" and
"Underwriting". The Company will not receive any of the proceeds from the sale
of shares, if any, by the Selling Stockholders. The Company's Common Stock is
listed on the American Stock Exchange ("ASE") under the Symbol "ALF." On June
18, 1996, the last reported sale price on the ASE of the Common Stock was
$21.50 per share. See "Price Range of Common Stock."

SEE "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
THE PUBLIC COMMISSIONS(1) THE COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................. $ $ $
- --------------------------------------------------------------------------------
Total(3).............................. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.

(2) Before deducting expenses payable by the Company and the Selling
Stockholders estimated at $ .

(3) The Company and the Selling Stockholders have granted to the Underwriters
an option, exercisable within 30 days hereof, to purchase up to an
aggregate of 270,000 (120,000 and 150,000, respectively) additional shares
of Common Stock at the price to the public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to the Public,
Underwriting Discounts and Commissions, Proceeds to the Company and
Proceeds to the Selling Stockholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."

The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain prior conditions including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be made in New York, New York, on or about , 1996.

-----------

NATWEST SECURITIES LIMITED

DEAN WITTER REYNOLDS INC.

SMITH BARNEY INC.

THE DATE OF THIS PROSPECTUS IS JULY , 1996
<PAGE>

[MAP HERE]

FOR THE UNITED KINGDOM PURCHASERS: THE SHARES MAY NOT BE OFFERED OR SOLD TO
PERSONS IN THE UNITED KINGDOM EXCEPT TO PERSONS WHOSE ORDINARY ACTIVITIES
INVOLVE THEM IN ACQUIRING, HOLDING, MANAGING OR DISPOSING OF INVESTMENTS (AS
PRINCIPAL OR AGENT) FOR THE PURPOSES OF THEIR BUSINESS, OR OTHERWISE IN
CIRCUMSTANCES WHICH WILL NOT RESULT IN AN OFFER TO THE PUBLIC IN THE UNITED
KINGDOM WITHIN THE MEANING OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS
1995, AND THIS PROSPECTUS MAY NOT BE PASSED ON TO ANY PERSON IN THE UNITED
KINGDOM WHO DOES NOT FALL WITHIN ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT
OF 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER 1995 OR WHO IS NOT A
PERSON TO WHOM THE PROSPECTUS MAY OTHERWISE LAWFULLY BE ISSUED OR PASSED ON.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, included
elsewhere in this Prospectus. Prospective investors should carefully consider
the information set forth under "Risk Factors". Unless otherwise indicated, the
information contained in this Prospectus assumes that the Underwriters' over-
allotment option will not be exercised. Except for the historical information
contained herein, the matters discussed in this Prospectus, such as the number
of residences to be opened in 1996, 1997 and 1998 are by their nature forward
looking and involve risks and uncertainties. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," as well as those discussed elsewhere
in the Prospectus.

THE COMPANY

Assisted Living Concepts, Inc. (the "Company") develops, owns, leases and
operates assisted living residences, an increasingly popular form of housing
for senior citizens who, although generally ambulatory, need help with the
activities of daily living. In addition to housing, the Company provides
personal care and support services, and makes available routine nursing
services (as permitted by applicable government regulations) designed to meet
the needs of its residents. The Company believes that this combination of
housing, personal care and support services provides a cost-efficient
alternative 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.

Currently, all of the Company's residences are located in small communities
in Oregon, Washington and Texas. Of the 43 residences that had certificates of
occupancy as of June 17, 1996, 14 residences (490 units) were owned and 29
residences (996 units) were leased. The Company is currently developing and, to
a lesser extent, seeking to acquire additional assisted living residences in
similar communities in Oregon, New Jersey, Texas, Washington, Ohio, Idaho and
other states with regulatory and reimbursement climates which it believes are
favorable. As of June 17, 1996, the Company had commenced construction on 20
residences (approximately 746 units), had agreed to lease upon completion two
residences (66 units) that were being developed by outside developers and had
entered into a management agreement to operate one residence (45 units) upon
its completion. In addition, the Company has entered into land purchase option
agreements for the development of 41 residences. The Company generally does not
acquire sites for development until it has completed its feasibility analysis
and appropriate zoning has been obtained. Capital expenditures for 1996, which
relate primarily to the development of new residences, are estimated to total
approximately $72 to $88 million, of which approximately $20 million had been
spent through March 31, 1996.

The Company intends to add approximately 50 to 60 residences per year in each
of 1996, 1997 and 1998. The principal elements of the Company's operating and
growth strategy are to: (i) develop additional residences thereby increasing
its market penetration in both existing and targeted markets, (ii) service
higher acuity residents

2
<PAGE>

and, (iii) pursue joint venture opportunities in ancillary services and
residence development. The Company anticipates that a majority of its resident
revenues will continue to come from private pay sources. However, the Company
believes that locating residences in states with favorable regulatory and
reimbursement climates should provide the Company with a stable source of
residents eligible for Medicaid reimbursement to the extent that private pay
residents are not available and, in addition, provide the Company's private pay
residents with alternative sources of income if and when their private funds
are depleted and they become Medicaid eligible.

THE OFFERING

Common Stock offered by the Company......... 1,800,000 shares

Common Stock to be Outstanding after the
Offering (1)............................... 4,813,334 shares

Use of Proceeds............................. To finance the development and
acquisition of additional
assisted living residences and
for working capital and general
corporate purposes.

AMEX Common Stock Symbol.................... ALF
- --------

(1) Does not include 586,666 shares of Common Stock reserved for issuance
pursuant to the Company's stock option plan under which options to purchase
424,699 have been granted at a weighted average exercise price of $11.67
per share. See "Management--Stock Option Plan." Also does not include
1,333,333 shares, issuable upon conversion of the Company's 7% Convertible
Subordinated Debentures due 2005.

3
<PAGE>

SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The summary financial data should be read in conjunction with the financial
statements of the Predecessor and the Company, including the notes thereto, and
the information in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------------------------------- ----------------------------------------
3 MONTHS
YEAR ENDED 11 MONTHS ENDED
DECEMBER 31, ENDED MONTH ENDED YEAR ENDED MARCH 31,
--------------------- NOVEMBER 30, DECEMBER 31, DECEMBER 31, --------------
1991 1992 1993 1994 1994(1) 1995 1995 1996
----- ------ ------ ------------ ------------ ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 999 $1,377 $1,884 $1,841 $ 212 $4,067 $ 682 $2,750
Operating expenses:
Residence operating
expenses.............. 712 908 1,090 1,127 125 2,779 449 1,936
Management fees........ 50 69 92 93 -- -- -- --
Corporate overhead..... -- -- -- -- 152 1,252 231 215
Building rentals....... -- -- -- -- 42 798 146 560
Depreciation and
amortization.......... 65 93 132 105 13 296 39 217
----- ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 827 1,070 1,314 1,325 332 5,125 865 2,928
----- ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)................. 172 307 570 516 (120) (1,058) (183) (178)
Interest (income)....... (5) (13) (11) (12) (64) (579) (180) (22)
Interest expense (2).... 228 260 320 297 8 96 24 31
----- ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ (51) $ 60 $ 261 $ 231 $ (64) $ (575) $ (27) $ (187)
===== ====== ====== ====== ------ ------ ------ ------
Net loss per share...... $(0.02) $(0.19) $(0.01) $(0.06)
====== ====== ====== ======
Weighted average common
shares outstanding..... 3,000 3,000 3,000 3,005
UNAUDITED PRO FORMA DATA (3):
Net income (loss)....... $ (51) $ 60 $ 261 $ 231
Pro forma provision for
income taxes .......... -- -- 67 85
----- ------ ------ ------
Pro forma net income
(loss)................. $ (51) $ 60 $ 194 $ 146
===== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT AT AT
DECEMBER 31, AT DECEMBER 31, MARCH 31, 1996
-------------------- NOVEMBER 30, --------------- -----------------------
1991 1992 1993 1994 1994(1) 1995 ACTUAL AS ADJUSTED(4)
------ ------ ------ ------------ ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 88 $ 109 $ 351 $ 299 $13,122 $(5,167) $(6,391) $30,209
Total assets............ 3,156 3,965 4,110 5,699 17,903 53,546 57,394 93,994
Long-term debt,
excluding current
portion................ 3,052 3,703 3,700 5,266 1,101 24,553 30,350 30,350
Partners' and
shareholders' equity... 45 105 263 197 16,219 15,644 15,503 52,103
</TABLE>
- --------
(1) The Company commenced operating the five initial residences on December 1,
1994.
(2) Includes corporate interest expense of $525,000 and $378,000 for the year
ended December 31, 1995 and the three months ended March 31, 1996,
respectively; and is net of $11,000, $577,000 and $447,000 of capitalized
interest for the one month ended December 31, 1994, the year ended December
31, 1995 and the three months ended March 31, 1996, respectively.
(3) The Predecessor was exempt from U.S. federal and state income taxes as a
result of its partnership and subchapter S status. The financial data
reflects the income tax expenses that would have been recorded had the
Predecessor not been exempt from paying such income taxes. The pro forma
financial data includes the effect of the Company adopting SFAS 109.

(4) Gives effect to the receipt of an estimated $36.6 million of net proceeds
from the sale of 1,800,000 shares of Common Stock offered by the Company
hereby at an assumed offering price of $21.50 per share.

4
<PAGE>

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors before
purchasing any of the Common Stock offered hereby.

LIMITED OPERATING HISTORY; ANTICIPATED OPERATING LOSSES

The Company has a limited operating history. The Company incurred a loss of
$64,000 for the first full month of operations ended December 31, 1994, a loss
of $575,000 for the fiscal year ended December 31, 1995 and a loss of $187,000
for the three months ended March 31, 1996. The Company anticipates that it
will incur losses during 1996 as the costs associated with opening new
residences and expanding the corporate infrastructure necessary to manage the
Company's future operations and to develop new assisted living residences will
only be partially offset by operating profits from existing or newly developed
residences. There can be no assurance that losses will not continue after
1996. The Company anticipates that each residence will have an operating loss
(prior to depreciation, rent or interest, if any) of $10,000 during the first
three to four months of operation. To the extent the Company sells a residence
and leases it back or otherwise finances it within four months of the
commencement of operations, the aggregate loss may increase by up to an
additional $40,000. The Company currently plans to open 50 to 60 residences in
1996, of which 10 were opened during the first quarter of 1996. The Company
estimates that the losses to be incurred during 1996 due to opening residences
could range from $1.5 million to $3.0 million. The success of the Company's
future operations is directly tied to the expansion of its operational base.
There can be no assurance that the Company will not experience unforeseen
expenses, difficulties, complications and delays in connection with the
expansion of its operational base which could have a material adverse effect
on the Company's financial condition and results of operations.

NO ASSURANCE AS TO ABILITY TO DEVELOP OR ACQUIRE ADDITIONAL ASSISTED LIVING
RESIDENCES

The Company's prospects for growth are directly affected by its ability to
develop and, to a lesser extent, acquire additional assisted living
residences. While the Company currently plans to open approximately 50 to 60
residences per year in each of 1996, 1997 and 1998, there can be no assurance
that such residences will be completed during this time frame, or, that they
will be successful once completed. The success of the Company's growth
strategy will depend upon, among other factors, the Company's ability to
obtain government licenses and approvals, the Company's ability to obtain
financing and the competitive environment for development and acquisitions.
The nature of such licenses and approvals and the timing and likelihood of
obtaining them vary widely from state to state, depending upon the residence,
or its operation, and the type of services to be provided. The successful
development of additional assisted living facilities will involve a number of
risks, including the possibility that the Company may be unable to locate
suitable sites at acceptable prices or may be unable to obtain, or may
experience delays in obtaining, necessary zoning, land use, building,
occupancy, and other required governmental permits and authorizations. The
Company is dependent upon these permits and authorizations to construct and
operate its residences and any delay or inability to obtain such permits could
adversely affect the results of operations. The Company may also incur
construction costs that exceed original estimates, may not complete
construction projects on schedule and may experience competition in the search
for suitable development sites. The Company relies on third-party general
contractors to construct its new assisted living facilities. There can be no
assurance that the Company will not experience difficulties in working with
general contractors and subcontractors, which could result in increased
construction costs and delays. Further, facility development is subject to a
number of contingencies over which the Company will have little control and
that may adversely affect project cost and completion time, including
shortages of, or the inability to obtain, labor or materials, the inability of
the general contractor or subcontractors to perform under their contracts,
strikes, adverse weather conditions and changes in applicable laws or
regulations or in the method of applying such laws and regulations.
Accordingly, if the Company is unable to achieve its development plans, its
business, financial condition and results of operations could be adversely
affected. There can be no assurance that the Company will be successful in
developing or acquiring any particular residence, that the Company's rapid
expansion will not adversely affect its operations or that any residence
developed or acquired by the Company

5
<PAGE>

will be successful. The various risks associated with the Company's
development or acquisition of assisted living residences and uncertainties
regarding the profitability of such operations could have a material adverse
effect on the Company's financial condition and results of operations.

NEED FOR ADDITIONAL FINANCING TO FUND FUTURE DEVELOPMENT AND ACQUISITIONS

To achieve its growth objectives, the Company will need to obtain sufficient
financial resources to fund its development, construction and acquisition
activities. The estimated cost to complete and fund start-up losses for the
new facilities that will be developed by December 31, 1998 is between $320
million and $350 million; accordingly, the Company's future growth will depend
on its ability to obtain additional financing on acceptable terms. The Company
will, from time to time, seek additional funding through public and/or private
financing sources, including equity and/or debt financing. If additional funds
are raised by issuing equity securities, the Company's stockholders may
experience dilution. There can be no assurance that adequate funding will be
available as needed or on terms acceptable to the Company. A lack of available
funds may require the Company to delay or eliminate all or some of its
development projects and acquisition plans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".

The Company's aggregate annual fixed debt and lease payment obligations
currently total approximately $3.3 million. These fixed payment obligations
will significantly increase as the Company pursues its development plan.
Failure to meet these obligations may result in the Company being in default
of its financing agreements and, as a consequence, the Company may lose its
ability to operate any individual residence or other residences which may be
cross-defaulted. There can be no assurance that the Company will generate
sufficient cash flow to meet its current or future obligations. The Company
has not historically covered its fixed charges with earnings. In addition, the
Company anticipates that future development of residences may be financed with
construction loans and, therefore, there is a risk that, upon completion of
construction, permanent financing for newly developed residences may not be
available or may be available only on terms that are unfavorable or
unacceptable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".

GEOGRAPHIC CONCENTRATION; DEPENDENCE ON STATE MEDICAID WAIVER PROGRAMS

As of June 17, 1996, approximately two-thirds of the Company's properties
are located in the State of Texas and approximately one-fourth are located in
the State of Oregon; therefore, the Company is dependent on the economies of
Texas and Oregon and, to a certain extent, on the continued funding of state
Medicaid waiver programs. The Company has operated residences in Oregon since
December 1994. In addition, the Company began operating residences in Texas
and Washington in July 1995 and December 1995, respectively. During the year
ended 1995 and the three months ended March 31, 1996, direct payments received
from state Medicaid agencies accounted for approximately 21% and 14%
respectively of the Company's revenue while the tenant-paid portion of
Medicaid residents accounted for approximately 10% and 8% of the Company's
revenue during these periods. The Company expects that state Medicaid
reimbursement programs will constitute a significant source of revenue for the
Company. The Company intends to continue developing and operating assisted
living residences in states other than Texas, Washington and Oregon, including
Idaho, New Jersey and Ohio. Adverse changes in general economic factors
affecting these states' respective health care industries or in these states'
laws and regulatory environment, including Medicaid reimbursement rates, could
have a material adverse effect on the Company's financial condition and
results of operations.

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including the
liquidity of the market for the Common Stock, variations in the Company's
operating results, new statutes or regulations or changes in the
interpretation of existing statutes or regulations affecting the health care
industry generally or assisted living residence businesses in particular. In
addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated

6
<PAGE>

to the operating performance of particular companies. These market
fluctuations also may adversely affect the market price of the Common Stock.

CONFLICTS OF INTEREST

Dr. Wilson holds interests in each of the entities from which the Company
purchased two of the initial residences known as Aspen Court and Hillside
House. Dr. Wilson received approximately $169,000 from the Company's purchase
of Aspen Court and approximately $65,000 (jointly with her husband) from the
Company's purchase of Hillside House.

Dr. Wilson also held, and her husband currently holds, an interest in
Assisted Living Facilities, Inc. ("ALF"), the entity which leases four
residences to the Company (the "ALF Leases"). The payment terms of the ALF
Leases were based on the residences' historical operating results. The
aggregate annual lease payments, when expressed as a percentage of the
independent appraisal values of such leased properties, reflected an average
blended lease rate of approximately 10.8% for such properties, which the
Company believes is typical for leases in the health care industry. The
"blended lease rate" is the amount of annual rent divided by the appraised
value of the property. Dr. Wilson sold her interest in ALF in the first half
of 1995. As a 25% shareholder in ALF, Dr. Wilson's husband may receive
dividends, which may be generated as a result of payments under the ALF
Leases. Payments made with respect to the ALF Leases were $37,000 for the one
month ended December 31, 1994, $734,000 for the year ended December 31, 1995
and $196,000 for the three months ended March 31, 1996.

Prior to April 18, 1996, Dr. Wilson owned all of the outstanding stock of
Concepts in Community Living, Inc. ("CCL"). On such date, Dr. Wilson
transferred her interest in CCL to her husband. CCL provides services to
several of the developers that have contracted with the Company to build and
develop assisted living facilities. CCL has performed feasibility studies and
pre-development consulting services for the developers on the Company's
behalf. For the year ended December 31, 1995, CCL performed these services on
36 sites collecting fees of $605,000. The direct costs incurred by CCL in
performing these services, exclusive of the compensation paid to Dr. Wilson's
husband, were approximately $452,000.

The Chairman and President of LTC Properties, Inc. ("LTC"), Andre C.
Dimitriadis and William McBride III, respectively, are members of the Board of
Directors and shareholders of the Company. Messrs. Dimitriadis and McBride
(Chairman of the Board of Directors of the Company) own 274,600 (1.7%) and
135,000 (0.7%) shares, respectively, in LTC. Since January 1, 1995, the
Company sold to LTC, through sale and leaseback transactions, 10 residences in
Texas with a combined total of 334 units for a total purchase price of
$18,100,000. Annual rental payments to LTC with respect to such residences are
approximately $1,847,700 ($63,300 in rent was paid in 1995). In addition, the
Company sold to LTC, through sale and leaseback transactions, five residences
in Washington with a combined total of 188 units for a total purchase price of
$11,280,000. Annual rental payments to LTC with respect to such residences are
approximately $948,000. The sales prices for the residences which the Company
has sold to date to LTC approximate cost. See "Certain Transactions" and
"Principal Stockholders and Management Ownership".

DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL

The Company depends, and will continue to depend, upon the services of Dr.
Wilson, its Chief Executive Officer and President and Stephen Gordon, its
Chief Administrative Officer and Chief Financial Officer. The Company has
entered into an employment agreement with Dr. Wilson and has obtained a
$500,000 key employee insurance policy covering her life. The Company is also
dependent upon its ability to attract and retain management personnel who will
be responsible for the day-to-day operations of each residence. The loss of
the services of any or all of such officers or the Company's inability to
attract additional management personnel in the future could have a material
adverse effect on the Company's financial condition or results of operations.

7
<PAGE>

DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS

A portion of the Company's revenues will be dependent upon reimbursement
from third-party payors, including state Medicaid programs and private
insurers. 27%, 29%, 21% and 14% of the Company's total revenues were received
under Medicaid programs for the years ended December 31, 1993, 1994, 1995, and
the three months ended March 31, 1996, respectively. Furthermore, there can be
no assurance that the Company's proportionate percentage of revenue received
from Medicaid programs will not increase. The revenues and profitability of
the Company will be affected by the continuing efforts of governmental and
private third-party payors to contain or reduce the costs of health care by
attempting to lower reimbursement rates, increasing case management review of
services and negotiating reduced contract pricing. In an attempt to reduce the
federal and certain state budget deficits, there have been, and management
expects that there will continue to be, a number of proposals to limit
Medicaid reimbursement in general. Adoption of any such proposals at either
the federal or the state level could have a material adverse effect on the
Company's business, financial condition, results of operations and prospects.

GOVERNMENT REGULATION

Health care is an area of extensive and frequent regulatory change. Changes
in the laws or new interpretations of existing laws can have a significant
effect on methods of doing business, costs of doing business and amounts of
reimbursement from governmental and other payors. The Company is and will
continue to be subject to varying degrees of regulation and licensing by
health or social service agencies and other regulatory authorities in the
various states and localities in which it operates or intends to operate. As a
provider of services under the Medicaid program in the United States, the
Company is subject to Medicaid fraud and abuse law, violations of which may
result in civil and criminal penalties and exclusions from participation in
the Medicaid program. The Company at all times attempts to comply with all
applicable fraud and abuse laws; however, there can be no assurance that
administrative or judicial interpretation of existing laws or regulations will
not have a material adverse effect on the Company's operations or financial
condition.

The success of the Company will be dependent in part upon its ability to
satisfy the applicable regulations and requirements and to procure and
maintain required licenses. The Company's operations could also be adversely
affected by, among other things, regulatory developments such as mandatory
increases in the scope and quality of care to be afforded residents and
revisions in licensing and certification standards. Currently, no federal
rules explicitly define or regulate assisted living. In addition, federal and
state laws currently exist restricting health care providers from referring
patients to affiliated entities. The Company believes that its operations do
not presently violate these referral laws. However, there can be no assurance
that federal, state or local laws or regulatory procedures which might
adversely affect the Company's business, financial condition, results of
operations or prospects will not be expanded or imposed.

STAFFING AND LABOR COSTS

The Company will compete with other providers of long-term care with respect
to attracting and retaining qualified personnel. The Company will also be
dependent upon the available labor pool of suitable wage employees. A shortage
of nurses and/or trained personnel may require the Company to enhance its wage
and benefits package in order to compete. No assurance can be given that the
Company's labor costs will not increase, or that, if they do increase, they
can be matched by corresponding increases in revenues.

COMPETITION

The long-term care industry is highly competitive and the Company expects
that the assisted living business, in particular, will become more competitive
in the future. The Company will be competing with numerous other companies
providing similar long-term care alternatives, such as home health agencies,
life care at home, community-based service programs, retirement communities
and convalescent centers. The Company expects that as assisted living receives
increased attention and the number of states which include assisted living in
their Medicaid waiver programs increases, competition will grow from new
market entrants, including publicly and

8
<PAGE>

privately held companies focusing primarily on assisted living. Nursing
facilities that provide long-term care services are also a source of
competition to the Company. Moreover, in the implementation of the Company's
expansion program, the Company expects to face competition for development and
acquisitions of assisted living residences. Some of the Company's present and
potential competitors are significantly larger and have, or may obtain,
greater financial resources than those of the Company. Consequently, there can
be no assurance that the Company will not encounter increased competition in
the future which could limit its ability to attract residents or expand its
business and could have a material adverse effect on the Company's financial
condition, results of operations and prospects.

DIFFICULTIES OF MANAGING RAPID GROWTH

The Company expects that the number of residences which it owns, leases or
otherwise operates will increase substantially as it pursues its growth
strategy. This rapid growth will place significant demands on the Company's
management resources. The Company's ability to manage its growth effectively
will require it to continue to expand its operational, financial and
management information systems and to continue to attract, train, motivate,
manage and retain key employees. If the Company is unable to manage its growth
effectively, its business, financial condition and results of operations could
be adversely affected.

LIABILITY AND INSURANCE

The provision of health care services entails an inherent risk of liability.
In recent years, participants in the long-term care industry have become
subject to an increasing number of lawsuits alleging malpractice or related
legal theories, many of which involve large claims and significant defense
costs. The Company currently maintains liability insurance intended to cover
such claims and the Company believes that its insurance is in keeping with
industry standards. There can be no assurance, however, that claims in excess
of the Company's insurance coverage or claims not covered by the Company's
insurance coverage (e.g., claims for punitive damages) will not arise. A
successful claim against the Company not covered by, or in excess of, the
Company's insurance coverage could have a material adverse effect upon the
Company's financial condition and results of operations. Claims against the
Company, regardless of their merit or eventual outcome, may also have a
material adverse effect upon the Company's ability to attract residents or
expand its business and would require management to devote time to matters
unrelated to the operation of the Company's business. In addition, the
Company's insurance policies must be renewed annually. There can be no
assurance that the Company will be able to obtain liability insurance coverage
in the future or that, if such coverage is available, it will be available on
acceptable terms.

ENVIRONMENTAL RISKS

Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the cost of removal or remediation of certain hazardous or
toxic substances, including, without limitation, asbestos-containing
materials, that could be located on, in or under such property. Such laws and
regulations often impose liability whether or not the owner or operator knew
of, or was responsible for, the presence of the hazardous or toxic substances.
The costs of any required remediation or removal of these substances could be
substantial and the liability of an owner or operator as to any property is
generally not limited under such laws and regulations and could exceed the
property's value and the aggregate assets of the owner or operator. The
presence of these substances or failure to remediate such substances properly
may also adversely affect the owner's ability to sell or rent the property, or
to borrow using the property as collateral. Under these laws and regulations,
an owner, operator or an entity that arranges for the disposal of hazardous or
toxic substances, such as asbestos-containing materials, at a disposal site
may also 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 its properties, the Company could be liable for
these costs, as well as certain other costs, including governmental fines and
injuries to persons or properties. As a result, the presence, with or without
the Company's knowledge, of hazardous or toxic substances at any property held
or operated by the Company, or acquired or operated by the Company in the
future, could have an adverse effect

9
<PAGE>

on the Company's business, financial condition and results of operations.
Environmental audits performed on the Company's properties have not revealed
any significant environmental liability that management believes would have a
material adverse effect on the Company's business, financial condition or
results of operations. No assurance can be given that existing environmental
audits with respect to any of the Company's properties reveal all
environmental liabilities.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of shares of Common Stock in the public market
after this Offering or the perception that such sales could occur could
adversely affect the market price of the Common Stock and the Company's
ability to raise capital in the future in the equity markets. Upon completion
of the Offering, the Company will have outstanding 4,813,334 shares of Common
Stock, assuming no exercise of the Underwriters' over-allotment option. Of
these shares, 3,813,334 will be freely tradeable without restriction or
limitation under the Securities Act, except for any shares purchased by
"affiliates," as that term is defined under the rules and regulations of the
Securities Act, of the Company. The remaining 1,000,000 outstanding shares of
Common Stock are "restricted securities" within the meaning of Rule 144 under
the Securities Act. The holders of 960,000 shares of these restricted
securities have agreed not to sell or otherwise dispose of such shares,
without the prior written consent of NatWest Securities Limited, until 180
days after the date of this Prospectus. After such date, all such shares may
be sold subject to the limitations of Rule 144. See "Shares Eligible For
Future Sale." Furthermore, the Company has registered approximately 586,666
shares of Common Stock reserved for issuance pursuant to the Company's Stock
Option Plan, under which options to purchase 424,669 shares have been granted
as of the date of this Prospectus. See "Management--Stock Option Plan." In
addition, the $20 million outstanding principal amount of the Company's 7%
Convertible Subordinated Debentures due 2005 (the "7% Debentures") are
convertible at any time after the effectiveness of a registration statement
covering the 7% Debentures and prior to maturity into 1,333,333 shares of
Common Stock at a conversion price of $15.00 per share, subject to adjustment
in certain circumstances. The Company has filed a registration statement
covering the 7% Debentures and the shares issuable upon conversion thereof.
Upon effectiveness of such registration statement, the 7% Debentures and such
shares shall be freely tradeable.

DIVIDEND POLICY

The Company has never declared or paid any dividends on its Common Stock.
The Company expects to retain any earnings to finance the operations and
expansion of the Company's business. Certain Trust Deed Notes, payable to the
State of Oregon Housing and Community Service Department restrict the payment
of cash dividends in certain circumstances and it is anticipated that the
terms of future debt financings may do so as well. Therefore, the payment of
any cash dividends on the Common Stock is unlikely in the foreseeable future.

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in net tangible book value per share of approximately
$10.66, assuming an offering price of $21.50 per share. See "Dilution."

10
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,800,000 shares being
offered by the Company hereby are estimated to be approximately $36.6 million,
assuming an offering price of $21.50 per share and after deducting the
estimated underwriting discounts and commissions and estimated expenses of the
Offering payable by the Company ($39.0 million assuming the over-allotment
option is exercised in full). The Company will not receive any proceeds from
the sale of shares of Common Stock, if any, by the Selling Stockholders. See
"Principal and Selling Stockholders and Management Ownership." The Company
intends to use the net proceeds to it from the Offering to finance the
development and acquisition of additional assisted living residences and for
working capital and general corporate purposes. Pending their use, the net
proceeds from the Offering will be invested in investment-grade interest
bearing securities.

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on the AMEX under the symbol ALF. The following
table sets forth the high and low closing sales prices of the Common Stock, as
reported by the AMEX, for the periods indicated:

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
------- -------
<S> <C> <C>
Fiscal Year Ended December 31, 1994:
4th Quarter(1)............................................... $ 9.38 $ 8.00
Fiscal Year Ended December 31, 1995:
1st Quarter.................................................. 9.25 7.50
2nd Quarter.................................................. 11.88 8.00
3rd Quarter.................................................. 16.50 10.00
4th Quarter.................................................. 15.88 12.38
Fiscal Year Ended December 31, 1996:
1st Quarter.................................................. 19.75 13.25
2nd Quarter(2)............................................... 22.25 17.75
</TABLE>
- --------
(1) Commencing November 22, 1994, the first day of trading of the Common Stock
(2) Through June 13, 1996

On June 18, 1996, the closing sale price of the Common Stock, as reported by
AMEX, was $21.50 per share. As of such date, the Company had approximately 23
holders of record of its Common Stock.

DIVIDEND POLICY

11
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to reflect the Offering. This table should be read in
conjunction with the financial statements of the Company and the notes thereto
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Mortgages payable, excluding current portion.............. $10,350 $10,350
7% Convertible Subordinated Debentures due 2005........... 20,000 20,000
------- -------
Total long-term debt, excluding current portion.......... 30,350 30,350
------- -------
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding................. -- --
Common Stock, $.01 par value; 40,000,000 shares
authorized; 3,004,734 shares issued and outstanding,
4,804,734 as adjusted shares issued and outstanding(1).. 30 48
Additional paid-in-capital............................... 16,538 53,120
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions............................................ (239) (239)
Accumulated deficit...................................... (826) (826)
------- -------
Total shareholders' equity.............................. 15,503 52,103
------- -------
Total capitalization.................................... $45,853 $82,453
======= =======
</TABLE>
- --------

(1) Assumes no exercise of the Underwriters' over-allotment option. Does not
include 595,266 shares of Common Stock reserved for issuance pursuant to
the Company's stock option plan, under which options to purchase 424,699
shares have been granted at a weighted average exercise price of $11.67
per share. Also does not include the 1,333,333 shares of Common Stock
issuable at $15.00 per share upon conversion of the Company's 7%
Convertible Subordinated Debentures due 2005.

DILUTION

The Company's tangible book value at March 31, 1996 was approximately $15.5
million, or $5.16 per share. Tangible book value per share at March 31, 1996
is equal to the Company's total tangible assets less its total liabilities,
divided by the total number of outstanding shares of Common Stock at that
date. After giving effect to the sale of the 1,800,000 shares of Common Stock
offered by the Company hereby at an assumed offering price of $21.50 per
share, the pro forma net tangible book value of the Common Stock at March 31,
1996 would have been approximately $52.1 million, or $10.84 per share. This
represents an immediate increase in pro forma net tangible book value of $5.68
per share to existing stockholders and immediate dilution of $10.66 per share
to purchasers of Common Stock in the Offering. The following table illustrates
this dilution of $10.66 per share to purchasers of Common Stock in the
Offering. The following table illustrates this dilution on a per share basis:

<TABLE>
<S> <C> <C>
Assumed offering price(1)......................................... $21.50
Net tangible book value prior to the Offering................... $5.16
Increase attributable to new investors.......................... 5.68
-----
Pro forma net tangible book value after the Offering.............. 10.84
------
Dilution to new investors in the Offering......................... $10.66
======
</TABLE>
- --------
(1) Before deducting underwriting discounts and commissions and offering
expenses to be paid by the Company.

12
<PAGE>

SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The following table presents selected consolidated historical condensed
financial data for the Company and the Predecessor as of the dates and for the
periods indicated. The selected financial data for the year ended December 31,
1991 were derived from the unaudited consolidated historical financial
statements of the Predecessor. The Predecessor consists of Assisted Living
Facilities, Inc., an S-corporation; Madras Elder Care, a partnership; and
Lincoln City Partners, a partnership, which, prior to December 1, 1994,
collectively owned the five residences operated by the Company in December
1994. The selected financial data for the one month period ended December 31,
1994, the year ended December 31, 1995, and the three-month periods ended
March 31, 1995 and 1996, are derived from the financial statements of the
Company. The financial statements of the Company for the month ended December
31, 1994 and the financial statements of the Predecessor for the years ended
December 31, 1992 and 1993 and the eleven months ended November 30, 1994 have
been audited by Price Waterhouse LLP, independent accountants. The financial
statements of the Company for the year ended December 31, 1995 have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.
The selected financial data for the three-month periods ended March 31, 1995
and 1996 were derived from unaudited financial statements of the Company. The
unaudited financial statements include all adjustments, consisting of only
normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. The selected historical financial data below should be read in
conjunction with the financial statements of the Predecessor and the Company,
including the notes thereto, and the information in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
---------------------------------- ----------------------------------------
3 MONTHS
YEAR ENDED 11 MONTHS ENDED
DECEMBER 31, ENDED MONTH ENDED YEAR ENDED MARCH 31,
-------------------- NOVEMBER 30, DECEMBER 31, DECEMBER 31, --------------
1991 1992 1993 1994(1) 1994(2) 1995 1995 1996
---- ------ ------ ------------ ------------ ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $999 $1,377 $1,884 $1,841 $ 212 $4,067 $ 682 $2,750
Operating expenses:
Residence operating expenses................. 712 908 1,090 1,127 125 2,779 449 1,936
Management fees.............................. 50 69 92 93 -- -- -- --
Corporate overhead........................... -- -- -- -- 152 1,252 231 215
Building rentals............................. -- -- -- -- 42 798 146 560
Depreciation and amortization................ 65 93 132 105 13 296 39 217
---- ------ ------ ------ ------ ------ ------ ------
Total operating expenses..................... 827 1,070 1,314 1,325 332 5,125 865 2,928
---- ------ ------ ------ ------ ------ ------ ------
Operating income (loss)...................... 172 307 570 516 (120) (1,058) (183) (178)
Interest (income)............................ (5) (13) (11) (12) (64) (579) (180) (22)
Interest expense(3).......................... 228 260 320 297 8 96 24 31
---- ------ ------ ------ ------ ------ ------ ------
Net income (loss)............................. $(51) $ 60 $ 261 $ 231 $ (64) $ (575) $ (27) $ (187)
==== ====== ====== ====== ====== ====== ====== ======
Net loss per share............................ $(0.02) $(0.19) $(0.01) $(0.06)
====== ====== ====== ======
Weighted average common shares outstanding.... 3,000 3,000 3,000 3,005
UNAUDITED PRO FORMA DATA(4):
Net income (loss)............................. $(51) $ 60 $ 261 $ 231
Pro forma provision for income taxes.......... -- -- 67 85
---- ------ ------ ------
Pro forma net income (loss)................... $(51) $ 60 $ 194 $ 146
==== ====== ====== ======
</TABLE>

13
<PAGE>

<TABLE>
<CAPTION>
AT AT AT
DECEMBER 31, AT DECEMBER 31, MARCH 31, 1996
-------------------- NOVEMBER 30, --------------- -----------------------
1991 1992 1993 1994 1994(1) 1995 ACTUAL AS ADJUSTED(5)
------ ------ ------ ------------ ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 88 $ 109 $ 351 $ 299 $13,122 $(5,167) $(6,391) $30,209
Total assets............ 3,156 3,965 4,110 5,699 17,903 53,546 57,394 93,994
Long-term debt,
excluding current
portion................ 3,052 3,703 3,700 5,266 1,101 24,553 30,350 30,350
Partners' and
shareholders' equity... 45 105 263 197 16,219 15,644 15,503 52,103
</TABLE>
- --------
(1) Includes only one month of operations for Hillside House which opened in
October 1994.
(2) The Company commenced operating the five initial residences on December 1,
1994.
(3) Includes corporate interest expense of $525,000 and $378,000 for the year
ended December 31, 1995 and the three months ended March 31, 1996,
respectively; and is net of $11,000, $577,000 and $447,000 of capitalized
interest for the one month ended December 31, 1994, the year ended
December 31, 1995 and the three months ended March 31, 1996, respectively.
(4) The Predecessor was exempt from U.S. federal and state income taxes as a
result of its partnership and subchapter S status. The financial data
reflects the income tax expenses that would have been recorded had the
Predecessor not been exempt from paying such income taxes. The pro forma
financial data includes the effect of the Company adopting SFAS 109.
(5) Gives effect to the receipt of an estimated $36.6 million of net proceeds
from the Offering.

14
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Revenues consists of rentals of units in assisted living residences and fees
associated with the provision of services to residents pursuant to contracts
with the residents. Operating expenses include (i) residence operating
expenses, such as staff payroll, food, property taxes, utilities, insurance
and other direct residence operating expenses, (ii) with respect to the
Predecessor, costs incurred under management agreements whereby a management
fee equal to 5% of revenue was charged by CCL for residence management and
administrative support, (iii) general and administrative expenses consisting
of corporate and support functions such as legal, accounting and other
administrative expenses, (iv) building rentals, and (v) depreciation and
amortization.

PREDECESSOR

The historical financial statements for the years ended December 31, 1991,
1992 and 1993 and the eleven months ended November 30, 1994 represent the
combined historical results of operations and financial condition of the
Predecessor. The Predecessor consists of the entities which, prior to December
1, 1994, owned and operated certain residences now operated by the Company.

THE COMPANY

At the closing of the Company's initial public offering in November, 1994,
the Company began operating five assisted living residences located in Oregon.
As of June 17, 1996, the Company owned or leased a total of 43 assisted living
residences containing an aggregate of 1,486 units. Of these residences, 14
residences (490 units) were owned and 29 residences (996 units) were leased.
The Company is currently developing and, to a lesser extent, seeking to
acquire additional assisted living residences in small communities in Oregon,
New Jersey, Texas, Washington, Ohio, Idaho and other states with regulatory
and reimbursement climates which it believes are favorable. As of June 17,
1996, the Company had commenced construction on 20 residences (approximately
746 units), had agreed to lease upon completion two residences (66 units) that
were being developed by outside developers and had entered into a management
agreement to operate one residence (45 units) upon its completion. In
addition, the Company had entered into land purchase option agreements for the
development of 41 residences. The Company generally does not acquire sites for
development until it has completed its feasibility analysis and appropriate
zoning has been obtained.

Results of operations for the three months ended March 31, 1995 and March
31, 1996, include the financial results of six and 26 residences, respectively
as well as the Company's historical corporate overhead. The historical results
are not necessarily indicative of the Company's future financial performance
as the Company intends to significantly expand its operating base of
residences in 1996, 1997 and 1998. The Company anticipates that each residence
will have an operating loss (prior to depreciation, rent or interest, if any)
of $10,000 during the first three to four months of operation. To the extent
the Company sells a residence and leases it back or otherwise finances it
within four months of the commencement of operations, the aggregate loss may
increase by up to an additional $40,000. Based on the Company's development
schedule, the number of residences planned to open in 1996 ranges from 50 to
60, of which 10 were opened in the first quarter. The Company estimates that
the losses to be incurred during 1996 due to the opening of new residences
will range from $1.5 million to $3.0 million.

The estimated cost to complete construction and fund start up losses for the
new facilities that are currently planned to be developed by December 31, 1998
is between $320 million and $350 million. The Company anticipates that it will
use a combination of construction lines of credit, sale and leaseback
transactions, equity and debt financing and cash generated from operations to
fund this development activity. Since 1994, the total capitalized cost to
develop, construct and open a new residence, including land acquisition and
construction costs has ranged from approximately $1.5 million to $2.6 million.
These costs vary considerably based on a variety of site-specific factors. See
"Liquidity and Capital Resources" and "Risk Factors--Need for Additional
Financing."

15
<PAGE>

The Company derives its revenue 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 responsible
parties. During the twelve months ended December 31, 1995 and for the three
months ended March 31, 1996, approximately 69% and 79%, respectively of the
Company's revenue was derived from private pay sources. During these same
periods 21% and 14% were derived from state Medicaid agencies and the tenant-
paid portion of Medicaid residents accounted for an additional approximate 10%
and 8% of the Company's revenue. Resident fees include revenue derived from a
multi-tiered rate structure which varies based on the level of care required.
Resident fees are recognized as revenues when services are provided.

RESULTS OF OPERATIONS

The following table sets forth, for periods presented, the number of total
residences and units operated, average occupancy rates and the sources of
revenue for the Company and the Predecessor. The portion of revenues received
from state Medicaid agencies are labeled as "Medicaid State Portion" while the
portion of the Company's revenues that a Medicaid-eligible resident must pay
out of his or her own resources is labeled "Medicaid Resident Portion".

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- ---------------------------------------------------
ELEVEN MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Residences operated
(End of Period)........ 4 5 5 19 6 26
Units operated (End of
Period)................ 104 137 137 595 174 817
Average occupancy rate.. 94.8% 96.4% 97.0% 82.3% 93.8% 78.0%
Source of revenue:
Medicaid State
Portion............... 27.0% 29.0% 27.0% 21.4% 26.7% 14.0%
Medicaid Resident
Portion............... 12.0% 13.0% 11.9% 9.6% 11.8% 7.5%
Private................ 61.0% 58.0% 61.1% 69.0% 61.5% 78.5%
----- ----- ----- ----- ----- -----
Total................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>

The following table sets forth, for the periods presented for Stabilized
Residences, the total number of residences and units operated, average
occupancy rates and the sources of revenue for the Company and the
Predecessor. Stabilized Residences are defined as those residences which were
operating for nine months prior to the beginning of the period or have
achieved a 95% occupancy rate within the first nine months of operations.

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- ---------------------------------------------------
ELEVEN MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Residences operated
(End of Period)........ 4 4 4 5 4 9
Units operated (End of
Period)................ 104 104 104 137 104 264
Average occupancy rate.. 94.8% 99.2% 100% 99.1% 99.4% 98.5%
Source of revenue:
Medicaid State
Portion............... 27.0% 28.9% 28.4% 23.9% 26.4% 17.3%
Medicaid Resident
Portion............... 12.0% 13.2% 12.1% 11.3% 11.9% 10.0%
Private................ 61.0% 57.9% 59.5% 64.8% 61.7% 72.7%
----- ----- ----- ----- ----- -----
Total................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>

16
<PAGE>

The following table sets forth, for the periods presented for Start-up
Residences, the total number of residences and units operated, average
occupancy rates and the sources of revenue for the Company and the
Predecessor. Start-up Residences are defined as those residences which were
operating for less than nine months prior to the beginning of the period and
had not achieved a 95% occupancy rate.

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- ---------------------------------------------------
ELEVEN MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Residences operated
(End of Period)........ -- 1 1 14 2 17
Units operated (End of
Period)................ -- 33 33 458 70 553
Average occupancy rate.. -- 87.5% 87.5% 77.3% 85.5% 68.2%
Source of revenue:
Medicaid State
Portion............... -- 36.4% 21.3% 16.4% 27.8% 11.0%
Medicaid Resident
Portion............... -- -- % 10.6% 6.3% 11.7% 5.2%
Private................ -- 63.6% 68.1% 77.3% 60.5% 83.8%
--- ----- ----- ----- ----- -----
Total................... -- 100.0% 100.0% 100.0% 100.0% 100.0%
=== ===== ===== ===== ===== =====
</TABLE>

The following table sets forth, for the periods presented, the results of
operations for Stabilized Residences (in thousands).

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- ---------------------------------------------------
ELEVEN MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $1,884 $1,819 $165 $2,699 $502 $1,308
Residence operating
expenses............... 1,090 1,073 96 1,667 309 732
------ ------ ---- ------ ---- ------
Residence operating
income................ 794 746 69 1,032 193 576
Management fees......... 92 90 -- -- -- --
Building rentals........ -- -- 42 500 125 274
Depreciation and
amortization........... 132 100 4 116 12 46
------ ------ ---- ------ ---- ------
Total other operating
expenses.............. 224 190 46 616 137 320
------ ------ ---- ------ ---- ------
Operating income....... 570 556 23 416 56 256
Interest expense........ 309 285 7 147 24 76
------ ------ ---- ------ ---- ------
Pre-tax income.......... $ 261 $ 271 $ 16 $ 269 $ 32 $ 180
====== ====== ==== ====== ==== ======
</TABLE>

The following table sets forth, for the periods presented, the results of
operations for Start-up Residences (in thousands).

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- ---------------------------------------------------
ELEVEN MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ -- $ 22 $47 $1,368 $180 $1,442
Residence operating
expenses............... -- 54 29 1,112 140 1,204
--- ---- --- ------ ---- ------
Residence operating
income (loss)......... -- (32) 18 256 40 238
Management fees......... -- 3 -- -- -- --
Building rentals........ -- -- -- 298 21 286
Depreciation and
amortization........... -- 5 9 180 27 138
--- ---- --- ------ ---- ------
Total other operating
expenses............... -- 8 9 478 48 424
--- ---- --- ------ ---- ------
Operating income
(loss)................. -- (40) 9 (222) (8) (186)
Interest expense........ -- 23 1 4 -- 24
--- ---- --- ------ ---- ------
Pre-tax income (loss)... -- $(63) $ 8 $ (226) $ (8) $ (210)
=== ==== === ====== ==== ======
</TABLE>

17
<PAGE>

The following table sets forth, for the periods presented, the results of
operations for the five residences which were operating for both periods in
their entirety (in thousands).

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues................................................ $ 658 $ 712
Residence operating expenses............................ 401 408
--------- ---------
Residence operating income.............................. 257 304
Building rentals........................................ 125 125
Depreciation and amortization........................... 29 28
--------- ---------
Total other operating expenses.......................... 154 153
--------- ---------
Operating income........................................ 103 151
Interest expense........................................ 23 48
--------- ---------
Pre-tax income.......................................... $ 80 $ 103
========= =========
</TABLE>

THE COMPANY

Three months ended March 31, 1996 compared to three months ended March 31,
1995

Revenues. For the three months ended March 31, 1996, revenues were
$2,750,000 compared to $682,000 in the three months ended March 31, 1995, an
increase of $2,068,000 or 303%. The Company had opened or had received
certificates of occupancy on 35 residences as of March 31, 1996, of which 26
had operating results for the quarterly period compared to six operating
residences in the corresponding 1995 period. The Company had five residences
which had operated for the entire quarter for both March 31, 1995 and March
31, 1996. For these residences, revenue increased by $54,000 or 8.2% from
$658,000 in the first quarter of 1995 to $712,000 in the first quarter of
1996. This increase was primarily attributable to increases in rental rates as
a result of changes in the level of resident care. The average occupancy rate
for these residences for these periods was approximately 99% while the average
occupancy rate for all residences was approximately 78%. The remaining
$2,014,000 of increased revenue was derived from the 21 residences which began
operating subsequent to January 1, 1995.

Residence Operating Expenses. Residence operating expenses were $1,936,000
in the three months ended March 31, 1996 compared to $449,000 in the
corresponding 1995 period, an increase of $1,487,000, or 331%. For the five
residences that operated for the entire first quarter of 1995 and 1996,
residence operating expenses were $408,000, an increase of $7,000, or 1.8%
from the $401,000 of residence operating expenses in the first quarter of
1995. Expenses were relatively flat for these five residences because the
residences operated at 99% occupancy for each of the periods. The remaining
$1,480,000 of the increase was due to the 21 new residences which began
operating subsequent to January 1, 1995.

Corporate Overhead. Corporate overhead expenses were $215,000 in the three
months ended March 31, 1996 compared to $231,000 in the corresponding 1995
period, a decrease of $16,000, or 6.9%. Corporate overhead does not include
costs incurred at the corporate level that are directly related to new
residences that are being developed, as these costs are capitalized to the
specific projects under development.

Building Rentals. Building rentals increased to $560,000 in the three months
ended March 31, 1996 from $146,000 during the corresponding 1995 period. The
increase was the result of additional sale and leaseback transactions
completed by the Company from March of 1995 through March of 1996. The Company
had 18 operating leases at March 31, 1996 compared to four at March 31, 1995.
Building rentals for the five residences which operated for the entire first
quarter of 1995 and 1996 were unchanged.

Depreciation and Amortization. Depreciation and amortization expense was
$217,000 in the three month period ended March 31, 1996 compared to $39,000 in
the corresponding 1995 period, an increase of $178,000

18
<PAGE>

or 456%. This increase in depreciation and amortization expense was related to
the 21 new residences that opened subsequent to January 1, 1995. Depreciation
and amortization expense for the five residences which operated for the entire
first quarter of 1995 and 1996 was flat.

Interest (Income) Expense--Net. Interest (income) expense--net was $9,000 in
the three months ended March 31, 1996 compared to ($156,000) in the
corresponding 1995 period, a change of $165,000. Interest income decreased
$158,000 due to the Company's utilization of cash arising from the initial
public offering for development activities. Interest expense increased $7,000
due to the additional loans with the State of Oregon and the interest on the
$20 million convertible subordinated debentures. The increase was due to
$375,000 of interest and amortization related to the convertible subordinated
debentures which were issued in August, 1995 and an additional $79,000 of
interest on State of Oregon loans which were made in March 1995 and the first
quarter of 1996. This was offset by capitalized interest of $447,000.

Net Loss. The net loss during the first quarter of 1996 was $187,000
compared to $27,000 during the corresponding period in 1995. These losses have
resulted primarily from initial operating losses of residences which commenced
operations and have not yet achieved stabilized occupancy and an increase in
corporate overhead, including additional staffing, necessary to accommodate
the Company's expansion plan.

Year ended December 31, 1995 compared to one month ended December 31, 1994
(Company) and the eleven months ended November 30, 1994 (Predecessor)

The Company incurred a net loss of $575,000 or $0.19 per share, on revenue
of $4,067,000 for the year ended December 31, 1995. The loss resulted
primarily from an increase in corporate overhead, including additional
staffing necessary to accommodate the Company's expansion plan to develop
additional residences in 1996 and initial operating losses of residences which
commenced operations during the year. For the one month ended December 31,
1994, the Company incurred a net loss $64,000, or $(.02) per share, on
revenues of $212,000.

Revenues. Revenues were $4,067,000 for the year ended December 31, 1995
compared to $212,000 for the one month ended December 31, 1994 and $1,841,000
for the eleven months ended November 30, 1994 for a combined total of
$2,053,000, in 1994 which represents an increase of 98%. The increase is the
direct result of the additional fourteen residences which commenced operations
during 1995. The monthly average revenue per unit for the five Stabilized
Residences at December 31, 1995 was $1,631, compared to $1,592 for the month
ended December 31, 1994. The increase was due to a combination of increased
service care levels and approved rate increases. The average monthly rate for
all residences for the year ended December 31, 1995 was $1,588, which reflects
the effects of the additional 14 residences opened by the Company during 1995.
The payments from the state portion of Medicaid programs comprised
approximately 21% of the Company's revenue for the year ended December 31,
1995 compared to 27% for the month ended December 31, 1994 and 29% for the
eleven months ended November 30, 1994.

Residence Operating Expense. Residence operating expenses were $2,779,000
for the year ended December 31, 1995 compared to $125,000 for the one month
ended December 31, 1994 and $1,127,000 for the eleven months ended November
30, 1994 for a combined total of $1,252,000 in 1994 which represents an
increase of 122%. The increase is due to the increase in revenues as discussed
above along with the start-up costs relating to the fourteen additional
residences which commenced operations during 1995. At December 31, 1995 the
Company had certificates of occupancy on 25 residences, of which 19 were
licensed and had operating results compared to the five licensed residences at
December 31, 1994.

Corporate Overhead. Corporate overhead expenses for the year ended December
31, 1995 was $1,252,000 compared to the one month ended December 31, 1994 of
$152,000. This increase was a result of the increased number of residences
operated by the Company and the establishment of the corporate office.

Building Rentals. Building rentals were $798,000 for the year ended December
31, 1995 compared to $42,000 for the month ended December 31, 1994. The
increase was due to the increased number of sale and

19
<PAGE>

leaseback transactions completed by the Company during 1995. The expense for
1995 represents rental on nine residences while the expense for 1994
represents rental on three residences.

Depreciation and Amortization. Deprecation and amortization for the year
ended December 31, 1995 was $296,000, compared to the depreciation for the one
month ended December 31, 1994 of $13,000 and eleven months ended November 30,
1994 of $105,000 for a combined total of $118,000 in 1994 which represents an
increase of 151%. This increase is the result of an additional 16 facilities
that were developed by the Company in 1995 and were still owned as of December
31, 1995. In addition, two residences which were leased in October of 1995
incurred two months and one month of depreciation, respectively, during 1995.

Interest (Income) Expense--Net. Interest expense for the year ended December
31, 1995 was $96,000 which represents interest on the loans on two initial
buildings purchased from the Predecessor. Interest income of $579,000 was
earned on the investment of cash from the proceeds of the initial public
offering in 1994 and the Company's private placement of convertible debentures
in August of 1995.

Net Income (Loss). The Company incurred a net loss of $575,000 or $0.19 per
share for the year ended December 31, 1995. The loss resulted primarily from
an increase in corporate overhead, including additional staffing necessary to
accommodate the Company's expansion plan to develop additional residences in
1996 and operating losses of residences which commenced operations during the
year.

PREDECESSOR

Eleven Months Ended November 30, 1994 Compared to Year Ended December 31,
1993

Operating results for the period January 1, 1994 to November 30, 1994
reflect eleven months of operations while the 1993 period represents a full
year of operations.

Revenues. For the eleven months ended November 30, 1994, the Predecessor had
revenues of $1,841,000 from the operations of five residences in Oregon,
including Hillside House which commenced operations on October 15, 1994.
Average occupancy in 1994 was 96%, compared to 95% in 1993. Hillside House
reported revenues of $69,000 for the period ended November 30, 1994. Revenues
from other residences increased approximately 3% in 1994 compared to 1993 due
to occupancy rate and reimbursement rate increases, which were partially
offset by a decrease in service levels in the 1994 period. The service needs
of tenants may change depending on the level of services required and the
current case mix.

Residence Operating Expenses. Residence operating expenses (which exclude
building rentals, depreciation and amortization, interest on long-term debt
and corporate costs) were $1,127,000, or 61% of revenue in the eleven months
ended November 30, 1994, compared to 58% in 1993. This increase in expenses
resulted in operating margins of 39% and 42% for the 1994 period and 1993,
respectively. The 1994 decrease in operating margin is primarily due to the
impact of the October 1994 opening of Hillside House, which expectedly
experienced lower initial operating revenues with relatively fixed operating
costs.

Management Fees. Management fees constituted 5% of revenues in the eleven
months ended November 30, 1994 and the year ended December 31, 1993 because
the fees were contractually fixed as a percentage of revenue pursuant to
management agreements.

Depreciation and Amortization. Depreciation and amortization expense was
$105,000 or 5.7% of revenues, in the eleven months ended November 30, 1994,
compared to $132,000 or 7.0% of revenues, in 1993. The Predecessor incurred
$32,000 of amortization expense in 1993 relating to capitalized loan fees and
start-up costs in connection with financing and start-up of buildings. The
Predecessor had no amortization expense in 1994, accounting for the relative
decrease in depreciation and amortization expense.

Interest (Income) Expense--Net. Interest (income) expense-net was $285,000
in the eleven months ended November 30, 1994 compared to $309,000 in 1993, a
decrease of $24,000. Interest income was relatively

20
<PAGE>

constant at $12,000 in the 1994 period compared to $11,000 in 1993. The
additional month in 1993 compared to the 1994 period accounts for the decrease
in net expense.

Net Income (Loss); Pro Forma Provision for Income Taxes; Pro Forma Net
Income (Loss). Income before income taxes was $231,000 in 1994 compared to
$261,000 in 1993. On a pro forma basis, the effective combined federal and
state tax rate would have been 36.8% in 1994 compared to 25.6% in 1993. Pro
forma net income would have been $146,000 in 1994 compared to $194,000 in
1993. The decrease in pro forma net income is due to 1994 reflecting eleven
months of operations compared to a full year in 1993. In addition, the
Predecessor utilized net operating loss carryforwards from previous years,
thereby reducing federal taxes by $27,000 in 1993.

Year Ended December 31, 1993 Compared to Year Ended December 31, 1992

Revenues. Revenues increased to $1,884,000 in 1993 from $1,377,000 in 1992,
an increase of $507,000 or 36.8%. The increase was primarily due to the
inclusion of a full year of operations in 1993 for Huffman House, which
commenced operations in October 1992. Huffman House operations increased
revenue by $401,000 in 1993. The remaining increase of $106,000 was due to
rental and service increases at Aspen Court, Juniper House and Rackleff House.

Residence Operating Expenses. Residence operating expenses increased to
$1,090,000 in 1993 from $908,000 in 1992, an increase of $182,000 or 20%. The
first full year of operations at Huffman House accounted for $160,000 of this
increase. As a percentage of revenues, residence operating expenses were 57.9%
in 1993 compared to 65.9% in 1992. The relative decrease is primarily due to
Huffman House which commenced operations in 1992. Residence operating expenses
were disproportionately high compared to lower start-up revenues in 1993. In
1993, Huffman House reached stabilized occupancy.

Management Fees. Management fees constituted 5% of revenues in each of the
years ended December 31, 1993 and 1992 because the fees were contractually
fixed as a percentage of revenue pursuant to management agreements.

Depreciation and Amortization. Depreciation and amortization increased to
$132,000 in 1993 from $93,000 in 1992, an increase of $39,000, or 41.9%. A
full year of depreciation with respect to Huffman House in 1993 accounted for
substantially all of the increase.

Interest (Income) Expense--Net. Interest (income) expense-net increased to
$309,000 in 1993 from $247,000 in 1992, an increase of $62,000 or 25.1%.
Interest associated with long-term debt on Huffman House increased interest
expense by $69,000 partially offset by lower interest costs due to a reduction
in long-term debt at the other operating properties.

Net Income (Loss); Pro Forma Provision for Income Taxes: Pro Forma Net
Income (Loss). As a result of the above, income before income taxes increased
to $261,000 in 1993 from $60,000 in 1992, an increase of $201,000 or 335.0%.
On a pro forma basis, the effective combined federal and state tax rate would
have been 25.6% in 1993. Due to net operating loss, the Company would have had
no tax provision in 1992. Pro forma net income would have increased to
$194,000 in 1993 from $60,000 in 1992, an increase of $134,000 or 223.3%. The
increase in pro forma net income is due to improved occupancy rates at the
operating properties and the additional profitability of Huffman House which
completed its first full year of operations in 1993.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1996, the Company had negative working capital of approximately
$6.4 million. The Company had accrued $1.9 million in connection with the
acquisition of a residence for which the Company had received a Certificate of
Occupancy, but had not completed closing documentation as of March 31, 1996.
Subsequent to March 31, 1996, the Company purchased this property and
immediately sold it to LTC in a sale and leaseback transaction which
approximated cost. In addition, the Company had received draw requests of

21
<PAGE>

approximately $5.3 million for the March development activity, which was not
due until April 10, 1996. Between March 31, 1996 and April 10, 1996, the
Company completed the sale and leaseback of eight residences in Texas for
$16.4 million which approximated cost.

Net cash used for operating activities was approximately $2.9 million during
the three month period ended March 31, 1996. The primary use of cash was $1.8
million to reduce accounts payable and accrued expenses, $0.7 million for pre-
opening costs on residences and $0.2 million related to the posting of
deposits for leaseback transactions.

Net cash used in investing activities totaled $6.2 million during the three
month period ended March 31, 1996. The primary use of cash was $20.5 million
related to the development of new assisted living residences in Oregon,
Washington and Texas. This was offset by proceeds of $14.4 million related to
the sale and leaseback of six residences in Texas. Net cash provided by
financing activities totaled $5.9 million during the three month period ended
March 31, 1996 which was primarily related to the proceeds on three separate
residence loans in Oregon.

The Company intends to utilize additional financing to develop additional
residences in 1996. The Company intends to seek additional long-term financing
through the Oregon Housing and Community Services Department (the "OHCS") and,
to the extent available, additional low-cost bond financing, and sale and
leaseback transactions in Washington, Texas and New Jersey. As of May 13,
1996, the Company had started construction or had purchased land for
development on 22 parcels of land in Oregon, Washington and Texas for a total
of 812 units. The Company expects 13 of these residences to open in the second
quarter, eight to open in the third quarter, and one to open in the fourth
quarter. In addition, the Company has entered into agreements to lease one
residence in Oregon (30 units) and one residence in Texas (36 units), which
are currently under development. The Company has also entered into a
management agreement to operate one residence in Oregon (45 units) upon its
completion. The Company anticipates that two of these residences will open in
the second quarter and one will open in the third quarter. In addition, the
Company has also entered into agreements pursuant to which, it may purchase,
subject to completion of due diligence and various other conditions, 38
undeveloped sites. The Company has made initial deposits relating to these
sites and has completed or is in the process of completing its demographic
analysis and initial architectural plans for purposes of building assisted
living residences and anticipates that six of these residences will open in
the third quarter and 16 will open in the fourth quarter.

Capital expenditures for 1996, which relate primarily to the development of
new residences, are estimated to total approximately $72 million to $88
million, of which approximately $20 million had been spent through March 31,
1996. Subsequent to March 31, 1996, the Company completed the sale and
leaseback of eight residences in Texas for $16.4 million. In addition, the
Company has agreed in principle, subject to written confirmation, to sell an
additional 24 residences to two REITs (one of which is LTC). The Company
expects these sales to generate approximately $62 million in proceeds.
Moreover, the Company anticipates being able to continue to utilize the State
of Oregon tax-exempt bond program for its Oregon residences under development.
The Company currently has an outstanding commitment from the Oregon tax-exempt
bond program to provide approximately $1 million of financing for one
residence and it has three applications under review which, if approved, will
generate approximately $6.6 million in proceeds.

The estimated cost to construct and fund start-up costs for the new
facilities which the Company anticipates developing by December 31, 1998 is
between $320 million and $350 million which substantially exceeds the funds
currently available to the Company. Substantial additional financing will be
required to complete the Company's growth plans. There can be no assurance
that such financing will be available on acceptable terms. See "Risk Factors--
Need for Additional Financing".

As of March 31, 1996, the Company had invested excess cash balances in
short-term certificates of deposit and U.S. Treasury securities. The Company
intends to satisfy future capital requirements for its development activities
by various means, including financing obtained from sale/leaseback
transactions, construction

22
<PAGE>

financing, long-term state bond financing, debt or equity offerings, such as
this Offering, and, to the extent available, cash generated from operations.

INFLATION

Management believes that the Company's operations have not been materially
adversely affected by inflation. The Company expects salary and wage increases
for its skilled staff will continue to be higher than average salary and wage
increases, as is common in the health care industry. The Company expects that
it 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.

RECENT ACCOUNTING PRONOUNCEMENTS

The Company has reviewed the requirements of the Financial Accounting
Standard Board's Statement No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"),
and does not anticipate the expected undiscounted future cash flows generated
by operating its long-lived assets to be less than the assets carrying
amounts, therefore the Company does not anticipate any impact upon
implementation of SFAS No. 121 in 1996.

The Company has determined not to implement FASB issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and will continue to comply with APB Opinion
25, "Accounting for Stock Issued to Employees", in accounting for stock-based
compensation issued to employees. The Company will record any stock-based
compensation to non-employees in accordance with SFAS No. 123. The Company
will adopt the new fair value accounting rules to disclose pro forma net
income and earnings per share under the new method. The Company will comply
with the disclosure requirements beginning January 1, 1996.

23
<PAGE>

BUSINESS

OVERVIEW

The Company develops, owns, leases and operates assisted living residences,
an increasingly popular form of housing for senior citizens who, although
generally ambulatory, need help with the activities of daily living. In
addition to housing, the Company provides personal care and support services,
and makes available routine nursing services (as permitted by applicable
government regulations) designed to meet the needs of its residents. The
Company believes that this combination of housing, personal care and support
services provides a cost-efficient alternative and provides an independent
lifestyle for individuals who do not require the broader array of medical
services that nursing facilities are required by law to provide.

The Company was founded in July 1994 by Dr. Keren B. Wilson, the Company's
Chief Executive Officer and President, to develop, own, lease and operate
assisted living residences. The Company completed its initial public offering
in November, 1994 and immediately began operating five assisted living
residences containing an aggregate of 137 units. As of June 17, 1996, the
Company owned or leased a total of 43 assisted living residences containing an
aggregate of 1,486 units. For the three months ended March 31, 1996, the
Company's nine stabilized residences which are defined as those residences
that had been operating for nine months prior to the beginning of the period
or had achieved 95% occupancy within the first nine months of operations, had
average occupancies of approximately 99%. The average monthly rental for the
nine Stabilized Residences for the three months ended March 31, 1996 was
approximately $1,682 per unit. The Company's total residences had average
occupancies of approximately 78% and an average monthly rental of $1,595 per
unit for the same period. The Company had revenues of $2.8 million and a net
loss of $187,000 for the three months ended March 31, 1996. The Company
anticipates that a majority of its revenues will continue to come from private
pay sources. However, the Company believes that locating residences in states
with favorable regulatory and reimbursement climates should provide a stable
source of residents eligible for Medicaid reimbursement to the extent that
private pay residents are not available and, in addition, provide the
Company's private pay residents with alternative sources of income when their
private funds are depleted and they become Medicaid eligible.

Currently, all of the Company's operating residences are located in small
communities in Oregon, Washington and Texas. The Company had 43 residences
opened as of June 17, 1996. Of the 43 residences opened by the Company, 14 of
the residences were owned and 29 of the residences were leased. The Company is
currently developing and, to a lesser extent, seeking to acquire additional
assisted living residences in small communities in Oregon, New Jersey, Texas,
Washington, Ohio, Idaho and other states with regulatory and reimbursement
climates that the Company believes are favorable. As of June 17, 1996, the
Company had commenced construction on 20 residences (approximately 746 units),
had agreed to lease upon completion two residences (66 units) that were being
developed by outside developers and had entered into a management agreement to
operate one residence (45 units). In addition, the Company had entered into
land purchase option agreements for the development of 41 residences. The
Company generally does not acquire sites for development until it has
completed its feasibility analysis and appropriate zoning has been obtained.
Capital expenditures for 1996, which relate primarily to the development of
new residences, are estimated to total approximately $72 to $88 million, of
which approximately $20 million had been spent through March 31, 1996.

INDUSTRY

The long-term care industry encompasses a continuum of accommodations and
health care services that are provided primarily to the elderly. For those
among the elderly requiring limited services, home-based care in the elderly
person's home or in a retirement center offers a viable option for assistance
on an "as required" basis. Services provided by congregate and retirement
centers are often limited to meals, housekeeping and laundry. As an elderly
person's needs for assistance increase, care in an assisted living residence,
where assistance with personal care (such as dressing and bathing), support
services (such as housekeeping and laundry), and routine nursing services
(such as assistance with taking medication and health monitoring), are
available, is often

24
<PAGE>

preferable to home-based care. For those elderly people in need of specialized
support, rehabilitative, nutritional, respiratory, and other skilled
treatments, care in a nursing facility may be required. Generally, assisted
living residents have higher acuity levels than residents of congregate and
retirement living centers but lower acuity levels than patients in skilled
nursing facilities.

Assisted living is designed to enhance both the physical and psychological
well-being of the frail elderly by promoting their independence in a home-like
setting. The services and supervision provided are intended to optimize the
residents' abilities and foster their autonomy. Residents are typically
individuals who do not require the 24-hour skilled medical care provided in
nursing care facilities, but who are unable, for various reasons, to live
alone. The Company believes that the assisted living industry is among the
most rapidly expanding sectors of the senior care marketplace. The Company
believes that the following factors should continue to positively affect the
assisted living industry:

Limited Supply of Nursing Facility Beds. The majority of states have adopted
certificate of need ("CON") or similar statutes that generally require a state
agency to determine that a need exists prior to the addition of new beds, or
the addition of new services which may be reimbursable, either in whole or in
part, by one or more government funded programs. Additionally, the Company
believes that high construction costs, limitations on government reimbursement
for the full cost of construction and start-up expenses further restrain the
growth in the supply of such facilities and beds.

Aging Population. According to the U.S. Bureau of Census, the number of
individuals in the United States 85 years and older is expected to increase by
approximately 43% during the 1990s, from 3.0 million in 1990 to an estimated
4.3 million in 2000, as compared to total U.S. population growth of
approximately 11% during the same period. It is further estimated that
approximately 57% of the population of seniors over age 85 currently need
assistance with activities of daily living and more than one-half of all
seniors are likely to develop Alzheimer's disease or other cognitive disorders
by age 85.

Lower Average Cost. The Company believes that the average annual cost to
residents of receiving assisted living care in the Company's residences is
approximately 60 to 80 percent of the cost of receiving similar care in a
skilled nursing facility. According to the Marion Merrell Dow Inc. Managed
Care Digest Series, Institutional Digest 1995, the average annual cost per
person in 1994 in the United States for private, nursing home care was
approximately $36,000. During the three months ended March 31, 1996, the
Company's nine Stabilized Residences annualized revenue per resident was
approximately $20,100.

Cost Containment Pressures. Responding to rising health care costs,
governmental and private payor sources have adopted cost containment measures
that have encouraged reduced lengths of stay in hospitals. The result of this
trend is an increase in the number of seniors requiring acute care who are
more likely to receive care in a skilled nursing facility as opposed to an
acute-care hospital. This, in turn, has caused nursing facility operators to
focus on improving occupancy and increasing services to residents requiring
these higher levels of care. As the level of care for nursing facility
residents rises and the supply of nursing facility space is filled by
residents having more acute needs, the Company believes that demand for
assisted living residences will increase.

Favorable Regulatory and Reimbursement Climate. In recent years, certain
states have adopted laws or regulations permitting individuals with higher
acuity levels to remain in assisted living communities, rather than requiring
that those individuals be transferred to a skilled nursing facility. These
changes have generally been prompted by the cost-containment pressures
discussed above and a desire to reduce the demand for expensive skilled
nursing services for the elderly. Ohio, Oregon, New Jersey, Texas and
Washington are among the states that have adopted such regulations for the
operation of assisted living residences. Each of these states, for example,
allows assisted living facilities to provide certain skilled nursing services
and permits occupancy by residents who may otherwise qualify for placement in
a nursing facility.

25
<PAGE>

In addition, in 1981, the federal government approved a Medicaid waiver
program, which permits states to develop programs relating to the health care
and housing needs of the low-income elderly eligible for nursing home
placement (the "Medicaid Waiver Program"). Medicaid waivers permit states to
apply a portion of Medicaid funding for skilled nursing facility care to other
forms of care, such as assisted living. Without a Medicaid Waiver Program,
states can only use federal Medicaid funds for long-term care in skilled
nursing facilities. Medicaid funds for assisted living services are currently
available in twenty states. Medicaid Waiver Programs to fund assisted living
services are being considered for implementation in additional states. The
implementation of these favorable laws and regulations and the Medicaid Waiver
Program have created a regulatory climate in these states that encourages the
development of assisted living facilities.

Consumer Acceptance. The Company believes assisted living is increasingly
the preferred alternative of seniors and their families. Assisted living
residents generally have greater independence, and assisted living services
typically allow residents to "age in place" in a residential setting. The
Company believes these factors result in a higher quality of life than would
be experienced in a more institutional or clinical settings, such as a skilled
nursing facility.

Increasing Affluence of the Elderly. According to the United States Bureau
of the Census, the median net worth of householders age 75 and older has
increased from $61,491 in 1988 to $76,541 in 1992. Accordingly, the Company
believes that the number of seniors who are able to afford high-quality
residential environments, such as those offered by the Company, has increased
in recent years.

STRATEGY

The Company intends to expand its position as a provider of assisted living
services through continued development and expansion opportunities. The
Company generally locates its residences in well-established residential
neighborhoods in smaller rural and suburban communities, where the population
typically ranges from 10,000 to 40,000 with a higher than average percentage
of middle aged or elderly individuals. The principal elements of the Company's
strategy for achieving this objective are as follows:

Expand Market Penetration. The Company intends to continue to grow primarily
through the development of additional residences and to increase its market
penetration in both existing and targeted markets. The Company targets smaller
rural and suburban communities with an appropriate concentration of seniors.
The Company also focuses on states with favorable regulatory environments and
Medicaid reimbursement programs. In its targeted markets, the Company seeks to
develop clusters of residences to enable the Company to realize operating
efficiencies and economies of scale within a region.

Service Higher Acuity Residents. The Company offers, directly and through
ancillary services, higher levels of care to its residents than is typical in
other assisted living residences. In addition, the Company will endeavor to
make available third party providers to complement the Company's range of
services in order to meet the varied needs of its residents. By providing
access to both a more intensive and broader spectrum of care, the Company
believes it will be more capable of providing residents the opportunity to
"age in place", and thereby eliminate the need for its residents to be
transferred to a higher acuity environment such as a skilled nursing facility.

Pursue Joint Venture Opportunities. Where appropriate, the Company seeks to
facilitate entry into new markets by entering into joint venture
relationships. Assisted living residence joint ventures will generally consist
of the Company providing strategic, operational and management services in
exchange for an ownership interest. The Company believes that the
implementation of these assisted living joint ventures will enable it to
establish a presence in certain markets on an expedited basis while limiting
its commitment of additional resources. The Company may also pursue joint
ventures with other community-based providers, such as home health agencies.
The Company believes that such joint ventures will allow it to offer
additional services and generate additional resident referrals.

26
<PAGE>

PROPERTIES

The following chart sets forth, as of June 17, 1996, the location, ownership
status, number of units, the licensure date and the occupancy at May 31, 1996
for the Company's residences.

<TABLE>
<CAPTION>
OCCUPANCY AT
RESIDENCE LOCATION OWNERSHIP UNITS LICENSURE DATE MAY 31, 1996
- --------- -------- --------- ----- -------------- ------------
<S> <C> <C> <C> <C> <C>
OREGON
Rackleff House Canby Leased(1) 25 December 1990 96%
Aspen Court Madras Owned 27 March 1991 100%
Juniper House Pendleton Leased(1) 26 April 1991 100%
Huffman House Newberg Leased(1) 26 October 1992 96%
Hillside House Lincoln City Owned 33 October 1994 100%
Brookside House Redmond Leased(1) 37 March 1995 95%
Davenport House Silverton Owned 30 July 1995 100%
Carriage House Prineville Owned 30 October 1995 83%
Parkhurst House Hood River Owned 30 October 1995 83%
Awbrey House Bend Owned 46 November 1995 78%
Adams House Myrtle Creek Leased(1) 34 March 1996 41%
-----
SUBTOTAL 344
=====
TEXAS
Oakwood House Marshall Leased(1) 30 July 1995 90%
Alpine House Longview Leased(1) 30 September 1995 97%
Preston House Sherman Leased(1) 30 October 1995 90%
Cedarview House Gun Barrel City Leased(1) 30 October 1995 97%
Winkler House Carthage Leased(1) 30 October 1995 73%
Lakeland House Athens Leased(1) 30 November 1995 90%
Harrison House Greenville Leased(1) 30 November 1995 83%
Angelina House Jacksonville Leased(1) 39 December 1995 82%
Wheeler House Gainesville Leased(1) 30 January 1996 53%
Hickory House Levelland Leased(1) 30 January 1996 73%
Hopkins House Sulphur Springs Leased(1) 30 January 1996 73%
Katy House Denison Leased(1) 30 January 1996 60%
Wren House Cleburne Leased(1) 36 January 1996 90%
Hoyt House Sweetwater Leased(1) 30 March 1996 53%
Sabine House Orange Leased(1) 36 March 1996 33%
Potter House Amarillo Leased(1) 50 March 1996 86%
Lucas House Beaumont Leased(1) 50 April 1996 42%
Neches House Lufkin Leased(1) 39 May 1996 28%
Rose House Port Arthur Leased(1) 50 May 1996 34%
Marcy House Big Spring Owned 38 June 1996 N/A
Austin House Nacogdoches Owned 30 June 1996 N/A
Millican House Bryan Owned 30 June 1996 N/A
Mackenzie House Lubbock Owned(2) 50 June 1996 N/A
Lakewell House Mineral Wells Owned 30 June 1996 N/A
Bradfield House Mesquite Owned(2) 50 June 1996 N/A
Santa Fe House Plainview Owned 36 (3) N/A
Connor House Canyon Owned 30 (3) N/A
-----
SUBTOTAL 954
=====
WASHINGTON
Chenoweth House Kennewick Leased(1) 36 December 1995 97%
Orchard House Grandview Leased(1) 36 February 1996 56%
Pioneer House Walla Walla Leased(1) 36 February 1996 94%
Mountainview House Camas Leased(1) 36 March 1996 36%
Lexington House Vancouver Leased(1) 44 June 1996 N/A
-----
SUBTOTAL 188
-----
TOTAL 1,486
=====
</TABLE>

27
<PAGE>

- --------
(1) The initial lease terms range from ten to twenty years. The Company is
responsible for all costs including repairs to the residence, property
taxes, and other direct operating costs of the residences. Building rent
is recorded on a straight-line basis for those residences which have a
specified rent increase. Building rent is recorded as incurred for those
residences which have annual increases based on an increase in the
consumer price index.

(2) The Company has entered into an agreement to sell to and lease back the
residence from a REIT.

(3) Certificates of occupancy have been received and licensure is pending.

The Company also leases approximately 3,500 square feet of office space in
Portland, Oregon which houses its corporate and northwest regional
headquarters. Due to the recent construction of its owned and leased
residences, the Company believes that these residences are suitable and
adequate for the conduct of its business and operations.

28
<PAGE>

DEVELOPMENT

The Company is developing additional residences in Oregon, New Jersey,
Texas, Washington, Ohio, Idaho and other states. As of June 17, 1996, the
Company had commenced construction on 20 residences, had agreed to lease upon
completion two residences which were being developed by outside developers,
and had entered into a management agreement to operate one residence upon its
completion. The following sets forth the location, number of units and
expected commencement of operations for these residences:

<TABLE>
<CAPTION>
EXPECTED COMMENCEMENT
LOCATION UNITS OF OPERATIONS(1)
-------- ----- ---------------------
<S> <C> <C>
IDAHO
Hayden 39 Q 3 1996
---
OHIO
Bellefontaine 35 Q 3 1996
Bucyrus 35 Q 3 1996
Defiance 39 Q 3 1996
---
109
---
OREGON
Brookings 36 Q 2 1996
Newport(2) 36 Q 2 1996
Astoria 28 Q 2 1996
Grants Pass(3) 45 Q 3 1996
Sutherlin(4) 30 Q 3 1996
Klamath Falls 35 Q 3 1996
Estacada 30 Q 3 1996
Talent 36 Q 4 1996
---
SUBTOTAL 276
---
TEXAS
Conroe 38 Q 2 1996
Pampa 36 Q 2 1996
Abilene 38 Q 3 1996
Grandbury(4) 36 Q 3 1996
College Station 39 Q 3 1996
Henderson 30 Q 3 1996
Midland 50 Q 3 1996
Rowlett 36 Q 3 1996
Wichita Falls 50 Q 3 1996
---
SUBTOTAL 353
---
WASHINGTON
Kelso 40 Q 2 1996
Battle Ground 40 Q 3 1996
---
SUBTOTAL 80
---
TOTAL 857
===
</TABLE>
- --------
(1) The quarter in which the residence expects to receive its certificate of
occupancy. The Company anticipates that the residence will receive its
licensure within 1 to 2 months of receiving its certificate of occupancy.
See "Risk Factors--No Assurance as to Ability to Develop or Acquire
additional Living Residences."

(2) The Company has control of this site through a 31 year land lease with two
consecutive 30-year extensions.

(3) The Company has agreed to operate this residence under a management
agreement upon completion.

(4) The Company has agreed to lease these residences from outside developers
upon completion.

29
<PAGE>

The Company has also entered into land purchase option agreements in
connection with the acquisition of 41 sites which it may develop into
additional residences. The Company has made initial deposits relating to these
sites and has completed or is in the process of completing its demographic
analysis and initial architectural plans for purposes of building assisted
living residences and anticipates that one of these residences will open in
the third quarter and 16 will open in the fourth quarter.

The Company generally locates its residences in well-established residential
neighborhoods in smaller rural and suburban communities, where the population
typically ranges from 10,000 to 40,000 with a higher than average percentage
of middle aged or elderly individuals. To provide the appropriate level of
personal care efficiently and economically, and to ensure that residents are
not intimidated by residence size, the Company develops residences ranging in
size from 30 to 50 residential units and containing approximately 16,000 to
32,000 total square feet, with each unit comprising an average of 320 square
feet of private living space.

The Company either retains outside developers to construct residences, or
acquires newly-constructed residences from developers under "turn-key"
agreements. The Company approves all aspects of development including, among
other things, site selection, plans and specifications, the proposed
construction budget and selection of the architect and general contractor. The
Company estimates the average construction time for a typical residence to be
approximately five to nine months, depending upon the number of units. The
Company estimates that, once developed, it takes approximately nine months
after licensure for each residence to achieve a stabilized occupancy level of
95% or higher. The Company anticipates that each residence will have an
operating loss (prior to depreciation, rent or interest, if any) of $10,000
during the first three to four months of operation. To the extent the Company
sells a residence and leases it back or otherwise finances it within four
months of the commencement of operations, the aggregate loss may increase by
up to an additional $40,000.

SERVICES

The Company's 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 but do not typically need the 24-
hour skilled medical care provided in nursing facilities. Services provided to
these residents are designed to respond to their individual needs and to
improve their quality of life. This individualized assistance is available 24
hours a day, to meet both anticipated and unanticipated needs. General
services in the Company's residences include the provision of three meals per
day, laundry, housekeeping and maintenance. Available support services include
personal care and routine nursing care, social and recreational services,
transportation and other special services needed by the resident. Personal
care includes services such as bathing, dressing, personal hygiene, grooming,
as well as eating and ambulating assistance. Routine nursing services, which
are made available and are provided according to the residents individual need
and state regulatory requirements, include assistance with taking medication,
skin care and injections. Organized activities are available for social
interaction and entertainment. Special services available include banking,
grocery shopping and pet care. The Company also arranges access to additional
services beyond its provision of basic housing and related services, including
physical therapy, pharmacy services and the sale or lease of durable medical
equipment.

Although a typical package of basic services provided to a resident includes
meals, housekeeping, laundry and personal care, the Company does not have a
standard service package for all residents. Instead, it is able to accommodate
the changing needs of its residents through the use of individual service
contracts and flexible staffing patterns. The Company's multi-tiered rate
structure for the services it provides is based upon the acuity of, or level
of services needed by, each resident. Supplemental and specialized health care
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). The Company assesses the level
of need of each resident regularly.

30
<PAGE>

OPERATIONS

The day-to-day operations of each residence are managed by an on-site
program director who is responsible for the overall operation of the
residence, including quality of care, marketing, social services and financial
performance. The program director 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 Company's facilities do not have any doctors on staff.
The nursing hours vary depending on the residents' needs. The Company consults
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 its residents. Personal care, dietary services,
housekeeping and laundry services are performed primarily by personal service
assistants who are full-time employees of the Company. Maintenance services
are performed by part-time employees, while landscaping services are typically
performed by third-party contractors.

The Company manages its residences, which includes the development of
operating standards and the provision of recruiting, training and accounting
services. The Company utilizes regional offices that include a team leader who
typically oversees four to six residences and works under the supervision of a
regional manager. The team leader is responsible for monitoring and
supervising all aspects of operations in the region, including reviewing and
monitoring compliance with corporate policies and procedures, and acting as a
liaison between the residences and corporate headquarters. The regional office
team leaders oversee the day-to-day operations of the residences. Financial
oversight, including all disbursements, are managed at the corporate office.

Presently, the residence personnel are supported by a corporate staff based
at the Company's headquarters. Corporate personnel work with the program
directors to establish residence goals and strategies, quality assurance
oversight, development of Company policies and procedures, development and
implementation of new programs, cash management and treasury functions and
human resource management.

COMPETITION

The long-term care industry generally is highly competitive and the Company
expects that the assisted living business in particular will become more
competitive in the future. The Company competes with numerous other companies
providing similar long-term care alternatives, such as home health agencies,
life care at home, community-based service programs, retirement communities
and convalescent centers. The Company expects that, as assisted living
receives increased attention and the number of states which include assisted
living in their Medicaid programs increases, competition will 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 the Company. 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 the Company's competitors operate on a not-for-profit basis or as
charitable organizations. Some of the Company's competitors are significantly
larger than the Company and have, or may obtain, greater resources than those
of the Company. The Company believes that there is moderate competition for
less expensive segments of the private market and for Medicaid patients in
small communities. The Company's major competitors are other long-term care
facilities within the same geographic area as its residences because
management's experience indicates that senior citizens who move into living
communities frequently choose communities near their homes.

FUNDING FOR ASSISTED LIVING CARE

Assisted living residents or their families generally pay the cost of care
from their own financial resources. Depending on the nature of an individuals
health insurance program or long-term care insurance policy, the individual
may receive reimbursement for costs of care under an "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

31
<PAGE>

needy persons, regardless of age, and is funded jointly by federal, state and
local governments. Medicaid reimbursement varies from state to state. Although
a majority of the Company's revenues come from private payors, the cost
structure of the residences has historically been, and is expected to continue
to be, sufficiently low so that the residences are able to operate profitably
if all of their revenues are derived through Medicaid reimbursements.

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
Health Care Financing Administration ("HCFA"). Under a Medicaid Waiver
Program, states apply to HCFA 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. A limited number of states including Oregon, New
Jersey, Texas, Washington, Ohio and other states currently have, or will have,
operating Medicaid Waiver Programs that allow them to pay for assisted living
care. Without a Medicaid Waiver Program, states can only use federal Medicaid
funds for long-term care in nursing facilities.

During the year ended December 31, 1995 and the three months ended March 31,
1996, direct payments received from state Medicaid agencies accounted for
approximately 21% and 14% respectively of the Company's revenue while the
tenant-paid portion of Medicaid residents accounted for approximately 10% and
8% of the Company's revenue during these periods. The Company expects that
state Medicaid reimbursement programs will constitute a significant source of
revenue of the Company

GOVERNMENT REGULATION

The Company's assisted living residences are subject to certain state
regulations and licensing requirements. In order to qualify as a state
licensed facility, the Company's residences must comply with regulations which
address, among other things, staffing, physical design, required services and
resident characteristics. The Company has obtained licenses in Oregon,
Washington, and Texas, and expects that it will obtain licenses in other
states as required. The Company's 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.

The Company believes that its residences are in substantial compliance with
all applicable regulatory requirements. However, in the ordinary course of
business, a residence can be cited for a deficiency. In such cases, the
appropriate corrective action is taken. No actions are currently pending on
any of the Company's residences nor have any of them been cited for non-
compliance with regulatory requirements.

As a provider of services under the Medicaid program in the United States,
the Company is subject to Medicaid fraud and abuse law, which prohibits 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 the Company operates or intends to 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. The
Company at all times attempts 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 enactments of new

32
<PAGE>

laws or regulations will not have a material adverse effect on the Company's
results of operations or financial condition.

Currently, assisted living residences are not regulated as such by the
federal government. State standards required of assisted living providers are
less in comparison with those required of other licensed health care
operators. For instance, the states initially targeted for
development/expansion by the Company do not set staffing ratios. 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.

EMPLOYEES

As of March 31, 1996, the Company had approximately 705 employees, of which
257 were full-time employees and 448 were part-time employees. None of the
Company's employees are represented by any labor union. The Company believes
that its labor relations are good.

33
<PAGE>

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth certain information with respect to the
directors, executive officers and certain other key employees of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS
Keren Brown Wilson...... 47 Chief Executive Officer, President and Director
Stephen Gordon.......... 46 Chief Financial Officer and Chief Administrative Officer
William McBride
III(1)(2).............. 36 Chairman of the Board of Directors
Andre C.
Dimitriadis(1)(2)...... 55 Director
Richard C. Ladd(2)...... 57 Director
Bradley G. Razook(1).... 40 Director
CERTAIN KEY EMPLOYEES
Connie J. Baldwin....... 51 Director of Operations
Rhonda S. Marsh......... 29 Controller
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

The Board of Directors currently consists of five persons. Directors are
elected for one-year terms expiring at the next annual meeting of shareholders
and will hold office until their successors are duly elected and qualified.

Dr. Keren Brown Wilson is a co-founder of the Company and became the Chief
Executive Officer and President and a director of the Company upon its
formation in July 1994. Dr. Wilson has 20 years of experience in aging service
delivery systems and has, for the past eleven years, focused primarily on
assisted living. From 1988 to September 1994, Dr. Wilson was the President and
sole director of Concepts in Community Living, a corporation which specializes
in the development and management of assisted living residences. From 1992 to
August 1994, Dr. Wilson was also President of Sterling Management Company, a
company which provides management services to private (non-Medicaid) assisted
living facilities in the state of Kansas. From 1986 to 1988, Dr. Wilson was a
Senior Vice President at Milestone, Inc., an assisted living development and
management company. Prior to 1986, Dr. Wilson was an owner and management
agent for Park Place Living Center in Portland, Oregon, and the Director of
Research and Education for the Oregon Association of Homes for the Aging in
Portland, Oregon. Since 1983, Dr. Wilson has also been an Associate Professor
at the Institute for Aging at Portland State University. In these capacities,
Dr. Wilson was responsible for designing, developing and managing the state of
Oregon's first assisted living residence along with the states first Medicaid-
eligible assisted living residence.

Stephen Gordon is the Chief Administrative Officer and Chief Financial
Officer and has over twenty years of financial services industry experience.
From April 1990 to July 1995, Mr. Gordon was the manager of Housing Finance
for the Oregon Housing and Community Services Department. In this capacity,
Mr. Gordon was instrumental in the development of over 5,000 units of
affordable housing for the state. Under the state's elderly and disabled
program, Mr. Gordon was responsible for the funding of over 1,000 units of
assisted living housing for the elderly. Mr. Gordon has a Bachelor of Science
from the University of California, Los Angeles.

William McBride III is a co-founder of the Company and has been a director
since its formation. Mr. McBride is President and Chief Operating Officer of
LTC Properties, Inc. (LTC), a health care real estate investment trust
specializing in the long-term care industry, which was co-founded by Mr.
McBride in 1992. Prior to founding LTC, Mr. McBride was employed from April
1988 to July 1992 by Beverly Enterprises, Inc., an owner/operator of long-term
care facilities, retirement living facilities and pharmacies where he served
as Vice President, Controller and Chief Accounting Officer. From 1982 to 1988,
Mr. McBride was employed by the

34
<PAGE>

public accounting firm of Ernst & Young. Mr. McBride serves as a member of the
board of directors of LTC and Malan Realty Investors, Inc.

Andre C. Dimitriadis is a co-founder of the Company and has been a director
since its formation. Mr. Dimitriadis is Chairman and Chief Executive Officer
of LTC, which he co-founded with Mr. McBride in 1992. Prior to founding LTC,
Mr. Dimitriadis was employed from October 1989 to May 1992 by Beverly
Enterprises, Inc., where he served as Executive Vice President and Chief
Financial Officer. From 1985 to 1989, Mr. Dimitriadis was employed by American
Medical International, Inc., an owner/operator of hospitals, where he served
as Executive Vice President Finance, Chief Financial Officer and Director. Mr.
Dimitriadis serves as a member of the board of directors of LTC, Magellan
Health Services, Inc. and Health Management, Inc.

Richard C. Ladd has been a director of the Company since September 1994.
Since September 1994, Mr. Ladd has been the President of Ladd and Associates,
a health and human services consultation firm. From June 1992 to September
1994, Mr. Ladd served as the Texas Commissioner of Health and Human Services
where he oversaw the development and implementation of a 22,000-bed Medicaid
Waiver Program to be used for assisted living and other community-based
service programs. From November 1981 to June 1992, Mr. Ladd served as
Administrator of the Oregon Senior and Disabled Services Division. Mr. Ladd
currently serves on the U.S. Advisory Panel on Quality of Care in Board and
Care Facilities and is an adjunct member of the faculty at the Lyndon Baines
Johnson School of Public Affairs at the University of Texas. He is also a
member of numerous professional and honorary organizations, including the
National Academy of State Health Policy, as a member of its Executive
Committee.

Bradley G. Razook has been a director of the Company since August 1994. Mr.
Razook is an Executive Vice President of National Westminster Bank PLC, New
York Branch ("NatWest Markets") which he joined in 1990. From 1985 to 1990,
Mr. Razook was a First Vice President and counsel at Drexel Burnham Lambert,
Inc., an investment banking firm. See "Underwriting."

Connie J. Baldwin has over twenty years of experience in designing and
implementing services to the elderly and joined the Company in February of
1995 as Director of Operations. From December 1993 to January 1995, Ms.
Baldwin was Executive Director for the Center for Developing Older Adult
Resources, a non-profit entity in Phoenix, Arizona. From September 1990 to
December 1993, she was the Health Care Administrator for Managed Care Systems,
a division of the state of Arizona's Long-Term Care Medicaid Program. In
addition, Ms. Baldwin has held the position of Manager of Home and Community
Based Care in the State of Oregon with the Senior and Disabled Services
Department and was instrumental in the development of the State's assisted
living rules.

Rhonda S. Marsh joined the Company as Controller in November 1995. From
March 1995 to October 1995, Ms. Marsh was Compliance Controller and Acting
Accounting Manager for Integrated Measurement Systems, Inc. From November 1992
to March 1995 Ms. Marsh worked at KPMG Peat Marwick LLP, an international
accounting firm. From 1989 to October 1992, she was the Corporate Controller
of Evergreen International Aviation, Inc.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors is comprised of Messrs.
McBride, Dimitriadis and Razook. The Compensation Committee reviews and
approves the compensation of the Company's executive officers and determines
the general compensation policy for the Company. The Compensation Committee
also is responsible for the administration of the Company's 1994 Stock Option
Plan and is authorized to determine the options to be granted under the plan
and the terms and provisions of such options.

Mr. McBride and Mr. Dimitriadis are the President and Chairman,
respectively, of LTC. The Company has completed certain sale-leaseback
transactions, and has agreed to enter into certain additional sale-leaseback
transactions with LTC. Mr. Razook is a managing director of NatWest Markets,
an investment banking firm that

35
<PAGE>

has provided investment banking services to the Company in the past, and may
do so in the future. See "Certain Transactions" and "Underwriting."

COMPENSATION OF DIRECTORS

Each Director receives a fee of $12,000 per year for services as a director
plus $500 for attendance in person at each meeting of the Board of Directors
or of any committee meeting held on a day on which the Board of Directors does
not meet. In addition, the Company reimburses the directors for travel
expenses incurred in connection with their duties as directors of the Company.
During 1995, the Company granted the directors non-qualified options to
purchase a total of 70,000 shares of Common Stock at $13.00 per share, subject
to shareholder approval of an amendment to the Company's 1994 Stock Option
Plan increasing the number of shares covered by the plan from 300,000 to
600,000. Dr. Wilson, Mr. McBride and each of the non-employee directors
received options to purchase 40,000, 7,500 and 7,500 shares of Common Stock,
respectively. Such options vest ratably on each of November 27, 1996, 1997 and
1998 or such director's earlier death or disability, and are exercisable
within seven years from the date of vesting.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation paid
during the fiscal year ended December 31, 1995 to the Company's Chief
Executive Officer (the "Named Executive Officer"). No other executive officer
of the Company received total compensation of $100,000 or more in fiscal 1995.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
AWARDS
------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATIONS
------------------ ---- -------- ----- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Keren B. Wilson.... 1995 $100,000 -- -- 40,000 --
1994 33,333 -- -- 60,000 --
</TABLE>

STOCK OPTION GRANTS

The following table provides information on stock options granted during
1995 to the Named Executive Officer.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AS ASSUMED
ANNUAL RATE OF
STOCK PRICE
APPRECIATION
FOR OPTION TERM (2)
---------------------
INDIVIDUAL GRANTS
--------------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(1) FISCAL YEAR SHARE DATES 5% ($) 10% ($)
---- ---------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Keren B. Wilson......... 13,333 8.7% $13.00 11/27/2003 82,759 198,222
13,333 8.7% 13.00 11/27/2004 95,564 235,378
13,333 8.7% 13.00 11/27/2005 109,008 276,249
</TABLE>

STOCK OPTION GRANTS IN LAST FISCAL YEAR

- --------
(1) These options become exercisable in three equal portions of 13,333 on
November 27, 1996, 1997 and 1998, and expire in each case on the seventh
anniversary of the date the option becomes exercisable.

(2) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), shown are the gains or "option spreads" that would
exist for the respective options granted. These gains are based on the
assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted over the full option term. These
assumed annual compound rates of stock price appreciation are mandated by
the rules of the Commission and do not represent the Company's estimate or
projection of future Common Stock prices.

36
<PAGE>

STOCK OPTION HOLDINGS

The following table provides information with respect to the Named Executive
Officer concerning unexercised stock options held as of December 31, 1995. No
stock options were exercised by the Named Executive Officer during 1995.

FISCAL YEAR-END STOCK OPTION VALUES

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Keren B. Wilson............. 20,000 80,000 $77,500 $162,500
</TABLE>
- --------
(1) The exercise price of Dr. Wilson's options to purchase Common Stock is
$9.25 per share for 60,000 shares and $13.00 per share for 40,000 shares.
The closing trading price on the American Stock Exchange for the Common
Stock on December 31, 1995 was $13.125.

EMPLOYMENT AGREEMENTS

Dr. Wilson has entered into an employment agreement (the "Employment
Agreement") providing for service to the Company as Chief Executive Officer.
During the term of her employment by the Company, Dr. Wilson as agreed to
devote substantially all of her time to the business of the Company and not
engage in any business of the type conducted by the Company without the
approval of the Board of Directors.

Dr. Wilson's Employment Agreement expires on August 31, 1997, such date to
be automatically extended until the earlier of (i) her death or disability,
(ii) termination by the Company "for cause," (iii) her voluntary resignation
"for good reason" or otherwise or (iv) the third anniversary of the Company's
notice to Dr. Wilson of termination other than "for cause." In the event Dr.
Wilson is terminated not for cause or voluntarily terminates her employment
"for good reason," she shall receive her base salary for three years from the
date of the notice of termination and retain all her Company stock options,
whether or not vested.

Under the Employment Agreement, termination for cause includes termination
for material disloyalty, failure to perform one's duties as an officer,
willful violation of a board directive and felony conviction, and resignation
for good reason is defined as resignation due to (i) a diminution in the
duties or compensation of such executive officer which is not part of an
overall diminution for all executive officers of the Company or (ii) the
Company's material breach of the Employment Agreement or the Stock Option
Plan.

Furthermore, the Employment Agreement provides that, for a period of three
years after any termination of employment, Dr. Wilson may not (i) solicit any
Company employees for employment, or (ii) commence any business, directly or
indirectly, which is in competition with all or any portion of the Company's
business in any state in which the Company operates or is in the process of
developing more than three assisted living residences; provided, however, that
in the event that Dr. Wilson's employment terminates after the first three
years of her employment, Dr. Wilson may compete with the Company in Oregon.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Articles of Incorporation, as amended, and the Bylaws of the Company
provide for indemnification of the officers, employees and agents of the
Company pursuant to the Nevada General Corporation Law (the "NGCL"). The NGCL
permits the indemnification of any officer, director, employee or agent of the
Company against expenses and liabilities in any action arising out of such
person's activities on behalf of the Company, if such person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interest of the Company or in a manner he had not reasonable cause to
believe was unlawful. Insofar as indemnification

37
<PAGE>

for liabilities arising under the Securities Act may be permitted to
directors, officers or controlling persons of the Company pursuant to the
foregoing provisions of otherwise, the Company has been advised that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable.

The Company has also purchased insurance for its directors and officers for
certain losses arising from claims or charges made against them in their
capacities as directors and officers of the Company.

STOCK OPTION PLAN

The Committee administers the Company's 1994 Stock Option Plan, as amended
(the "Plan"), which provides for grants of incentive and non-qualified stock
options to the Company's executive officers, as well as its directors and
other key employees. Under the Plan, options are granted to provide incentives
to participants to promote long-term performance of the Company and
specifically, to retain and motivate senior management in achieving a
sustained increase in shareholder value. Currently, the Plan has no pre-set
formula or criteria for determining the number of options that may be granted.
The Committee reviews and evaluates the overall compensation package of the
executive officers and determines the awards based on the overall performance
of the Company and the individual performance of the executive officers. The
Company currently has reserved 586,666 shares of Common Stock for issuance
under the Plan.

38
<PAGE>

CERTAIN TRANSACTIONS

Dr. Wilson holds interests in each of the entities from which the Company
purchased two of the initial properties known as Aspen Court and Hillside
House. Because of Dr. Wilson's conflict of interest, she did not participate
in any of the negotiations related to such transactions and the Company has
received independent appraisals for such properties, whose purchase prices
(excluding closing costs) exceed their appraised values by $509,000. These
appraisals, however, only reflect the value of the real property and do not
include the intangible value of the existing and future operations and
resident base. Dr. Wilson received approximately $169,000 from the Company's
purchase of Aspen Court and approximately $65,000 (jointly with her husband)
from the Company's purchase of Hillside House.

Dr. Wilson also held, and her husband currently holds, an interest in ALF,
the entity which leases four of the initial properties to the Company. The
payment terms of the ALF Leases were based on the residences' historical
operating results. The aggregate annual lease payments, when expressed as a
percentage of the independent appraisal values of such leased properties,
reflects an average blended lease rate of approximately 10.8% for such
properties, which the Company believes is typical for leases in the health
care industry. Dr. Wilson sold her interest in ALF in the first half of 1995.
As a 25% shareholder in ALF, Dr. Wilson's husband may receive dividends, which
may be generated as a result of payments under the ALF Leases. The "blended
lease rate" is the amount of annual rent divided by the appraised value of the
property. Payments made with respect to the ALF Leases were $37,000 for the
one month ended December 31, 1994, $734,000 for the year ended December 31,
1995 and $196,000 for the three months ended March 31, 1996.

The Chairman and President of LTC Properties, Inc. ("LTC"), Andre C.
Dimitriadis and William McBride III, respectively, are members of the Board of
Directors and shareholders of the Company. Messrs. Dimitriadis and McBride
(Chairman of the Board of Directors of the Company) own 274,600 (1.7%) and
135,000 (0.7%) shares, respectively, in LTC. Since January 1, 1995, the
Company sold to LTC, through sale and leaseback transactions, 10 residences in
Texas with a combined total of 344 units for a total purchase price of
$18,100,000. Annual rental payments to LTC with respect to such residences are
approximately $1,847,700 ($63,300 in rent was paid in 1995). In addition, the
Company sold to LTC through sale and leaseback transactions, five residences
in Washington with a combined total of 188 units for a total purchase price of
$11,280,000. Annual rental payments to LTC with respect to such residences are
approximately $948,000. The sales prices for the residences the Company has
sold to LTC to date approximate cost.

Bradley Razook, a director of the Company, is an Executive Vice President of
NatWest Markets, an investment banking firm. NatWest acted as placement agent
with respect to the original placement of the Debentures. NatWest Markets is
an affiliate of NatWest Securities Limited, which acted as one of the
underwriters in the Company's initial public offering. NatWest Markets and its
affiliates may provide additional investment banking services to the Company
in the future. See "Underwriting."

39
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS AND MANAGEMENT OWNERSHIP

The following table sets forth information as of March 28, 1996 with respect
to the beneficial ownership of the Common Stock by (i) each person who is
known by the Company to own beneficially more than 5% of its Shares, (ii) each
director of the Company, (iii) the Chief Executive Officer and (iv) the
Company's directors and executive officers as a group, and assumes exercise of
the Underwriters' over-allotment option.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF OWNED AFTER
OFFERING (2)(3) OVER-ALLOTMENT OFFERING (2)(3)
------------------------ SHARES ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER PERCENT BEING OFFERED NUMBER PERCENT
---------------------------------------- ----------- ---------- -------------- ---------- ----------
<C> <S> <C> <C> <C> <C>
Keren B. Wilson................................. 500,000 16.6% 25,000(4) 475,000 9.6%
Andre C. Dimitriadis............................ 198,667 6.6% 75,000(4) 123,667 2.5%
William McBride III............................. 212,000 7.0% 50,000(4) 162,000 3.3%
Richard C. Ladd................................. 6,667 * -- 6,667 *
Stephen Gordon.................................. -- -- -- -- --
Bradley G. Razook (5)........................... 13,667 * -- 13,667 *
175 Water Street, 20th Floor
New York, NY 10038
Palisade Capital Management (6)................. 543,997 18.1% -- 543,997 11.0%
One Bridge Plaza, Suite 695
Fort Lee, NJ 07024
The TCW Group, Inc. (7)......................... 227,266 7.5% -- 227,266 4.6%
865 South Figueroa St.
Los Angeles, CA 90017
Columbia Management Co., Inc. (8)............... 231,100 7.7% -- 231,100 4.7%
1300 Southwest 6th Avenue
Portland, Oregon 97206
Waddell and Reed Investment Management Co. (9).. 474,532 15.7% -- 474,532 9.6%
6300 Lamar Road
Kansas City, Missouri 66201-9217
All directors and executive officers as a group
(6 persons).................................... 931,001 30.9% 150,000(4) 781,001 15.8%
</TABLE>
- --------
*Less than 1%.
(1) Except as otherwise noted, the address of the Company's directors and
officers is c/o Assisted Living Concepts, Inc., 9955 S.E. Washington,
Suite 201, Portland, Oregon, 97216.
(2) Includes options to purchase 20,000 shares of Common Stock granted to Dr.
Wilson, 20,000 to Mr. McBride and options to purchase 6,667 shares of
Common Stock granted to Messrs. Dimitriadis, Ladd and Razook pursuant to
the Company's 1994 Stock Option Plan which are exercisable within 60 days.

(3) Percentage ownership is based on 3,013,334 shares of Common Stock
outstanding before this Offering and 4,933,334 shares of Common Stock
outstanding after this Offering.
(4) Dr. Wilson is an officer and a director as well as a potential Selling
Stockholder and Messrs. Dimitriadis and McBride are directors as well as
potential Selling Stockholders. Dr. Wilson and Messrs. Dimitriadis and
McBride will only sell shares in this Offering if the Underwriters' over-
allotment option is exercised.
(5) Includes 7,000 shares owned by Mr. Razook's son.

(6) As of February 14, 1996, based on the Form 13G received by the Company.
Includes approximately 300,000 shares issuable upon conversion of
Debentures.

(7) As of February 12, 1996, based on the Form 13G received by the Company.
Includes approximately 114,666 shares issuable upon conversion of
Debentures.
(8) As of February 9, 1996, based on the Form 13G received by the Company.

(9) As of April 10, 1996, based on the Form 13G received by the Company.
Includes approximately 133,333 shares issuable upon conversion of
Debentures.

40
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The following is a brief description of the capital stock of the Company,
the NGCL and the provisions contained in the Company's Articles of
Incorporation and Bylaws. Copies of the Articles of Incorporation and Bylaws
have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The description which follows is qualified in its
entirety by reference to the full text of the Articles of Incorporation and
Bylaws.

The Company's Articles of Incorporation authorize 40,000,000 shares of
Common Stock, par value $0.01 per share, and 1,000,000 shares of preferred
stock, par value $0.01 per share. As of June 13, 1996, the Company had
3,013,334 shares of Common Stock issued and outstanding and no outstanding
shares of preferred stock.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share owned of
record on all matters voted upon by shareholders, and a majority vote is
required for all action to be taken by shareholders. Cumulative voting of
shares is prohibited. Accordingly, the holders of a majority of the voting
power of the shares voting for the election of directors can elect all of the
directors if they choose to do so. The Common Stock bears no preemptive
rights, and is not subject to redemption, sinking fund or conversion
provisions. The shares of Common Stock offered hereby will be, when issued and
paid for, fully paid and non-assessable.

Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Company's Board of Directors out of funds legally available
therefor, subject to the dividend and liquidation rights of any preferred
stock that may be issued (and subject to any dividend restriction contained in
any credit facility which the Company may enter into in the future) and
distributed pro rata in accordance with the number of shares of Common Stock
held by each shareholder. See "Risk Factors--Dividend Policy."

The Common Stock is listed on the American Stock Exchange.

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.

PREFERRED STOCK

The Company's Board of Directors is authorized, without further shareholder
action, to issue the authorized shares of preferred stock from time to time
and to divide any or all shares of the authorized preferred stock into series
and, subject to limitations prescribed by law, to fix and determine the number
of shares in and designations, preferences and relative, participating,
optional or, unless in conflict with the Company's Articles of Incorporation,
other special rights, and qualifications, limitations or restrictions thereon,
of any series so established, including voting powers, if any, dividend
rights, liquidation preferences, redemption rights and conversion privileges.
As of the date of this Prospectus, the Board of Directors has not issued any
shares of preferred stock or authorized any series of preferred stock and
there are no plans, agreements or understandings for the issuance of any
shares of preferred stock or rights to purchase such shares.

The issuance of shares of preferred stock by action of the Company's Board
of Directors could adversely affect the voting power, dividend rights and
other rights of holders of the Common Stock.

Issuance of a series of shares of preferred stock also could, depending on
the terms of such series, either impede or facilitate the completion of a
merger, tender offer or other takeover attempt. Although the Company's Board
of Directors is required to make a determination as to the best interests of
the shareholders of the Company when issuing shares of preferred stock, the
Company's Board of Directors could act in a manner that would discourage an
acquisition attempt or other transaction that some or a majority, of the
shareholders might believe to be in the best interests of the Company or in
which shareholders might receive a premium for their stock over the then
prevailing market price. Although there are currently no plans to issue shares
of preferred stock or rights to purchase such shares, management believes that
the availability of the preferred stock will provide the

41
<PAGE>

Company with increased flexibility in structuring possible future financings
and acquisitions and in meeting other corporate needs that might arise. The
authorized shares of preferred stock are available for issuance without
further action by the Company's shareholders, unless such action is required
by applicable law or the rules of any stock exchange on which the Common Stock
may then be listed.

RESTRICTIONS ON BUSINESS COMBINATIONS AND CORPORATE CONTROL

The NGCL contains provisions restricting the ability of a corporation to
engage in business combinations with an "interested shareholder." Under the
NGCL, except under certain circumstances, business combinations are not
permitted for a period of three years following the date such shareholder
became an interested shareholder. The NGCL defines an "interested
shareholder," generally, as a person who beneficially owns 10% or more of the
outstanding shares of a corporation's voting stock.

In addition, the NGCL generally disallows the exercise of voting rights with
respect to "control shares" of an "issuing corporation" (as defined in the
NGCL). "Control shares" are the voting shares of an issuing corporation
acquired in connection with the acquisition of a "controlling interest."
"Controlling interest" is defined in terms of threshold levels of voting share
ownership, which, when crossed, trigger application of the voting bar with
respect to the newly acquired shares. The NGCL also permits directors to
resist a change or potential change in control of the corporation if the
directors determine that such a change is opposed to or not in the best
interest of the corporation.

LIMITATIONS ON DIRECTORS LIABILITY

The Articles of Incorporation limit the liability of directors and officers
to the Company or its shareholders to the fullest extent permitted by the
NGCL. The inclusion of this provision in the Articles of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter shareholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and its
shareholders.

SHARES ELIGIBLE FOR FUTURE SALE

The Company's 7% Convertible Subordinated Debentures due 2005 are
convertible into Common Stock at any time after the effectiveness of a
registration statement covering the 7% Debentures and prior to maturity,
unless previously redeemed, into 1,333,333 shares at a price of $15.00 per
share, subject to adjustment in certain cases. The Company has filed a
registration statement covering the 7% Debentures and the shares issuable upon
conversion thereof. Upon effectiveness of such registration statement, the 7%
Debentures and such shares shall be freely tradeable. The Company has also
registered approximately 586,666 shares of Common Stock reserved for issuance
pursuant to the Company's Stock Option Plan, under which options to purchase
424,669 shares have been granted as of the date of this Prospectus.

As of June 13, 1996, the Company had outstanding 3,013,334 shares of Common
Stock. Upon completion of the Offering and assuming no exercise of the
Underwriters' over-allotment option, the Company will have outstanding
4,813,334 shares of Common Stock. Of these shares, approximately 3,813,334
shares of Common Stock are freely transferable and tradable without
restriction or further registration under the Securities Act except for any
shares purchased by any affiliates of the Company, which will be subject to
the resale limitations of Rule 144. The remaining 1,000,000 outstanding shares
of Common Stock are "restricted securities" within the meaning of Rule 144
adopted under the Securities Act (the "Restricted Shares"). The Restricted
Shares were issued and sold by the Company in private transactions in reliance
upon exemptions from registration under the Securities Act and may not be sold
in a public distribution except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption, including that
provided by Rule 144. The holders of 960,000 Restricted Shares have agreed not
to sell or otherwise dispose of such shares, without the prior written consent
of NatWest Securities Limited, until 180 days after the date of this
Prospectus. If the Underwriters

42
<PAGE>

exercise their over-allotment option, the 150,000 shares sold by Selling
Stockholders pursuant to the over-allotment option will be freely transferable
and tradable without restriction or further registration under the Securities
Act except for any shares purchased by any affiliates of the Company, which
will be subject to the resale limitations of Rule 144. As a result, only
850,000 shares of Common Stock will be Restricted Shares.

In general, under Rule 144 as currently in effect, affiliates of the Company
would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of one percent of the number of shares of
Common Stock then outstanding or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly, through one
or more intermediaries, controls, or is controlled by, or is under common
control with, such issuer. Persons holding shares of Common Stock which are
restricted shares within the meaning of Rule 144 of the Securities Act, who
have beneficially owned their shares for at least three years and who are not
deemed "affiliates" of the Company are entitled to sell their shares under
Rule 144 without regard to the volume limitations.

UNDERWRITING

The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of Shares set forth opposite their respective
names:

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
NatWest Securities Limited....................................
Dean Witter Reynolds Inc......................................
Smith Barney Inc..............................................
---------
Total..................................................... 1,800,000
=========
</TABLE>

The Underwriters are committed to purchase all of the Shares, if any Shares
are purchased.

The Underwriters propose to offer the Shares directly to the public at the
public offering price set forth on the cover page of this Prospectus
Supplement and to certain securities dealers at such price less a concession
not in excess of $ per Share. The Underwriters may allow, and such selected
dealers may reallow a concession not in excess of $ per share to certain
brokers and dealers.

The Company and certain stockholders of the Company have granted the
Underwriters an option for 30 days after the date of this Prospectus
Supplement to purchase at the public offering price, less the underwriting
discount, as set forth on the cover page of this Prospectus, up to 270,000
additional Shares. If the Underwriters exercise their option to purchase any
of the additional Shares, each of the three Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof which the number of Shares to be purchased by each of them
as shown in the above table bears to the 1,800,000 Shares offered hereby. The
Underwriters may exercise such option only to cover over-allotments in
connection with the sale of the Shares.

The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including civil liabilities under the Securities Act of 1933, as
amended, or will contribute to payments the Underwriters may be required to
make in respect thereof.

The Company and its executive officers have agreed that, until 180 days
after the date of this Prospectus, they will not without the consent of
NatWest Securities Limited ("NatWest"), offer, sell, offer to sell, distribute

43
<PAGE>

or otherwise dispose of the United States any Common Stock or any securities
or interests convertible into, or exercisable or exchangeable for, Common
Stock, other than (a) the Shares, (b) Common Stock issuable upon the
conversion of the Company's outstanding stock options or (c) grants to
employees for compensation purposes.

NatWest, a United Kingdom broker-dealer and a member of the Securities and
Futures Authority Limited, has agreed that, as part of the distribution of the
Common Stock offered hereby and subject to certain exceptions, it will not
offer or sell any common stock within the United States, its territories or
possessions or to persons who are citizens thereof or residents therein. The
Underwriting Agreement does not limit the sale of the Shares outside of the
United States.

NatWest Securities Limited acted as the underwriter for the Company's
initial public offering. Bradley Razook, a director of the Company, is an
Executive Vice President of NatWest Markets, which is an affiliate of NatWest
Securities Limited. NatWest Markets acted as Placement Agent in connection
with the issuance and sale by the Company of its 7% Debentures. As of June 17,
1996, an affiliate of NatWest Markets held approximately $3.3 million of the
7% Debentures. NatWest Markets and its affiliates may in the future provide
investment banking and/or other advisory services to the Company.

NatWest has further represented and agreed that (a) it has not offered or
sold and will not offer or sell in the United Kingdom by means of any
document, any Common Stock except to persons whose ordinary activities involve
them in acquiring, holding, managing or disposing of investments (as principal
or agent) for the purposes of their business or otherwise in circumstances
which will not result in an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995; (b) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
Common Stock in, from or otherwise involving the United Kingdom; and (c) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issues of the
Common Stock to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1995 or is a person to whom such document may otherwise lawfully be issued or
passed on.

LEGAL MATTERS

Certain legal matters will be passed upon for the Company by Latham &
Watkins, Los Angeles, California. Certain legal matters relating to the
validity of the shares of Common Stock offered hereby will be passed upon for
the Company by Schreck, Jones, Bernhard, Woloson & Godfrey, Las Vegas, Nevada
as to certain matters of Nevada law. Certain legal matters will be passed upon
for the Underwriters by Stroock & Stroock & Lavan, New York, New York.

EXPERTS

The financial statements of Assisted Living Concepts Group as of November
30,1994 and the eleven months then ended and as of December 31, 1993 and the
year then ended and the financial statements of Assisted Living Concepts, Inc.
for the one month ended December 31, 1994 included in this Prospectus have
been so included in reliance on the report of Price Waterhouse LLP,
independent accountants given on the authority of said firm as experts in
auditing and accounting.

The financial statements of the Company as of and for the year ended
December 31, 1995 have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, in reliance upon the authority
of said firm as experts in accounting and auditing.

44
<PAGE>

AVAILABLE INFORMATION

The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by the Company may be inspected
and copied at the public reference facilities of the Commission located at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at the New
York Regional Office of the Commission, Seven World Trade Center, Suite 1300,
New York, New York 10048, and at the Chicago Regional Office of the
Commission, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621.
Copies of such material can also be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such reports and other information may also be
inspected at the offices of the American Stock Exchange, 86 Trinity Place, New
York, New York 10006.

The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the registration of the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits thereto, certain
portions of which have been omitted as permitted by the rules and regulations
of the Commission. Statements contained in this Prospectus or in any document
incorporated by reference herein as to the contents of any contract or other
documents referred to herein or therein are not necessarily complete and, in
each instance, reference is made to the copy of such documents filed as an
exhibit to the Registration Statement or such other documents, which may be
obtained from the Commission as indicated above upon payment of the fees
prescribed by the Commission. Each such statements is qualified in its
entirety by such reference.

45
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
PAGE
-------
1.FINANCIAL STATEMENTS:

<S> <C>
Reports of Independent Auditors...................................... F-2-F-4
Balance Sheets of Assisted Living Concepts, Inc. as of December 31,
1994 and December 31, 1995.......................................... F-5
Statements of Operations of Assisted Living Concepts, Group
(Predecessor) for the year ended December 31, 1993, and the eleven
months ended November 30, 1994 and Assisted Living Concepts, Inc.
for the one month period ended December 31, 1994 and year ended
December 31, 1995................................................... F-6
Statements of Shareholders' Equity of Assisted Living Concepts, Inc.
for the period July 19, 1994 to December 31, 1995................... F-7
Statements of Changes in Partners' and Shareholders' Equity.......... F-8
Statements of Cash Flows of Assisted Living Concepts, Group
(Predecessor) for the year ended December 31, 1993 and eleven months
ended November 30, 1994, and Assisted Living Concepts, Inc., for the
one month ended December 31, 1994 and year ended December 31,
1995................................................................ F-9
Notes to Financial Statements........................................ F-10
Unaudited Condensed Balance Sheets of Assisted Living Concepts, Inc.
and subsidiary as of March 31, 1996................................. F-22
Condensed Statements of Operations of Assisted Living Concepts,
Inc................................................................. F-23
Condensed Statements of Cash Flows of Assisted Living Concepts,
Inc................................................................. F-24
Notes to Unaudited Financial Statements.............................. F-25
</TABLE>

2.FINANCIAL STATEMENTS SCHEDULES:

All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules.

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc.

We have audited the accompanying balance sheet of Assisted Living Concepts,
Inc. as of December 31, 1995, and the related statements of operations,
changes in shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.

In our opinion, the 1995 financial statements referred to above present
fairly, in all material respects, the financial position of Assisted Living
Concepts, Inc. as of December 31, 1995, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.

KPMG PEAT MARWICK LLP

Portland, Oregon
February 29, 1996
(Except for Note 10, as to which the
date is March 28, 1996.)

F-2
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc.

In our opinion, the accompanying balance sheet and related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Assisted Living Concepts, Inc.
(the "Company" (formerly Assisted Living Concepts Group)) at December 31,
1994, and the results of its operations and its cash flows for the month ended
December 31, 1994, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. We have not audited the financial statements
of Assisted Living Concepts, Inc., for any period subsequent to December 31,
1994.

PRICE WATERHOUSE LLP

Portland, Oregon
March 17, 1995

F-3
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc.

In our opinion, the accompanying combined balance sheet and related combined
statements of operations, of partners' and shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Assisted Living Concepts Group (the "Predecessor"), which is comprised of
Assisted Living Facilities, Inc., a subchapter S corporation, Madras Elder
Care (dba Aspen Court), a general partnership, and Lincoln City Partners, a
general partnership, at November 30, 1994 and December 31, 1993, and the
results of their operations and their cash flows for the eleven month period
ended November 30, 1994 and for the year ended December 31, 1993, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Predecessor's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above. We have not audited the combined financial statements
of Assisted Living Concepts Group for any period subsequent to November 30,
1994.

PRICE WATERHOUSE LLP

Portland, Oregon
March 17, 1995

F-4
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 1)................. $13,343 $ 7,335
Accounts receivable................................ 58 136
Other current assets (Note 5)...................... 304 558
------- -------
Total current assets............................. 13,705 8,029
------- -------
Property and equipment (Note 1, 2, 4 and 6).......... 3,254 28,446
Less accumulated depreciation...................... 8 163
------- -------
Property and equipment--net........................ 3,246 28,283
------- -------
Construction in process (Note 4)..................... 280 13,075
Goodwill (Note 1 and 2).............................. 408 393
Other assets (Note 5)................................ 264 3,766
------- -------
Total assets..................................... $17,903 $53,546
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 177 $ 8,248
Accrued expenses................................... 356 4,706
Other current liabilities.......................... 38 195
Current portion of long-term debt (Note 6)......... 12 47
------- -------
Total current liabilities........................ 583 13,196
Deferred gain........................................ 153
Long-term debt (Note 6).............................. 1,101 4,553
Convertible subordinated debentures.................. 20,000
------- -------
Total liabilities................................ 1,684 37,902
------- -------
Commitments
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding...........
Common Stock, $.01 par value; 40,000,000 shares au-
thorized; 3,000,000 shares issued and outstanding... 30 30
Additional paid-in capital......................... 16,492 16,492
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions (Note 2)............................. (239) (239)
Accumulated deficit................................ (64) (639)
------- -------
Total shareholders' equity....................... 16,219 15,644
------- -------
Total liabilities and shareholders' equity....... $17,903 $53,546
======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements

F-5
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- -------------------------
ELEVEN MONTHS
ENDED MONTH ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1993 1994 1994 1995
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues.................. $1,884 $1,841 $ 212 $ 4,067
------ ------ ----- -------
Operating expenses:
Residence operating
expenses............... 1,090 1,127 125 2,779
Management fees from
related party (Note 1
and 8)................. 92 93
Corporate general and
administrative......... 152 1,252
Building rentals........ 5 64
Building rentals from
related party (Note 1
and 8)................. 37 734
Depreciation and
amortization (Note 1
and 2)................. 132 105 13 296
------ ------ ----- -------
Total operating
expenses............. 1,314 1,325 332 5,125
------ ------ ----- -------
Operating income (loss)... 570 516 (120) (1,058)
------ ------ ----- -------
Interest expense (Note 1
and 6)................... 320 297 8 96
Interest (income)......... (11) (12) (64) (579)
------ ------ ----- -------
Interest expense
(income)--net............ 309 285 (56) (483)
------ ------ ----- -------
Net income (loss)......... $ 261 $ 231 $ (64) $ (575)
====== ====== ===== =======
Unaudited pro forma data:
Net income.............. $ 261 $ 231
Provision for income
taxes.................. 67 85
------ ------
Pro forma net income.... $ 194 $ 146
====== ======
Net loss per common share
(Note 1)................. $(.02) $ (.19)
===== =======
Weighted average common
shares outstanding....... 3,000 3,000
</TABLE>

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

F-6
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE PERIOD JULY 19, 1994 TO DECEMBER 31, 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- ADDITIONAL FAIR MARKET ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL VALUE IN EXCESS DEFICIT EQUITY
------ ------ --------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares to
founders............... 1,000 $10 $ 90 $ 100
Net proceeds from public
offering............... 2,000 20 16,402 16,422
Fair market value in
excess of historical
cost of acquired net
assets attributable to
related party
transaction............ $(239) (239)
Net loss................ $ (64) (64)
----- --- ------- ----- ----- -------
Shareholders' equity,
December 31, 1994...... 3,000 $30 $16,492 $(239) $ (64) $16,219
Net loss................ $(575) $ (575)
----- --- ------- ----- ----- -------
Shareholders' equity,
December 31, 1995...... 3,000 $30 $16,492 $(239) $(639) $15,644
===== === ======= ===== ===== =======
</TABLE>

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

F-7
<PAGE>

ASSISTED LIVING CONCEPTS GROUP ("THE PREDECESSOR")
STATEMENTS OF CHANGES IN PARTNERS' AND SHAREHOLDERS' EQUITY

FOR THE PERIOD DECEMBER 31, 1992 TO NOVEMBER 30, 1994
(IN THOUSANDS)

<TABLE>
<S> <C>
Partner's and shareholders' equity, December 31, 1992.................... $ 105
Capital contributions.................................................... 1
Capital distributions.................................................... (104)
Net income............................................................... 261
-----
Partners' and shareholders' equity, December 31, 1993.................... 263
Capital contributions.................................................... --
Capital distributions.................................................... (297)
Net income............................................................... 231
-----
Partners' and shareholders' equity, November 30, 1994.................... $ 197
=====
</TABLE>

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

F-8
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- -------------------------
ELEVEN MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1993 1994 1994 1995
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........ $ 261 $ 231 $ (64) $ (575)
Adjustment to reconcile
net income (loss) to net
cash provided by (used
for) operating
activities:
Depreciation and
amortization.......... 132 105 13 296
Changes in other non-cash
items:
Accounts receivable.... (13) (9) (58) (78)
Other current assets... (2) (22) (307) (254)
Other assets........... (6) 31 (264) (2,828)
Accounts payable....... (23) 4 177 8,071
Accrued expenses....... 10 96 356 4,350
Accounts payable to
related party......... 1 (7)
Other current
liabilities........... 2 (5) 38 157
----- ------- ------- --------
Net cash provided by
(used for) operating
activities.............. 362 424 (109) 9,139
----- ------- ------- --------
INVESTING ACTIVITIES:
Proceeds from sale and
leasebacks.............. 8,067
Purchases of property and
equipment............... (55) (1,688) (3,069) (45,901)
----- ------- ------- --------
Net cash used for
investing activities.... (55) (1,688) (3,069) (37,834)
----- ------- ------- --------
FINANCING ACTIVITIES:
Proceeds from short-term
construction borrowings
expected to be
refinanced.............. 1,600
Proceeds from long-term
debt.................... 47 3,505
Payments on long-term
debt.................... (40) (33) (1) (18)
Proceeds from issuance of
common stock............ 16,522
Capital contributions.... 1
Proceeds from convertible
subordinated
debentures.............. 19,200
Payments on loan with
related party........... (10)
Capital distributions.... (104) (297)
----- ------- ------- --------
Net cash provided by
(used for) financing
activities.............. (106) 1,270 16,521 22,687
----- ------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............. 201 6 13,343 (6,008)
Cash and cash
equivalents, beginning
of period............... 156 357 13,343
----- ------- ------- --------
Cash and cash
equivalents, end of
period.................. $ 357 $ 363 $13,343 $ 7,335
===== ======= ======= ========
Supplemental disclosure
of cash flow
information:
Cash payments for
interest................ $ 320 $ 297 $ 8 $ 154
===== ======= ======= ========
</TABLE>

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

F-9
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Assisted Living Concepts, Inc. ("the Company") owns, operates and develops
assisted living residences which provide housing to senior citizens who need
help with the activities of daily living such as bathing and dressing. The
Company provides personal care and support services and makes available
routine nursing services designed to meet the needs of its residents.

The Company was organized in July 1994, initially capitalized through the
sale of 500,000 shares of $0.01 par value common stock for $100,000. From July
19, 1994 to November 22, 1994, the date of its initial public offering, the
Company began to put into place the management organization to commence
operations and execute its strategy to expand the Company's business. On
September 9, 1994, the Company merged with CCL Sub, Inc., a wholly owned
subsidiary of Concepts in Community Living, Inc. Pursuant to the merger
agreement (the "Merger"), the sole shareholder of CCL Sub, Inc. exchanged its
100% interest in CCL Sub, Inc., which consisted primarily of an operating
leasehold interest in its office premises; all management agreements and all
operating systems for six operating facilities known as Juniper House,
Rackleff House, Huffman House, Brookside House, Aspen Court and Hillside
House; and all intangible assets used in connection with these facilities, for
500,000 shares of the Company's $0.01 par value common stock. The shares,
which represented a 50% interest in the Company, were valued at $100,000. Due
to their propriety nature, the assets transferred had no historical basis.
Since the Company's president was the sole shareholder of CCL Sub, Inc., the
recorded value of the assets acquired has been reduced by $100,000 which
represented the president's proportional interest in the excess of the fair
value over historical cost.

On November 22, 1994, the Company sold 2,000,000 shares of common stock at
$9.25 in a public offering realizing net proceeds of $16,422,000. On December
1, 1994, the Company purchased two and leased four assisted living residences
(see Note 2) from Assisted Living Concepts Group ("the Predecessor") and
commenced operations. One of the six residences, which was under construction
as of December 1, 1994 and leased to the Company, commenced operations in
March 1995. The Company developed nineteen additional residences throughout
1995. As of December 31, 1995, a total of twenty-five residences were
operating or had received Certificates of Occupancy. Five of the nineteen
additional residences were sold and leased back to the Company leaving sixteen
residences owned by the Company as of December 31, 1995.

PREDECESSOR

The historical financial statements for the year ended December 31, 1993 and
the eleven months ended November 30, 1994 represent the combined historical
results of operations and financial condition of the Predecessor. The
Predecessor consists of the entities which, prior to December 1, 1994, owned
and operated residences which are now owned and operated by the Company. The
Predecessor developed and owned assisted living residences for senior citizens
and disabled individuals. Pursuant to purchase and lease agreements, the
Company acquired the businesses of the Predecessor. The president of the
Company owned a 30% interest in Madras Elder Care, and the president and her
husband each owned a 20% interest in ALF and jointly owned a 50% interest in
Redbud Associates which owns a 35% interest in Lincoln City Partners ("LCP")
(See Note 8-- Related Party Transactions).

F-10
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The residences operated by the Predecessor were as follows:

<TABLE>
<CAPTION>
COMMENCED
RESIDENCE ENTITY LEGAL FORM OPERATIONS
--------- ------ ---------- ----------
<S> <C> <C> <C>
Aspen Court Madras Elder Care Partnership November 1990
Huffman House ALF S-Corporation October 1992
Rackleff House ALF S-Corporation June 1990
Juniper House ALF S-Corporation April 1991
Hillside House Lincoln City Partners Partnership October 1994
</TABLE>

BASIS OF PRESENTATION

The financial statements as of and for the year ended December 31, 1995 and
the month ended December 31, 1994, are those of the Company. The financial
statements for the year ended December 31, 1993 and the eleven months ended
November 30, 1994, are those of the Predecessor before its business and
substantially all of the assets were acquired by the Company.

The accompanying combined financial statements of the Predecessor include
the assets, liabilities and operations associated with the residences listed
above. Since the residences have ownership and management interest in common,
the assets and liabilities are reflected at historical cost. As discussed in
Note 2, the Predecessor sold and has leased the assets to the Company. All
significant inter-company accounts and transactions have been eliminated in
combination.

REVENUES

Revenues are recorded when services are rendered and consist of residents'
fees for basic housing and support services and fees associated with
additional services such as routine nursing, and personalized assistance on a
fee for service basis.

MANAGEMENT FEES--PREDECESSOR

Each residence of the Predecessor was operated under a management agreement
with Concepts in Community Living, Inc. (CCL), a related party, whereby CCL
charged a management fee of 5% of revenues in exchange for providing each
facility certain management and administrative support services (See Note 8--
Related Party Transactions).

ESTIMATED MALPRACTICE COSTS

The Company provides for estimated malpractice claims when a material loss
is probable and estimable for both reported claims and claims incurred but not
reported. The liability for malpractice claims is presented gross on the
balance sheet even for claims expected to be covered by insurance. The Company
currently has no claims that are probable or estimable, therefore no provision
or liability has been recorded in the financial statements.

CLASSIFICATION OF EXPENSES

All expenses (except interest, depreciation, amortization, residence
operating expenses and management fees) associated with corporate or support
functions have been classified as corporate general and administrative
expense. All other expenses incurred by the Company have been classified as
residence operating expenses.

F-11
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.

RECLASSIFICATIONS

Certain reclassifications have been made in the prior year's financial
statements to conform with the current year's presentation. Such
reclassifications have no effect on previously reported net income or
partners' and shareholders' equity.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at the lower of cost or net realizable
value with depreciation being provided over the assets' estimated useful lives
on the straight-line basis as follows:

<TABLE>
<S> <C>
Buildings........................................................ 40 years
Furniture and equipment.......................................... 7 years
</TABLE>

Interest incurred during construction periods is capitalized as part of the
building costs. Capitalized interest was $11,000 and $577,000 for the eleven
months ended November 30, 1994 and the year ended December 31, 1995. There was
no interest capitalized during the year ended December 31, 1993 or the month
ended December 31, 1994.

Maintenance and repairs are charged to expense as incurred, and significant
betterments and improvements are capitalized.

In March of 1995, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 121 (FAS121) Accounting for Long-Lived Assets and
Long-Lived Assets To Be Disposed Of. The Company will implement FAS121 on
January 1, 1996. The Company will determine if an asset has been impaired by
analyzing the rental demand by geographical region to determine if future cash
flows (undiscounted and without interest charge) is less than the carrying
amount of the asset. If an impairment is determined to have occurred, an
impairment loss will be recognized. For those assets the Company intends to
hold and use, the fair value of the asset will be used in its calculation.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on deposit and debt securities held
at financial institutions with maturities of three months or less at the date
of purchase (Note 5).

DEFERRED FINANCING COSTS

Financing costs included in other assets are deferred and amortized to
interest expense over the term of the related debt using the straight-line
method.

F-12
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

ORGANIZATIONAL COSTS

The Company capitalized organizational costs incurred from the Company's
inception (July 19, 1994) to December 1, 1994. Organizational costs of
$35,000, were amortized over a one-year period commencing December 1, 1994.
Amortization expense of $3,000 and $32,000 is reflected in the month ended
December 31, 1994 and the year ended December 31, 1995.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents approximate fair value
because of the short-term nature of these accounts and because they are
invested in accounts earning market rates of interest. The carrying amount of
the Company's debt approximates fair value because the interest rates
approximate the current rates available to the Company.

GOODWILL

Costs in excess of fair value of the net assets acquired at date of
acquisition have been recorded as goodwill and are being amortized over 15
years on a straight-line basis. Management maintains an impairment review
policy whereby the future economic benefit of the recorded balance is
substantiated at the end of each reporting period based on the estimated
undiscounted cash flows from operating activities compared with the carrying
value of the goodwill. If the aggregate future cash flows are less than the
carrying value, a write down would be required, measured by the difference
between the undiscounted future cash flows and the carrying value of the
goodwill.

INCOME TAXES

The businesses comprising the Predecessor elected to be taxed as either S-
Corporations or as Partnerships pursuant to the provisions of the Internal
Revenue Code and, as such, were not individually subject to federal or state
income taxes because their taxable income or loss accrues to individual
shareholders or partners, respectively (See Note 7). The pro forma data
reflects the income tax expense that would have been recorded had the
Predecessor operated as a C-Corporation, subject to income taxes for these
periods.

NET LOSS PER COMMON SHARE

Net loss per common share has been calculated by dividing the net loss for
the period by the weighted average common shares outstanding during the
period.

STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board (FASB) Issued
Statement of Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation," which provides an alternative to APB Opinion No. 25,
"Accounting for Stock Issued to Employee," in accounting for stock-based
compensation issued to employees. The Statement encourages, but does not
require financial reporting to reflect compensation expense for grants of
stock, stock options and other equity instruments to employees based on change
in the fair value of the underlying stock. The Company intends to continue to
apply the existing accounting rules contained in APB Opinion No. 25,
"Accounting for Stock Issued to Employees." While recognition for employee
stock-based compensation is not mandatory, SFAS 123 requires companies that
choose not to adopt the new fair value accounting rules to disclose pro forma
net income and earnings per share under the new method. The Company will
comply with the disclosure requirements beginning January 1, 1996.

F-13
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

2. ACQUISITION OF RESIDENCES

In December 1994, the Company purchased two assisted living residences known
as Aspen Court and Hillside House, from Madras and LCP for $1,705,000 and
$2,173,000, respectively (including closing costs of $20,000 and $9,000,
respectively). The Company paid $2,764,000 cash and assumed $1,114,000 of
long-term notes (see Note 6).

The acquisition has been accounted for as a purchase and, accordingly, the
purchase price was allocated to assets based on estimated fair value at date
of acquisition. Allocation of the cash purchase price is summarized as follows
(in thousands):

<TABLE>
<CAPTION>
ASPEN HILLSIDE
COURT HOUSE TOTAL
------- -------- -------
<S> <C> <C> <C>
Property and equipment............................ $ 1,328 $1,900 $ 3,228
Goodwill.......................................... 186 225 411
Fair value in excess of historical cost........... 191 48 239
Long-term debt.................................... (1,114) (1,114)
------- ------ -------
Total cash purchase price......................... $ 591 $2,173 $ 2,764
======= ====== =======
</TABLE>

The Company's president beneficially owned 48% of the common stock of the
Company prior to the purchase of these residences and was the sole shareholder
of CCL, Sub, Inc. who managed the day-to-day operations of Aspen Court under a
management agreement. The president also held a 30% interest in Madras, and
with her husband, together owned a 17.5% interest in LCP, the predecessor
entities which sold these residences to the Company. Because of the
controlling interest in Aspen Court, the recorded value of Aspen Court was
reduced by $112,000 representing the president's 30% interest in the excess of
Aspen Court's appraised value over its historical cost of $1,068,000. This
amount has been charged directly to shareholders' equity reflected under the
caption "Fair market value in excess of historical cost of acquired net assets
attributable to related party transactions" in the accompanying financial
statements.

Goodwill of $186,000 and $225,000 related to Aspen Court and Hillside House,
respectively, represents the excess of purchase price ($1,705,000 and
$2,173,000, respectively) over appraised value ($1,440,000 and $1,900,000,
respectively). Goodwill related to Aspen Court and Hillside House has been
reduced by $79,000 and $48,000, respectively, in order to reflect a reduction
for the president's 30% interest in Madras and 17.5% interest in LCP. The
aggregate reduction of $127,000 has also been charged directly to
shareholders' equity reflected under the caption "Fair market value in excess
of historical cost of acquired net assets attributable to related party
transactions" in the accompanying financial statements. Amortization of
goodwill was $2,000 and $28,000 for the month ended December 31, 1994 and the
year ended December 31, 1995, respectively.

3. LEASES

In December 1994, the Company entered into agreements to lease four
additional assisted living residences in Oregon. The leases which have fixed
terms of ten years have been accounted for as operating leases (the "Oregon
Leases"). Aggregate deposits on these properties as of December 31, 1995 was
$59,000 which is reflected in other assets in the accompanying financial
statements. In addition during 1995, the Company completed the sale of five
Texas facilities under sell and leaseback arrangements. The Company sold the
facilities for approximately $8.7 million and leased them back over initial
terms ranging from twelve to fifteen years. The transactions produced a gain
of $153,000 which was deferred and is being amortized over the lease period.
Building rent is recorded on a straight-line basis for the residences which
have a specified rent increase. Building rent is recorded as incurred for the
residences which have annual increases based on increases in the consumer
price index.

F-14
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

In connection with the Oregon Leases, the Company entered into a "Lease
Approval Agreement" with the State of Oregon, Housing and Community Services
Department (OHCS) and the lessor of the residences, pursuant to which the
Company is obligated to comply with the terms and conditions of certain
regulatory agreements (see Notes 5 and 6) to which the lessor is a party.

As of December 31, 1995, future minimum lease payments under operating
leases are as follows (in thousands):

<TABLE>
<S> <C>
1996.............................................................. $ 1,600
1997.............................................................. 1,638
1998.............................................................. 1,673
1999.............................................................. 1,713
2000.............................................................. 1,753
Thereafter........................................................ 13,723
-------
$22,100
=======
</TABLE>

4. PROPERTY AND EQUIPMENT

The Company's property and equipment are stated at cost and consist of the
following at December 31, 1994 and December 31, 1995 (in thousands):

<TABLE>
<CAPTION>
1994 1995
------ -------
<S> <C> <C>
Land......................................................... $ 162 $ 1,747
Buildings.................................................... 2,969 25,804
Equipment.................................................... 69 214
Furniture.................................................... 54 681
------ -------
Sub-total.................................................. 3,254 28,446
Less accumulated depreciation................................ 8 163
------ -------
Total...................................................... $3,246 $28,283
====== =======
</TABLE>

Land and buildings and certain furniture and equipment relating to three
Oregon residences serve as collateral for long-term debt (see Note 6).
Depreciation expense was $100,000, $105,000, $8,000, and $200,000 in the year
ended December 31, 1993, eleven months ended November 30, 1994, month ended
December 31, 1994, and year ended December 31, 1995, respectively.

F-15
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Construction In Process

As of December 31, 1995, the Company has entered into agreements pursuant to
which it may purchase, subject to completion of due diligence and various
other conditions, twenty-two undeveloped sites in Texas, Washington, New
Jersey and Oregon for an aggregate purchase price of approximately $2.8
million. The Company has paid initial deposits relating to these sites and or
has entered into agreements to purchase and has completed or is in the process
of completing demographic analyses and initial architectural plans for these
sites for purposes of building assisted living residences. In addition, the
Company has purchased land in Texas and Washington for twenty-one sites and
has commenced development of residences. As of December 31, 1995, the Company
had capitalized all costs incurred in connection with the development of these
properties, consisting of the following (in thousands):

<TABLE>
<CAPTION>
1994 1995
---- -------
<S> <C> <C>
Land purchased............................................... $151 $ 2,402
Earnest money deposits....................................... 36 61
Other costs, including legal fees, building permits and other
development costs........................................... 93 10,612
---- -------
Total...................................................... $280 $13,075
==== =======
</TABLE>

5. OTHER ASSETS

Pursuant to lease agreements, residents are required to provide security
deposits, and in certain cases, the last months rent. Such deposits have been
recorded as other current assets which are restricted as to use by the
Company. The Company has recorded a liability for these deposits, which is
reflected in other current liabilities in the financial statements.

Under the terms of the debt agreements with the OHCS, the Company is
required to maintain escrow deposits for insurance, taxes and building
replacements. Such escrow deposits totaled $66,000 and $42,000 as of December
31, 1994 and December 31, 1995, respectively and have been classified as other
assets and are restricted as to use by the Company (Note 6). In addition, the
Company is required to maintain a contingency escrow reserve for a three year
period or such longer period as determined by the State of Oregon. As of
December 31, 1995, the contingency escrow reserve for the two State of Oregon
loans held in the Company's name was $100,000. These escrow deposits are
restricted to use by the Company in residence operations pursuant to
regulatory agreements and are recorded in other assets.

In August of 1995, the Company entered into an agreement with a Bank that
provided interim construction financing to the developer of three residences
in Washington. The Company has agreed to purchase these three residences for
approximately $7 million once construction is completed. Under the terms of
the agreement, the Company purchased a $1.1 million certificate of deposit
which is being held by the bank as security. These funds will be released by
the Bank at such time that the Company completes the purchase of these
residences. The restricted certificate of deposit is reflected under the
caption other assets.

F-16
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

6. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Trust Deed Notes, payable to the State
of Oregon Housing and Community
Services Department.................... $1,113 $4,600
Less current portion.................... (12) (47)
------ ------
Total.................................. $1,101 $4,553
====== ======
</TABLE>

Trust Deed Notes consists of five trust deed notes payable to the OHCS,
secured by buildings, land, furniture and fixtures of five Oregon residences,
payable in monthly installments including interest at effective rates ranging
from 7.375% to 8.9%. These notes have scheduled maturity dates ranging between
January 2021 and October 2028. As of December 31, 1995, the following annual
principal payments are scheduled (in thousands):

<TABLE>
<S> <C>
1995............................................................... $ 47
1996............................................................... 51
1997............................................................... 54
1998............................................................... 58
1999............................................................... 62
Thereafter......................................................... 4,328
</TABLE>

Indebtedness of the Predecessor used to finance Huffman House, Juniper
House, Rackleff House, and Brookside remained an obligation of previous owners
and was not assumed by the Company. The Company has entered into a lease
approval agreement 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 and regulatory agreements 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, which as of December
31, 1994 and December 31, 1995, was $66,000 and $42,000, respectively and is
reflected in other assets in the accompanying financial statements. In
addition, for the loans in the Company's name, a contingency escrow account in
the amount of 3% of the original loan balance is required. This account had a
balance of $100,000 as of December 31, 1995 and is reflected in other assets
in the accompanying financial statements (See Note 5). Distribution of any
assets or income of any kind to 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, 1995, the Company was restricted from paying dividends on
$63,000 and $17,000 of income and retained earnings, respectively, in
accordance with the terms of the regulatory 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.

F-17
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

On August 15, 1995, the Company sold, through a public offering, $20,000,000
aggregate principal amount of 7% Convertible Subordinated Debentures due
August 15, 2005. The debentures are convertible at any time after the
effectiveness of the registration statement filed by the Company and at or
prior to maturity, unless previously redeemed, at a conversion price of $15.00
per share, subject to adjustments under certain circumstances. The net
proceeds were used to fund development activities.

7. INCOME TAX INFORMATION

The accompanying financial statements set forth the provision for income
taxes for the Company and the Predecessor as follows: Effective December 1,
1994, the Company adopted the provisions of SFAS 109, "Accounting for Income
Taxes." SFAS 109 requires the use of an 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. The Company is subject
to federal and state income taxes and deferred income taxes for the cumulative
difference between the financial statement amounts and the income tax bases of
assets and liabilities.

At December 31, 1995, the Company had a net operating loss carryforward of
approximately $601,000 for income tax purposes. This loss will be carried
forward and expires in the years 2009 and 2010. As such, no provision for
income taxes has been recorded.

The provision for income taxes for the Predecessor is based on the
historical combined financial data of Madras Elder Care, LCP and ALF, as if
the combined companies operated as a C-Corporation, and adopted the provisions
of SFAS 109 on January 1, 1993. Had the Predecessor been taxed as a regular
corporation during the years ended December 31, 1990 and 1991, no income tax
provision would have been recorded because of the operating losses of $83,000
and $51,000, respectively, that were generated during those years. The tax
benefit from those losses would have been available for use in subsequent
years to offset taxable income. The provision for income taxes for the year
ended December 31, 1992 takes this net operating loss carryover into effect,
effectively eliminating any tax liability for 1992. The 1993 tax provision was
also reduced due to the remaining net operating loss carryforward utilized in
1993. Unaudited income taxes for each of the periods subsequent to December
31, 1992 for the Predecessor and audited income taxes for the Company are as
follows (in thousands):

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------------------------------- -----------------------------------
YEAR ENDED ELEVEN MONTHS ENDED MONTH ENDED YEAR ENDED
DECEMBER 31, 1993 NOVEMBER 30, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Current:
Federal........................................ $53 $70 $ -- $ --
State.......................................... 13 16 -- --
Deferred:
Federal........................................ 1 (1) -- --
State.......................................... -- -- -- --
-------------------------------------------------- --- --- -------- --------
$67 $85 $ -- $ --
=== === ======== ========
</TABLE>

F-18
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The provision for income taxes differs from the amount of income determined
by applying the applicable U.S. statutory federal rate to pretax income as a
result of the following differences:

An analysis of the tax differences at December 31, 1994 and December 31,
1995 for deferred tax assets and liabilities, consists of the following (in
thousands):

<TABLE>
<CAPTION>
THE COMPANY
-----------------------------------
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss..................... $ 55 $ 231
Deferred revenue....................... -- 59
Other.................................. -- 43
Deferred tax liabilities:
Depreciation........................... -- (92)
Net deferred asset valuation reserve.... (55) (241)
---- -----
Deferred tax asset (liability).......... $-- $ --
==== =====
</TABLE>

8. RELATED PARTY TRANSACTIONS

THE COMPANY

The Company leases four residences from Assisted Living Facilities, Inc.
(ALF), a related party (see Note 2). The Company's president's spouse owns a
25% interest in ALF. During the month ended December 31, 1994 and year ended
December 31, 1995, the Company paid ALF aggregate lease deposits of $75,000
and $0, respectively and aggregate rentals of $37,000 and $734,000,
respectively.

In December of 1994, the Company purchased Aspen Court and Hillside Manor
from Madras and LCP for $1,685,000 and $2,164,000 (including the assumption of
$1,114,000 in debt, but excluding closing costs), respectively (See Note 2).
Prior to the purchase, the president of the Company owned a 30% interest in
Madras and, together with her spouse, owned a 50% partnership interest in
Redbud Associates which held a 35% partnership interest in LCP. Subsequent to
the purchase, neither the President nor her spouse have any ownership in
Madras or LCP.

F-19
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Concepts in Community Living, Inc. (CCL) is a company that is owned 100% by
the President. CCL provides services to several of the developers that have
contracted with the Company to build and develop assisted living facilities.
CCL has performed feasibility studies and pre-development consulting services
for the developers on the Company's behalf. For the year ended December 31,
1995, CCL performed these services on 36 sites collecting fees of $605,000 of
which was capitalized in construction in process on the balance sheet. The
direct costs incurred by CCL in performing these services was approximately
$510,000.

PREDECESSOR

The Predecessor residences operated under management agreements with CCL
(the CCL Management Agreements). Under the terms of the CCL Management
Agreements, CCL provided management and administrative support to the
Predecessor and, as such, was entitled to reimbursement for accounting,
marketing and other expenses incurred on behalf of the Predecessor. Fees paid
to CCL under the CCL Management Agreements are reflected as management fees in
the accompanying Statements of Operations.

9. STOCK OPTION PLAN

The Company has a Stock Option Plan (the "Plan") in which options may be
granted as either incentive or non-qualified stock options. The Plan is
administered by the Compensation Committee which sets the terms and provisions
of options granted under the Plan. Incentive options may be granted only to
officers or other full-time employees of the Company, while non-qualified
options may be granted to directors, officers or other employees of the
Company, or consultants who provide services to the Company. The Company has
reserved 300,000 shares of common stock for deferred issuance under the plan.

The following summarizes transactions regarding the nonqualified options for
the year ended December 31, 1995.
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE ($)
------- -------------
<S> <C> <C>
Outstanding December 1, 1994 ..................... -- --
Options Granted................................... 220,000 9.25
-------
Outstanding December 31, 1994..................... 220,000 9.25
Options Granted................................... 95,250 9.25 to 15.00
Options Exercised ................................ -- --
Options Canceled.................................. (32,217) 9.25 to 15.00
-------
Outstanding December 31, 1995..................... 283,033 9.25 to 15.00
=======
</TABLE>

In addition to the above, the Board of Directors have granted, subject to
Shareholder Approval of the amendment to increase the number of shares covered
by the plan from 300,000 to 600,000, 140,000 shares at $13.00 per share. Each
option shall 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.
Such options vest three years from the date of issuance and are exercisable
within seven to ten years from the date of vesting. Each option is exercisable
in equal installments as designated by the Compensation Committee at the
option price designated by the Compensation Committee; however, incentive
options cannot be less than the fair market value of the common stock on the
date of grant. All options are nontransferable and subject to adjustment upon
changes in capitalization by the Compensation Committee. The Board of
Directors, at its option, may discontinue the Plan or amend the Plan at any
time. At December 31, 1995, there were 64,445 shares which were exercisable.

F-20
<PAGE>

10. SUBSEQUENT EVENTS

As of March 28, 1996, the Company sold and leasedback eight assisted living
residences in Washington and Texas for fixed terms ranging from twelve to
twenty years at annual lease payments of $1.4 million to LTC Properties, Inc.
In addition, the Company entered into agreements to sale and leaseback, once
development has been completed, an additional three facilities located in
Washington for approximately $7.1 million. The leases will have fixed terms of
twenty years with initial annual lease payments of $596,400. The Company
anticipates these transactions will close by June 30, 1996.

As of March 28, 1996, the Company purchased an additional nine properties in
Oregon and Texas at an aggregate purchase price of approximately $1.3 million
to develop assisted living residences of which seven of the properties were
subject to purchase as of December 31, 1995. In addition, the Company has
entered into fourteen additional option agreements to acquire land for
development, subject to completion of due diligence and various other
conditions, for an aggregate purchase price of approximately $1.5 million.
Between January 1, 1996 and March 28, 1996, the Company had opened or had
received Certificates of Occupancy on five additional residences since
December 31, 1995.

11. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth the pro forma statement of operations of the
Company for the years ended December 31, 1993 and 1994, as if the acquisition
of the Predecessor's assets and the initial public offering had occurred at
January 1, 1993 (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1993 1994
------ ------
<S> <C> <C>
Revenues................................................. $1,884 $2,053
Operating income......................................... (409) (402)
Interest expense--net.................................... 85 84
Net loss................................................. (494) ( 486)
Loss per common share.................................... $ (.16) $ (.16)
Weighted average common shares........................... 3,000 3,000
</TABLE>

F-21
<PAGE>

ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARY

CONDENSED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
ASSETS ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 7,335 $ 4,170
Accounts receivable................................. 136 217
Other current assets................................ 558 651
------- -------
Total current assets.............................. 8,029 5,038
------- -------
Property and equipment................................ 28,446 31,856
Less accumulated depreciation....................... 163 267
------- -------
Property and equipment--net......................... 28,283 31,589
------- -------
Construction in process (Note 2)...................... 13,075 15,672
Goodwill.............................................. 393 384
Other assets.......................................... 3,766 4,711
------- -------
Total assets...................................... $53,546 $57,394
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............... $13,149 $11,340
Current portion of long-term debt................... 47 89
------- -------
Total current liabilities........................... 13,196 11,429
Other non-current liabilities......................... 153 112
Mortgages payable..................................... 4,553 10,350
Convertible subordinated debt......................... 20,000 20,000
------- -------
Total liabilities................................. 37,902 41,891
------- -------
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized;
none issued and outstanding
Common Stock, $.01 par value; 40,000,000 shares au-
thorized;
3,000,000 and 3,004,734 shares issued and outstand-
ing............................................... 30 30
Additional paid-in-capital........................... 16,492 16,538
Fair market value in excess of historical cost of ac-
quired net assets
attributable to related party transactions.......... (239) (239)
Accumulated deficit.................................. (639) (826)
------- -------
Total shareholders' equity........................... 15,644 15,503
------- -------
Total liabilities and shareholders' equity........ $53,546 $57,394
======= =======
</TABLE>

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

F-22
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Revenues................................ $ 682 $2,750
----- ------
Operating expenses:
Residence operating expenses.......... 449 1,936
Corporate general and administrative.. 231 215
Building rentals...................... 0 364
Building rentals from related party... 146 196
Depreciation and amortization......... 39 217
----- ------
Total operating expenses................ 865 2,928
----- ------
Operating loss.......................... (183) (178)
----- ------
Interest expense........................ 24 31
Interest (income)....................... (180) (22)
----- ------
Interest expense (income)--net.......... (156) 9
----- ------
Net loss................................ $ (27) $ (187)
===== ======
Net loss per common share............... $(.01) $ (.06)
===== ======
Weighted average common shares outstand-
ing.................................... 3,000 3,005
</TABLE>

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

F-23
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................ $ (27) $ (187)
Adjustment to reconcile net loss to net
cash provided by operating
activities:
Depreciation and amortization......... 39 217
Changes in other non-cash items:
Accounts receivable................... (13) (81)
Other current assets.................. 44 (93)
Other assets.......................... (46) (936)
Accounts payable and accrued ex-
penses............................... 893 (1,809)
------- --------
Net cash provided by (used for) operat-
ing activities......................... 890 (2,889)
------- --------
INVESTING ACTIVITIES:
Proceeds from sale leasebacks........... 14,380
Purchases of property and equipment..... (3,162) (20,541)
------- --------
Net cash used for investing activities.. (3,162) (6,161)
------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt............ 5,865
Payments on long-term debt.............. (4) (26)
Proceeds from exercise of stock op-
tions.................................. 46
------- --------
Net cash provided by (used for) financ-
ing activities......................... (4) 5,885
------- --------
Net decrease in cash and cash equiva-
lents.................................. (2,276) (3,165)
Cash and cash equivalents, beginning of
period................................. 13,453 7,335
------- --------
Cash and cash equivalents, end of peri-
od..................................... $11,177 $ 4,170
------- --------
Supplemental disclosure of cash flow in-
formation:
Cash payments for interest............ $ 24 $ 784
======= ========
</TABLE>

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

F-24
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

The Company was organized in July 1994, initially capitalized through the
sale of 500,000 shares of $0.01 par value common stock for $100,000. From July
19, 1994 to November 30, 1994, the date of its initial public offering, the
Company began to put into place the management organization to commence
operations and execute its strategy to expand the Company's business.

On November 22, 1994, the Company sold 2,000,000 shares of common stock at
$9.25 per share in a public offering realizing net proceeds of $16,422,000. On
December 1, 1994, the Company purchased two and leased four assisted living
residences from Assisted Living Concepts Group ("the Predecessor") and
commenced operations. As of March 31, 1996, the Company had received
certificates of occupancy for 35 residences of which 26 had commenced
operations.

Basis of Presentation

These financial statements have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. These condensed financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1995.

The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. The result of operations for the three-month period ended March 31,
1995 and 1996 are not necessarily indicative of the results to be expected for
the full year.

2. PROPERTY AND EQUIPMENT

Construction in Process

As of March 31, 1996, the Company had begun construction or had purchased
land to begin construction on 22 parcels of land. The Company has also entered
into agreements pursuant to which it may purchase, subject to completion of
due diligence and various other conditions, 28 additional sites for
approximately $3.1 million. In addition, the Company has entered into
agreements to manage and or lease 3 additional sites once development has been
completed by outside developers.

F-25
<PAGE>

ASSISTED LIVING CONCEPTS, INC. (THE COMPANY)
AND ASSISTED LIVING CONCEPTS GROUP (PREDECESSOR)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

2. PROPERTY AND EQUIPMENT (CONTINUED)

As of March 31, 1996, the Company had capitalized all costs incurred in
connection with the development of properties, and accordingly, construction
in process consisted of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Land purchased............................................ $ 2,728
Construction costs and architectural fees................. 10,504
Other costs, including legal fees, building permits and
other
development costs........................................ 2,440
-------
$15,672
=======
</TABLE>

During the quarter ended March 31, 1996, the Company capitalized $447,000 of
interest costs relative to financing of construction in process. Of the 35
residences the Company had opened or had received certificates of occupancy,
18 were leases, 15 were owned (8 in Texas, 6 in Oregon and 1 in Washington)
and 2 Washington residences were under agreements to purchase.

3. LEASES

During the quarter ended March 31, 1996, the Company completed the sale of
six Texas residences under sale and leaseback arrangements. The Company sold
the residences for approximately $10,300,000, which approximates cost, and
leased them back over initial terms of twelve years. The residences were
leased back at an initial annual lease rate of approximately $1,047,000. In
addition the Company completed the sale of two Washington residences under
sale and leaseback arrangements. The Company sold the residences for
approximately $4,080,000, which approximate costs, and leased them back over
an initial term of twenty years. The residences were leased back at an initial
annual lease rate of approximately $343,000. The above transactions were
completed with LTC Properties, Inc., the Chairman and President of which are
members of the Board of Directors and Shareholders of the Company.

In addition, the Company completed a lease agreement for one Oregon
residence with an initial term of fifteen years at an initial annual rate of
$208,200.

4. LONG-TERM DEBT

During the quarter ended March 31, 1996, the Company closed three loans with
the State of Oregon Housing and Community Service Department for $5,865,000.
The loans, which bear interest at a rate of 7.375%, have terms of 30 years and
monthly principal and interest payments of $40,510. The Company is also
required to make deposits into an interest bearing account of $10,990 per
month for insurance, real estate taxes and replacement reserves.

5. SUBSEQUENT EVENTS AND COMMITMENTS

The Company has entered into agreements to sell and leaseback, once
development has been completed, an additional three residences located in
Washington for approximately $7.1 million. The leases will have fixed terms of
twenty years with initial annual lease payments of $596,400. The Company
anticipates these transactions will close by June 30, 1996.

The Company completed the sale of eight Texas residences under sale and
leaseback arrangements. The Company sold the residences for approximately
$16.4 million, which approximates cost, and leased them back over terms
ranging from twelve to fifteen years. The residences were leased back at an
annual lease rate of approximately $1,773,700.

F-26
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS IN CONNEC-
TION WITH THIS OFFERING MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR BY ANY SELLING STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITA-
TION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITA-
TION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE OF THIS PROSPECTUS.

----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 2
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 11
Price Range of Common Stock.............................................. 11
Dividend Policy.......................................................... 11
Capitalization........................................................... 12
Dilution................................................................. 12
Selected Financial Data.................................................. 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 24
Management............................................................... 34
Certain Transactions..................................................... 39
Principal and Selling Stockholders and Management Ownership.............. 40
Description of Capital Stock............................................. 41
Shares Eligible for Future Sale.......................................... 42
Underwriting............................................................. 43
Legal Matters............................................................ 44
Experts.................................................................. 44
Available Information.................................................... 45
Index to Financial Statements............................................ F-1
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

1,800,000 SHARES

[LOGO OF ASSISTED LIVING CONCEPTS, INC. APPEARS HERE]

ASSISTED LIVING CONCEPTS, INC.

COMMON STOCK

----------------

PROSPECTUS

----------------

NATWEST SECURITIES LIMITED
DEAN WITTER REYNOLDS INC.
SMITH BARNEY INC.

JULY , 1996

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee, all amounts are estimates.

<TABLE>
<S> <C>
SEC Registration Fee.............................................. $15,261
NASD Fee.......................................................... 4,926
AMEX Listing Fee.................................................. 10,000
Printing and Engraving Expenses................................... 50,000
Legal Fees and Expenses........................................... 25,000
Accounting Fees and Expenses...................................... 30,000
Registrar and Transfer Agent Fees and Expenses.................... 5,000
Miscellaneous Expenses............................................ 24,813
-------
Total........................................................... 165,000
=======
</TABLE>

All of the costs identified above will be paid by the Company, except that
the selling stockholders will pay their pro-rata share of the SEC registration
fee ($1,105) and any incremental expenses incurred in connection with the
sales of their shares.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company's Articles of Incorporation provide that a director or officer
of the Company shall not be personally liable to the Company or its
stockholders for damages for any breach of fiduciary duty as a director or
officer, except for liability for (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law, or (ii) the
payment of distributions in violation of Nevada Revised Statutes 78.300. In
addition, Nevada Revised Statutes 78.751 and Article III, Section 13 of the
Company's Bylaws, under certain circumstances, provide for the indemnification
of the Company's officers, directors, employees, and agents against
liabilities which they may incur in such capacities. A summary of the
circumstances in which such indemnification is provided for is contained
herein, but that description is qualified in its entirety by reference to
Article III, Section 13 of the Company's Bylaws.

In general, any officer, director, employee or agent shall be indemnified
against expenses including attorneys' fees, fines, settlements, or judgments
which were actually and reasonably incurred in connection with a legal
proceeding, other than one brought by or on behalf of the Company, to which he
was a party as a result of such relationship, if he acted in good faith, and
in the manner he believed to be in or not opposed to the Company's best
interest and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. If the action or suit is
brought by or on behalf of the Company, the person to be indemnified must have
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the Company's best interest. No indemnification will be made in
respect of any claim, issue or matter as to which such person shall have
adjudged by a court of competent jurisdiction, after exhaustion of all appeals
therefrom, to be liable to the Company or for amounts paid in settlement to
the Company, unless and only to the extent that the court in which the action
or suit was brought or other court of competent jurisdiction, determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.

Any indemnification under the previous paragraphs, unless ordered by a court
or advanced as provided in the succeeding paragraph, must be made by the
Company only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made (i) by the stockholders, (ii) by
the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to the act, suit or proceeding, (ii) if a majority vote
of a quorum of

II-1
<PAGE>

directors who were not parties to the act, suit or proceeding so orders, by
independent legal counsel in a written opinion or (iv) if a quorum consisting
of directors who were not parties to the act, suit or proceeding cannot be
obtained, by independent legal counsel in a written opinion. To the extent
that a director, officer, employee or agent of the Company has been successful
on the merits or otherwise in defense of any action, suit or proceeding
referred to in the previous paragraph, or in defense of any claim, issue or
matter therein, he must be indemnified by the Company against expenses,
including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.

Expenses incurred by an officer or director in defending a civil or criminal
action, suit or proceeding must be paid by the Company as they are incurred
and in advance of the final disposition of the action, suit or proceeding,
upon receipt of an undertaking by or on behalf of the director or officer to
repay the amount if it is ultimately determined by a court of competent
jurisdiction that he is not entitled to be indemnified by the Company as
authorized by the By-Laws. Such expenses incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the Board of
Directors deems appropriate.

The indemnification and advancement of expenses authorized in or ordered by
a court as provided in the foregoing paragraphs does not exclude any other
rights to which a person seeking indemnification or advancement of expenses
may be entitled under the Articles of Incorporation or any bylaw, agreement,
vote of shareholders or disinterested directors or otherwise, for either an
action in his official capacity or an action in another capacity while holding
his office, except that indemnification, unless ordered by a court as
described in the third preceding paragraph or for advancement of expenses made
as described in the next preceding paragraph, may not be made to or on behalf
of any director or officer if a final adjudication establishes that his acts
or omissions involved intentional misconduct, fraud or a knowing violation of
the law and was material to the cause of action. If a claim for
indemnification or payment of expenses under Article III, Section 13 of the
By-Laws is not paid in full within ninety (90) days after a written claim
therefor has been received by the Company, the claimant may file suit to
recover the unpaid amount of such claim, if successful in whole or in part,
shall be entitled to be paid the expense of prosecuting such claim. In any
such action, the Company shall have the burden of proving that the claimant
was not entitled to the requested indemnification or payment of expenses under
applicable law.

The Board of Directors may authorize, by a vote of a majority of a quorum of
the Board of Directors, the Company to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Company would have the power to indemnify him against such
liability under the provisions of Article III, Section 13 of the By-Laws. The
Board of Directors may authorize the Company to enter into a contract with any
person who is or was a director, officer, employee or agent of the Company or
is or was serving at the request of the Company as a director, officer,
employee or agent of another partnership, joint venture, trust or other
enterprise providing for indemnification rights equivalent to or, if the Board
of Directors so determines, greater than those provided for in Article III,
Section 13 of the By-Laws.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On August 15, 1995, the Company issued $20,000,000 aggregate principal
amount of the Debentures in a private placement to certain institutional
investors and individual accredited investors.

II-2
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
2.1 Merger Agreement between the Company and CCL Sub, Inc. (Incorporated
by reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.2 Agreement and Plan of Corporate Separation and Reorganization between
Concepts in Community Living, Inc. and Keren Wilson (Incorporated by
reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.3 Assignment, Bill of Sale, License, and Assumption Agreement between
Concepts in Community Living, Inc. and CCL Sub, Inc. (Incorporated by
reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.4 Purchase Agreement between the Company and Lincoln City Limited
Partnership (Incorporated by reference to the same titled exhibit to
the Company's Registration Statement on Form S-1, File No. 33-83938).
2.5 Letter Purchase Agreement between the Company and Madras Senior
Residence, LRW partners, Keren Brown Wilson and Mr. Joseph Hughes
(Incorporated by reference to the same titled exhibit to the Company's
Registration Statement on Form S-1, File No. 33-83938).
3.1 Articles of Incorporation 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).
3.2 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).
4.1 Indenture, dated as of August 15, 1995, between the Company and Harris
Trust and Savings Bank, as Trustee, in respect of the Company's 7.0%
Convertible Subordinated Debentures due 2005 (Incorporated by
reference to the same titled exhibit to the Company's Quarterly Report
on
Form 10-Q for the period ended September 30, 1995, File No. 1-83938).
4.2 Form of 7.0% Convertible Subordinated Debentures due 2005
(Incorporated by reference to the same titled exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1995,
File No. 1-83938).
4.3 Registration Rights Agreement dated August 2, 1995 between the Company
and the initial purchasers of its 7.0% Convertible Subordinated
Debentures due 2005 (Incorporated by reference to the same titled
exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1995, File No. 1-83938).
5.1 Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey.**
10.1 Stock Option Plan of the Company incorporated by referenced exhibit to
the Company's Registration Statement on Form S-1, File No. 33-83938.
10.2 Employment Agreement between the Company and Keren B. Wilson
incorporated by referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.3 Employment Agreement between the Company and Stephen J. Toth
incorporated by referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.4 Lease Agreement between the Company and Assisted Living Facilities,
Inc. regarding Rackleff House incorporated by referenced exhibit to
the Company's Registration Statement on Form S-1, File No. 33-83938.
10.5 Lease Agreement between the Company and Assisted Living Facilities,
Inc. regarding Juniper House incorporated by referenced exhibit to the
Company's Registration Statement on Form S-1, File No. 33-83938.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------------------------------------------------------
<C> <S>
10.6 Lease Agreement between the Company and Assisted Living Facilities,
Inc. regarding Huffman House incorporated by referenced exhibit to the
Company's Registration Statement on Form S-1, File No. 33-83938.
10.7 Lease Agreement between the Company and Assisted Living Facilities,
Inc. regarding Brookside House incorporated by referenced exhibit to
the Company's Registration Statement on Form S-1, File No. 33-83938.
10.8 Amendment to 1994 Stock Option Plan incorporated by reference to the
same titled exhibit to the Company's Registration Statement on Form S-
8, File No. 333-2352.
23.1 Consent of Schreck, Jones, Bernhard, Woloson & Godfrey (included in
Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney.**
</TABLE>
- --------
* To be filed by amendment

** Previously filed

ITEM 17. UNDERTAKINGS.

(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer of
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of his counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.

(b) The undersigned registrant hereby undertakes:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(b) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the time
shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Portland, State of
Oregon, as of the 19th day of June, 1996.

ASSISTED LIVING CONCEPTS, INC.

By: /s/ Keren B. Wilson
_____________________________________
Keren B. Wilson
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated:

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Keren B. Wilson Director, President and June 19, 1996
____________________________________ Chief Executive Officer
Keren B. Wilson (Principal Executive
Officer)
/s/ Stephen Gordon Chief Administrative Officer June 19, 1996
____________________________________ and Chief Financial Officer
Stephen Gordon (Principal Financial and
Accounting Officer)
* Director June 19, 1996
____________________________________
William McBride III
* Director June 19, 1996
____________________________________
Andre C. Dimitriadis
* Director June 19, 1996
____________________________________
Richard C. Ladd
* Director June 19, 1996
____________________________________
Bradley G. Razook
</TABLE>

*By: /s/ Keren B. Wilson

_______________________________

Attorney-in-Fact

II-5
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NO.
------- --------------------------------------------------------- ----------
<C> <S> <C>
1.1 Form of Underwriting Agreement*
2.1 Merger Agreement between the Company and CCL Sub, Inc.
(Incorporated by reference to the same titled exhibit to
the Company's Registration Statement on Form S-1, File
No. 33-83938).
2.2 Agreement and Plan of Corporate Separation and
Reorganization between Concepts in Community Living, Inc.
and Keren Wilson (Incorporated by reference to the same
titled exhibit to the Company's Registration Statement on
Form S-1, File No. 33-83938).
2.3 Assignment, Bill of Sale, License, and Assumption
Agreement between Concepts in Community Living, Inc. and
CCL Sub, Inc. (Incorporated by reference to the same
titled exhibit to the Company's Registration Statement on
Form S-1, File No. 33-83938).
2.4 Purchase Agreement between the Company and Lincoln City
Limited Partnership (Incorporated by reference to the
same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.5 Letter Purchase Agreement between the Company and Madras
Senior Residence, LRW partners, Keren Brown Wilson and
Mr. Joseph Hughes (Incorporated by reference to the same
titled exhibit to the Company's Registration Statement on
Form S-1, File No. 33-83938).
3.1 Articles of Incorporation 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).
3.2 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).
4.1 Indenture, dated as of August 15, 1995, between the
Company and Harris Trust and Savings Bank, as Trustee, in
respect of the Company's 7.0% Convertible Subordinated
Debentures due 2005 (Incorporated by reference to the
same titled exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1995, File
No. 1-83938).
4.2 Form of 7.0% Convertible Subordinated Debentures due 2005
(Incorporated by reference to the same titled exhibit to
the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1995, File No. 1-83938).
4.3 Registration Rights Agreement dated August 2, 1995
between the Company and the initial purchasers of its
7.0% Convertible Subordinated Debentures due 2005
(Incorporated by reference to the same titled exhibit to
the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1995, File No. 1-83938).
5.1 Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey.**
10.1 Stock Option Plan of the Company incorporated by
referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.2 Employment Agreement between the Company and Keren B.
Wilson incorporated by referenced exhibit to the
Company's Registration Statement on Form S-1, File
No. 33-83938.
10.3 Employment Agreement between the Company and Stephen J.
Toth incorporated by referenced exhibit to the Company's
Registration Statement on Form S-1, File
No. 33-83938.
10.4 Lease Agreement between the Company and Assisted Living
Facilities, Inc. regarding Rackleff House incorporated by
referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NO.
------- -------------------------------------------------------- ----------
<C> <S> <C>
10.5 Lease Agreement between the Company and Assisted Living
Facilities, Inc. regarding Juniper House incorporated by
referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.6 Lease Agreement between the Company and Assisted Living
Facilities, Inc. regarding Huffman House incorporated by
referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.7 Lease Agreement between the Company and Assisted Living
Facilities, Inc. regarding Brookside House incorporated
by referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.8 Amendment to 1994 Stock Option Plan incorporated by
reference to the same titled exhibit to the Company's
Registration Statement on Form S-8, File No. 333-2352.
23.1 Consent of Schreck, Jones, Bernhard, Woloson & Godfrey
(included in Exhibit 5.1).**
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney.**
</TABLE>
- --------

* To be filed by amendment

** Previously filed

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated March 17, 1995, which
appear in such Prospectus, relating to the financial statements of Assisted
Living Concepts Group (which is comprised of Assisted Living Facilities, Inc.,
a subchapter S Corporation, Madras Elder Care (dba Aspen Court), a general
partnership, and Lincoln City Partners, a general partnership) for the eleven
months ended November 30, 1994 and the year ended December 31, 1993, and of
Assisted Living Concepts, Inc. for the one month period ended December 31,
1994, respectively. We also consent to the references to us under the headings
"Experts" and "Selected Financial Data" in such Prospectus. However, it should
be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Financial Data."

PRICE WATERHOUSE LLP

Portland, Oregon

June 19, 1996

<PAGE>

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Shareholders
Assisted Living Concepts, Inc.:

We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Financial Data" and "Experts" in the
Prospectus.

KPMG Peat Marwick LLP

Portland, Oregon

June 19, 1996