ASSISTED LIVING CONCEPTS INC, S-1/A, 1996-06-17

ASSISTED LIVING CONCEPTS INC
S-1/A, 1996-06-17
SKILLED NURSING CARE FACILITIES

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1996
REGISTRATION NO. 33-80295
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 3 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 (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

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.
Latham & Watkins
633 West Fifth Street - Suite 4000
Los Angeles, California 90071
(213) 485-1234

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective, depending on market
conditions.
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. [X]
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(a), MAY DETERMINE.
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<PAGE>

ASSISTED LIVING CONCEPTS, INC.

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

ITEM NO. AND CAPTION IN FORM S-1 PROSPECTUS CAPTION
- --------------------------------- ------------------
<S> <C>
1. Forepart of the Facing Page; Cross-Reference Sheet; Outside
Registration Statement and Front Cover Page
Outside Front Cover of
Prospectus..................

2. Inside Front and Outside Inside Front and Outside Back Cover Pages
Back Cover Pages of
Prospectus..................

3. Summary Information, Prospectus Summary, Risk Factors; Selected
Risk Factors and Ratio of Financial Data
Earnings to Fixed Charges...

4. Use of Proceeds.......... Use of Proceeds

5. Determination of *
Offering Price..............

6. Dilution................. *

7. Selling Security Holders. Selling Debentureholders

8. Plan of Distribution..... Plan of Distribution

9. Description of Description of Debentures; Description of
Securities to be Registered. Capital Stock

10. Interests of Named Legal Matters
Experts and Counsel.........

11. Information with Respect Prospectus Summary; Risk Factors; The Company;
to the Registrant........... Price Range of Common Stock; Dividend Policy;
Selected Consolidated Financial Data; Business;
Management; Description of Capital Stock;
Description of Debentures
12. Disclosure of Commission
Position on Indemnification *
for Securities Act
Liabilities.................
</TABLE>
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* Omitted from Prospectus because item is inapplicable or answer is in the
negative.
<PAGE>

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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.
- --------------------------------------------------------------------------------

PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE 17, 1996

$20,000,000
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2005
(INTEREST PAYABLE JANUARY 31 AND JULY 31)

1,333,333 SHARES
COMMON STOCK, PAR VALUE $.01 PER SHARE

ASSISTED LIVING CONCEPTS, INC.

This Prospectus relates to $20,000,000 aggregate principal amount of 7%
Convertible Subordinated Debentures due 2005 (the "Debentures") of Assisted
Living Concepts, Inc., a Nevada corporation (the "Company"), issued in a private
placement on August 15, 1995 (the "Debenture Offering") and the 1,333,333 shares
of common stock, par value $.01 per share (the "Common Stock"), of the Company
which are issuable upon conversion of the Debentures (the "Conversion Shares").
The Debentures or the shares of Common Stock issued upon conversion of the
Debentures may be offered from time to time for the account of holders of
Debentures named herein (the "Selling Debentureholders"). See "Plan of
Distribution." The Company will not receive any proceeds from this Offering.

The aggregate principal amount of Debentures that may be offered by the
Selling Debentureholders pursuant to this Prospectus is $19,650,000. Information
concerning such Selling Debentureholders may change from time to time and will
be set forth in Supplements to this Prospectus. Accordingly, the aggregate
principal amount of Debentures offered hereby may increase or decrease. As of
the date of this Prospectus, the aggregate principal amount of Debentures
outstanding is $20,000,000.

The Debentures are convertible into Common Stock at any time after the
effectiveness of the registration statement of which this Prospectus is a part
and at or prior to maturity, unless previously redeemed, at a conversion price
of $15.00 per share, subject to adjustment under certain circumstances. Prior
to this Offering, there has not been any public market for the Debentures,
although the Debentures have been eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") Market. The Common
Stock is traded on the American Stock Exchange ("AMEX") under the symbol "ALF."
On June 13, 1996, the last reported sale price of the Common Stock, as reported
by AMEX, was $21.50 per share. The Conversion Shares have been approved for
listing on AMEX, subject to notice of issuance.

The Debentures are redeemable, in whole or in part, at the option of the
Company, for cash, at any time on or after July 31, 1998 on at least 30 days'
notice at a redemption price equal to 100% of the principal amount thereof plus
accrued interest. See "Description of the Debentures."

The Debentures are unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined) of the Company. The Indenture does not restrict the incurrence of
Senior Indebtedness or other Indebtedness by the Company or any subsidiary. At
March 31, 1996 the Company had approximately $10,439,000 in Senior Indebtedness
and no subsidiary indebtedness.

SEE "RISK FACTORS" COMMENCING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE DEBENTURES AND 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.

The Company has been advised by the Selling Debentureholders that the
Selling Debentureholders, acting as principals for their own account, directly,
through agents designated from time to time, or through dealers or underwriters
also to be designated, may sell all or a portion of the Debentures or shares of
Common Stock offered hereby from time to time on terms to be determined at the
time of sale. The aggregate proceeds to the Selling Debentureholders from the
sale of Debentures and Common Stock offered by the Selling Debentureholders
hereby will be the purchase price of such Debentures or Common Stock less any
commissions. For information concerning indemnification arrangements between the
Company and the Selling Debentureholders, see "Plan of Distribution."

The Selling Debentureholders and any broker-dealers, agents or underwriters
that participate with the Selling Debentureholders in the distribution of the
Debentures or shares of Common Stock may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended (the "Securities Act"), in
which event any commissions received by such broker-dealers, agents or
underwriters and any profit on the resale of the Debentures or shares of Common
Stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.

THE DATE OF THIS PROSPECTUS IS JUNE __, 1996

<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 Debentures and
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.

<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". 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 36 residences that had certificates of
occupancy as of April 30, 1996, eight residences (270 units) were owned and 28
residences (952 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 and other
states with regulatory and reimbursement climates which it believes are
favorable. As of May 13, 1996, the Company had commenced construction or had
purchased land to begin the development of 22 residences (approximately 812
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 38 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.

3
<PAGE>

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 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.

4
<PAGE>

THE OFFERING
<TABLE>
<S> <C>
Securities Offered........... $20,000,000 principal amount of 7% Convertible
Subordinated Debentures due 2005 and 1,333,333
shares of Common Stock issuable upon conversion
thereof, subject to adjustment under certain
circumstances.
Interest Payment Dates....... 7% per annum payable semi-annually on January 31
and July 31, commencing January 31, 1996
Conversion Rights............ The Debentures are convertible into shares of
Common Stock at any time after the effective
date (the "Registration Date") of the
registration statement of which this Prospectus
is a part, and prior to maturity, unless
previously redeemed, at a conversion price of
$15.00 per share, subject to adjustment under
certain circumstances as described herein and in
the Indenture (the "Conversion Price").
Accordingly, each $1,000 principal amount of
Debentures is convertible into 66 2/3 shares of
Common Stock, subject to adjustment, or an
aggregate of 1,333,333 shares. See "Description
of Debentures--Conversion Rights."
Optional Redemption.......... The Debentures are subject to redemption, as a
whole or in part, at any time or from time to
time commencing July 31, 1998 at the option of
the Company on at least 30 days' and not more
than 60 days' prior notice by mail at a
redemption price equal to 100% of the principal
amount thereof plus interest accrued to the date
of redemption.
Registration Rights.......... Pursuant to a Registration Rights Agreement
between the Company and the Initial Purchasers,
the Company is obligated to, among other things,
cause a shelf registration statement to be
effective with respect to the resale of the
Debentures and the Conversion Shares from time
to time until August 15, 1998 in the
over-the-counter market, in privately negotiated
transactions or, with respect to the Conversion
Shares only, on the AMEX.
Subordination................ The Debentures are subordinated in right of
payment to the extent set forth in the Indenture
to all Senior Indebtedness (as defined) of the
Company. The Indenture governing the Debentures
does not limit or restrict the Company's ability
to incur any additional indebtedness. See
"Description of the Debentures--Subordination of
Debentures."
Risk Factors................. See "Risk Factors" for a discussion of certain
factors that should be considered in connection
with an investment in the Debentures and the
Common Stock.
AMEX Common Stock
Symbol..................... ALF
</TABLE>

5
<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.

PREDECESSOR THE COMPANY
-------------------------------------------- ---------------------------------------------------
11 MONTHS 3 MONTHS 3 MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1991 1992 1993 1994 1994(1) 1995 1995 1996
---- ---- ---- ---- ------- ---- ---- ----
(Unaudited) (Unaudited)
<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 (4)......... 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 (2):
Net income (loss)............ $ (51) $ 60 $ 261 $ 231
Pro forma provision for
income taxes................ - - 67 85
------ ------ ------ ------
Pro forma net income (loss).. $ (51) $ 60 $ 194 $ 146
====== ====== ====== ======
Ratio of earnings to fixed
charges (3)................. - 1.08x 1.74x 1.71x - - - -
</TABLE>

<TABLE>
<CAPTION>
AT DECEMBER 31, AT NOVEMBER 30, AT DECEMBER 31, AT MARCH 31,
-------------- -------------- -------------- -----------
1991 1992 1993 1994 1994(1) 1995 1995 1996
------ ------ ------ ------ ------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).... $ 88 $ 109 $ 351 $ 299 $13,122 $(5,167) $ 9,701 $(6,391)
Total assets................. 3,156 3,965 4,110 5,699 17,903 53,546 18,765 57,394
Long-term debt, excluding
current portion............ 3,052 3,703 3,700 5,266 1,101 24,553 1,097 30,350
Partners' and shareholders'
equity...................... 45 105 263 197 16,219 15,644 16,192 15,503
</TABLE>
- ----------

(1) The Company commenced operating the five initial residences on December 1,
1994.

(2) 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.

(3) For the fiscal year ended December 31, 1991, the one month period ended
December 31, 1994, the year ended December 31, 1995, the three months ended
March 31, 1995 and the three months ended March 31, 1996, earnings were
insufficient to cover fixed charges by $101,000, $64,000, $1,152,000,
$27,000 and $634,000 respectively.

(4) 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.

6
<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 Debentures or 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 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.

7
<PAGE>

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 $3.0 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 April 30, 1996, approximately one-half of the Company's properties
are located in the State of Texas and approximately one-third 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 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.

ABSENCE OF PUBLIC MARKET FOR THE DEBENTURES

Prior to the registration, there has been no public market for the
Debentures, although the Debentures have been eligible for trading in the PORTAL
Market since issuance. It is unlikely that an active or liquid trading market
will develop or be sustained for the Debentures.

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Common Stock into which the Debentures are
convertible 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 to the operating
performance of particular companies. These market fluctuations also may
adversely affect the market price of the Common Stock.

SUBORDINATION OF DEBENTURES; NO RESTRICTION ON THE INCURRENCE OF ADDITIONAL
INDEBTEDNESS

8
<PAGE>

The Debentures are unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined) of the Company, and are structurally subordinated to indebtedness
of any subsidiary. The Indenture does not restrict the incurrence of Senior
Indebtedness or other Indebtedness by the Company or any subsidiary. In the
event of bankruptcy, liquidation or reorganization of the Company, the assets of
the Company will be available to make payments on the Debentures only after all
Senior Indebtedness of the Company has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on the Debentures. At March 31,
1996 the Company had approximately $10,439,000 in Senior Indebtedness, and there
was no indebtedness of any subsidiary. See "Description of Debentures--
Subordination of Debentures."

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, eight residences in Texas
with a combined total of 284 units for a total purchase price of $14,900,000.
Annual rental payments to LTC with respect to such residences is approximately
$1,525,800 ($63,300 in rent was paid in 1995). In addition, the Company has
entered into agreements with LTC to sell for approximately $11,180,000 five
residences in Washington with a total of 188 units. Two of the five Washington
residences had been sold and leased back as of April 30, 1996 for a total
purchase price of $4,080,000. Annual rental payments to LTC with respect to such
residences is approximately $342,000. Subsequent to April 30, 1996, the Company
sold and leased back an additional Washington residence to LTC for a total
purchase price of $2,275,000. Annual rental payments to LTC with respect to this
residence are approximately $191,000. The other two Washington residences are
presently in various stages of development and/or construction and once
construction has been completed, which is expected to happen prior to June 30,
1996, the residences will be sold to LTC and leased back. 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".

9
<PAGE>

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.

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.

10
<PAGE>

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 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.

11
<PAGE>

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 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.

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.

12
<PAGE>

USE OF PROCEEDS

The proceeds from the sale of the Debentures and shares of Common Stock
offered hereby are solely for the account of the Selling Debentureholders.
Accordingly, the Company will receive none of the proceeds from sales thereof.

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 13, 1996, the closing sale price of the Common Stock, as reported
by AMEX, was $22.00 per share. As of such date, the Company had approximately
23 holders of record of its Common Stock.

13
<PAGE>

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.

CAPITALIZATION

The following table sets forth the capitalization of the Company at March
31, 1996. 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
--------------
(IN THOUSANDS)
<S> <C>
Mortgages payable, excluding current
portion................................. $10,350
7% Convertible Subordinated Debentures
due 2005................................ 20,000
Total long-term debt, excluding -------
current portion........................ 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 (1)....................... 30
Additional paid-in-capital............. 16,538
Fair market value in excess of
historical cost of acquired net
assets attributable to related party
transactions.......................... (239)
Accumulated deficit................... (826)
-------
Total shareholders' equity...... 15,503
-------
Total capitalization............ $45,853
=======
</TABLE>

- ----------

(1) 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. Also does not include the
1,333,333 shares of Common Stock issuable upon conversion of the
Debentures.

14
<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 auditors. The financial statements of the
Company for the year ended December 31, 1995 have been audited by KPMG Peat
Marwick LLP, independent auditors. 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 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
---------------------------------------- ----------------------------------------------------
11 MONTHS 3 MONTHS 3 MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1991 1992 1993 1994(1) 1994(2) 1995 1995 1996
----------- ------ ------ ------------- ------------ ------------ --------- ---------
(Unaudited) (Unaudited)
<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 (5)......... 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
====== ====== ====== ======
Ratio of earnings to fixed
charges (4)................. - 1.08x 1.74x 1.71x - - - -
</TABLE>

<TABLE>
<CAPTION>
AT DECEMBER 31, AT NOVEMBER 30, AT DECEMBER 31, AT MARCH 31,
----------------------------- --------------- -------------------- -------------------
1991 1992 1993 1994(1) 1994(2) 1995 1995 1996
----------- ------ ------ ------- ------- ------- ------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).... $ 88 $ 109 $ 351 $ 299 $13,122 $(5,167) $ 9,701 $(6,391)
Total assets................. 3,156 3,965 4,110 5,699 17,903 53,546 18,765 57,394
Long-term debt, excluding
current portion............ 3,052 3,703 3,700 5,266 1,101 24,553 1,097 30,350
Partners' and shareholders'
equity...................... 45 105 263 197 16,219 15,644 16,192 15,503
</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) 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) For the fiscal year ended December 31, 1991, the one month period ended
December 31, 1994, the year ended December 31, 1995, the three months ended
March 31, 1995 and 1996, earnings were insufficient to cover fixed charges
by $101,000, $64,000, $1,152,000, $27,000 and $634,000 respectively.

(5) 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.

15
<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 April 30, 1996, the Company owned or leased a total of 36 assisted living
residences containing an aggregate of 1,222 units. Of these residences, eight
residences (270 units) were owned and 28 residences (952 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 and other states with regulatory and
reimbursement climates which it believes are favorable. As of May 13, 1996, the
Company had commenced construction or had purchased land to begin the
development of 22 residences (approximately 812 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 38 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."

16
<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
----------------------------------- -----------------------------------------------------------------
Year ended Eleven months ended Month ended Year ended Three months ended Three months 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 4 5 5 19 6 26
(End of Period)
Units operated 104 137 137 595 174 817
(End of Period)
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
----------------------------------- -----------------------------------------------------------------
Year ended Eleven months ended Month ended Year ended Three months ended Three months 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>

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.

Predecessor The Company
----------------------------------- -------------------------------------------------------------------
Year ended Eleven months ended Month ended Year ended Three months ended Three months 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>

17
<PAGE>

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

<TABLE>
<CAPTION>
Predecessor The Company
----------------------------------- --------------------------------------------------------------------
Year ended Eleven months ended Month ended Year ended Three months ended Three months 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
----------------------------------- --------------------------------------------------------------------
Year ended Eleven months ended Month ended Year ended Three months ended Three months 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 27 171
------ ------ ---- ------ ---- ------
Total other operating
expenses 8 9 478 48 457
------ ------ ---- ------ ---- ------
Operating income (loss) -- (40) 9 (222) (8) (219)
Interest expense -- 23 1 4 -- 24
------ ------ ---- ------ ---- ------
Pre-tax income (loss) -- $(63) $ 8 $ 226 $ (8) $ 243
====== ====== ==== ====== ==== ======
</TABLE>

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.

18
<PAGE>

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 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 expense (income) - 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 $160,000 due to
the Company's utilization of cash arising from the initial public offering for
development activities. Interest expense increased $5,000 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 $373,000 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

19
<PAGE>

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 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.

20
<PAGE>

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 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 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%

21
<PAGE>

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 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 acccrued $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
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

22
<PAGE>

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

On June 14, 1996 the Company filed with the Commission a registration
statement for a public offering of 1,800,000 shares of Common Stock by the
Company, plus an underwriters' over-allotment option for 270,000 shares of which
the first 150,000 shares will be sold by certain stockholders of the Company and
the remainder will be sold by the Company, if the overallotment option is
exercised, (the "Equity Offering"). If the Equity Offering is consummated, the
proceeds of the Equity Offering will be used to fund the Company's growth plans;
however, there can be no assurance when, or if, the Equity Offering will be
completed. See "Business -- Recent Developments."
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 increaingly 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 April 30, 1996, the Company owned or
leased a total of 36 assisted living residences containing an aggregate of 1,222
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 36 residences
opened as of April 30, 1996. Of the 36 residences opened by the Company, eight
of the residences were owned and 28 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 and other states with regulatory and reimbursement climates
that the Company believes are favorable. As of May 13, 1996, the Company had
commenced construction or had purchased land to begin the development of 22
residences (approximately 812 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 38 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.

RECENT DEVELOPMENTS

On June 17, 1996 the Company filed with the Commission a registration
statement for a public offering of 1,800,000 shares of Common Stock by the
Company, plus an underwriters' over-allotment option for 270,000 shares of which
the first 150,000 shares will be sold by certain stockholders of the Company and
the remainder will be sold by the Company, if the over-allotment option is
exercised (the "Equity Offering"). If the Equity Offering is consummated, the
proceeds of the Equity Offering will be used to fund the Company's growth plans;
however, there can be no assurance when, or if, the Equity Offering will be
completed. NatWest Securities Limited, Dean Witter Reynolds, Inc. and Smith
Barney Inc. will manage the underwriting group for the Equity Offering.

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 preferable to
home-based care. For those elderly people in need of specialized support,
rehabilitative, nutritional, respiratory, and other skilled

24
<PAGE>

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.

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.

25
<PAGE>

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 April 30, 1996, the location,
ownership status, number of units, the licensure date, and the occupancy at
May 31, 1996 for the Company's residences.

for the Company's
residences.

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)(2) 30 January 1996 53%
Hickory House Levelland Leased (1)(2) 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)(2) 30 March 1996 53%
Sabine House Orange Leased (1)(2) 36 March 1996 33%
Potter House Amarillo Leased (1)(2) 50 March 1996 86%
Lucas House Beaumont Leased (1)(2) 50 April 1996 42%
Neches House Lufkin Leased (1) 39 May 1996 28%
Rose House Port Arthur Leased (1) 50 May 1996 34%
Connor House Canyon Owned 30 (4) N/A
-----
SUBTOTAL 690
-----

WASHINGTON
- ----------
Chenoweth House Kennewick Leased (1) 36 December 1995 97%
Orchard House Grandview Leased (1) 36 February 1996 56%
Pioneer House Walla Walla Leased (3) 36 February 1996 94%
Mountainview House Camas Leased (1) 36 March 1996 36%
Lexington House Vancouver Owned (5) 44 (4) N/A
-----
SUBTOTAL 188
-----
TOTAL 1,222
=====
</TABLE>
- ----------

(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) These residences were owned as of April 30, 1996, but were subsequently sold
in a sale and leaseback transaction.

(3) The Company purchased this residence from a third party and sold it to LTC.
The Company has entered into a 20 year lease with LTC on this residence.

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

(5) The Company has entered into an agreement to sell to and lease back the
residence from LTC. See "Certain Transactions".

27
<PAGE>

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.

DEVELOPMENT

The Company is developing additional residences in Oregon, New Jersey,
Texas, Washington, Ohio and other states. As of May 13, 1996, the Company had
commenced construction or had purchased land to begin development on 22
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:

EXPECTED COMMENCEMENT
LOCATION UNITS OF OPERATIONS (1)
- -------- ----- -----------------
<S> <C> <C>
OREGON
- ------
Grants Pass (2) 45 Q 2 1996
Brookings 36 Q 2 1996
Newport (3) 36 Q 2 1996
Astoria 28 Q 2 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
- -----
Big Springs 38 Q 2 1996
Nacogdoches 30 Q 2 1996
Lubbock 50 Q 2 1996
Mesquite 50 Q 2 1996
Bryan 30 Q 2 1996
Plainview 36 Q 2 1996
Mineral Wells 30 Q 2 1996
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
---
SUBTOTAL 567
---

WASHINGTON
- ----------
Kelso 40 Q 2 1996
Battle Ground 40 Q 3 1996
---
SUBTOTAL 80
---
TOTAL 923
===
</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 agreed to operate this residence under a management
agreement upon completion.

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

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

28
<PAGE>

The Company has also entered into land purchase option agreements in
connection with the acquisition of 38 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 architectual 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.

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.

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

29
<PAGE>

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
oversees typically 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 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

30
<PAGE>

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 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.

31
<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
----
DIRECTORS AND EXECUTIVE OFFICERS AGE POSITION WITH THE COMPANY
- -------------------------------- --- -------------------------
<C> <C> <S>
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 public

32
<PAGE>

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.
Since 1990, Mr. Razook has been a managing director of National Westminster Bank
PLC, New York Branch ("NatWest Markets"). From 1985 to 1990, Mr. Razook was a
First Vice President and counsel at Drexel Burnham Lambert, Inc., an investment
banking firm.

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

33
<PAGE>

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.

STOCK OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AS
ASSUMED ANNUAL RATE
OF STOCK PRICE
APPRECIATION FOR
OPTION TERM (2)
-------------------------------------------------------- ----------------------
% 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>
- ----------

(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

34
<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

NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE
OPTIONS AT FISCAL YEAR END MONEY OPTIONS AT 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 for liabilities arising under

35
<PAGE>

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.

36
<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, eight residences in Texas
with a combined total of 284 units for a total purchase price of $14,900,000.
Annual rental payments to LTC with respect to such residences is approximately
$1,525,800 ($63,300 in rent was paid in 1995) In addition, the Company has
entered into agreements with LTC to sell for approximately $11,180,000 five
residences in Washington with a total of 188 units. Two of the five Washington
residences have been sold and leased back as of April 30, 1996 for a total
purchase price of $4,080,000. Annual rental payments to LTC with respect to
such residences is approximately $342,000. Subsequent to April 30, 1996, the
Company sold and leased back an additional Washington residence to LTC for a
total purchase price of $2,275,000. Annual rental payments to LTC with respect
to this residence are $191,000. The other two Washington residences are
presently in various stages of development and/or construction and once
construction has been completed, which is expected to happen prior to June 30,
1996, the residences will be sold to LTC and leased back. The sales prices for
the residences the Company has sold to LTC to date approximate cost.

Bradley Razook, a director of the Company, is a managing director 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.

37
<PAGE>

PRINCIPAL 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 and (iv) the Company's
directors and executive officers as a group.

SHARES BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED(2) CLASS
- ---------------------------------------- ---------------------- -----------
<S> <C> <C>
Keren B. Wilson 500,000 16.7%

Andre C. Dimitriadis 198,667 6.6%

William McBride III 212,000 7.0%

Richard C. Ladd 6,667 *

Stephen Gordon 0 0

Bradley G. Razook (3) 13,667 *
175 Water Street, 20th Floor
New York, NY 10038

Palisade Capital Management(4) 543,997 18.0%
One Bridge Plaza, Suite 695
Fort Lee, NJ 07024

The TCW Group, Inc.(5) 227,266 7.6%
865 South Figueroa St.
Los Angeles, CA 90017

Columbia Management Co., Inc.(6) 231,100 7.7%
1300 Southwest 6th Avenue
Portland, Oregon 97206

Waddell and Reed Investment Management 474,532 15.2%
Co.(7)
6300 Lamar Road
Kansas City, Missouri 66201-9217

All directors and executive officers as 931,001 30.9%
a group (6 persons)
</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) Includes 7,000 shares owned by Mr. Razook's son.

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

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

(6) As of February 9, 1996, based on the Form 13G received by the Company.

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

38
<PAGE>

SELLING DEBENTUREHOLDERS

The Debentures being offered hereby were acquired by the Selling
Debentureholders in connection with a private placement of the Debentures by the
Company on August 15, 1995 pursuant to Rule 144A, and Regulation D under the
Securities Act or in permitted resale transactions from the initial purchasers
of the Debentures (the "Initial Purchasers") or holders acquiring such
Debentures from prior holders thereof in further permitted resale transactions.
The following table sets forth information concerning the principal amount of
Debentures beneficially owned by each Selling Debentureholder which may be
offered from time to time pursuant to this Prospectus. Other than as a result of
the ownership of Debentures or Common Stock, none of the Selling
Debentureholders has had any material relationship with the Company within the
past three years, except as noted herein. The table has been prepared based upon
information furnished to the Company by the Trustee for the Debentures, by
Depository Trust Company and by or on behalf of the Selling Debentureholders.

<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF
DEBENTURES DEBENTURES PERCENT OF
BENEFICIALLY THAT MAY OUTSTANDING
NAME OWNED BE SOLD DEBENTURES
---- ------------ ----------- ------------
<S> <C> <C> <C>
NatWest Securities Limited.............. $3,280,000 $3,280,000 16.40%

Chase Manhattan trustee for IBM Corp.
Retirement Plan Trust Dtd
12-18-45 Convertible Account............ 2,000,000 2,000,000 10.00

Total Return Portfolio.................. 2,000,000 2,000,000 10.00

Delaware State Employees' Retirement
Fund................................... 1,465,000 1,465,000 7.33

Bankers Trust trustee for Chrysler Corp
Emp#1 Pension Plan Dtd 4-1-89 converts. 1,000,000 1,000,000 5.00

United High Income Fund, Inc............ 1,000,000 1,000,000 5.00

United High Income Fund II, Inc......... 1,000,000 1,000,000 5.00

Heritage Series Trust- Small Cap Stock
Fund................................... 750,000 750,000 3.75

The TCW Group, Inc...................... 720,000 720,000 3.60

TCW Convertible Securities Fund, Inc.... 630,000 630,000 3.15

Bankers Trust trustee for Chrysler Corp
Emp#1 Pension Plan Dtd 4-1-89.......... 500,000 500,000 2.50

Chase Manhattan trustee for IBM Corp
Ret. Plan Trust Dtd 12-18-45........... 500,000 500,000 2.50

Comdisco Foundation..................... 500,000 500,000 2.50

State Street Bank Cust. for G.E.
Pension Trust.......................... 500,000 500,000 2.50

Declaration of Trust for Defined
Benefit Plan of ICI American Holdings,
Inc................................... 450,000 450,000 2.25

Declaration of Trust for Defined
Benefit Plan of Zeneca Holdings, Inc... 285,000 285,000 1.43

City of Milford, Conn. Pension and
Retirement Fund........................ 285,000 285,000 1.43

Vista Small Cap Equity Fund............. 250,000 250,000 1.25

TCW/DW Income and Growth Fund........... 220,000 220,000 1.10

Drs. Nichol, Phillips, Elias, Sayfie &
Cassis M/P/P........................... 200,000 200,000 1.00

Michael D. Mintz Trust.................. 200,000 200,000 1.00

Thermo Electron Corp., Balanced Invest.
Fund................................... 200,000 200,000 1.00

William N. Pontikes..................... 200,000 200,000 1.00

Vista Balanced Fund..................... 150,000 150,000 *
</TABLE>

39
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF
DEBENTURES DEBENTURES PERCENT OF
BENEFICIALLY THAT MAY OUTSTANDING
NAME OWNED BE SOLD DEBENTURES
---- ------------ ----------- ------------
<S> <C> <C> <C>
Awad & Associates L.P................... 100,000 100,000 *

Hillside Industries Corporate Account... 100,000 100,000 *

John F. Kosik........................... 100,000 100,000 *

Nanette E. Scofield..................... 100,000 100,000 *

Pontikes Family Trust, William M.
Pontikes TTEE.......................... 100,000 100,000 *

Vista Equity Income Fund................ 100,000 100,000 *

Barbara Slater.......................... 50,000 50,000 *

Brian Donnally & Catherine Donnally..... 50,000 50,000 *

Elizabeth Scofield...................... 50,000 50,000 *

Jessica Farkas.......................... 50,000 50,000 *

Martin Walsh............................ 50,000 50,000 *

Marvin Sharfstein....................... 50,000 50,000 *

Nanette & Elizabeth Scofield TTEES FBO 50,000 50,000 *
Anthony Scofield.......................

Neurosurgical Specialists Employees'
Profit Sharing Trust................... 50,000 50,000 *

Neurosurgical Specialists Employees'
Pension Trust.......................... 50,000 50,000 *

Stanley Nemer as Trustee of R F Capital
Trust.................................. 50,000 50,000 *

Stanley Nemer as Trustee of Rose
Fingerhut Lifetime Trust............... 50,000 50,000 *

The Edward Stewart Revocable Trust...... 50,000 50,000 *

Thermo Securities Corp.................. 50,000 50,000 *

Atwell & Company........................ 25,000 25,000 *

D/B/P of South Richmond FAMILY PRACTICE
PC Dtd 4/11/83......................... 20,000 20,000 *

Edward M. Kreps......................... 20,000 20,000 *

Fred P. Segal and Micheline P. Segal.... 20,000 20,000 *

Adam J. Kreps........................... 10,000 10,000 *

Judith Goldstein MD, PC P/S/P........... 10,000 10,000 *

Lois/USA Inc. Profit Sharing Plan....... 10,000 10,000 *
----------- ----------- -----
$19,650,000 $19,650,000 98.25%
=========== =========== =====
</TABLE>

Because the Selling Debentureholders may offer all or some of the
Debentures which they hold and/or shares of Common Stock issued upon conversion
thereof pursuant to the offering contemplated by this Prospectus, and because
there are currently no agreements, arrangements or understandings with respect
to the sale of any of the Debentures or shares of Common Stock that will be held
by the Selling Debentureholders after completion of this offering, no estimate
can be given as to the principal amount of Debentures or shares of Common Stock
that will be held by the Selling Debentureholders after completion of this
offering. See "Plan of Distribution".

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

41
<PAGE>

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 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.

42
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

The Debentures offered hereby will be convertible into Common Stock at any
time after the Registration Date and prior to maturity, unless previously
redeemed, at a conversion price of $15.00 per share, subject to adjustment in
certain cases. See "Description of the Debentures."

As of June 13, 1996, the Company had outstanding 3,013,334 shares of Common
Stock. Of these shares, approximately 2,013,334 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.

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.

PLAN OF DISTRIBUTION

The Company will not receive any of the proceeds from this offering. The
Company has been advised by the Selling Debentureholders that the Selling
Debentureholders may sell all or a portion of the Debentures and shares of
Common Stock offered hereby from time to time in the over-the-counter market on
terms to be determined at the times of such sales. The Selling Debentureholders
may also make private sales directly or through a broker or brokers.
Alternatively, any of the Selling Debentureholders may from time to time offer
the Debentures or shares of Common Stock through underwriters, including any of
the Initial Purchasers, dealers or agents, who may receive compensation in the
form of underwriting discounts, commissions or concessions from the Selling
Debentureholders and the purchasers of the Debentures or shares of Common Stock
for whom they may act as agent. To the extent required, the aggregate principal
amount of Debentures and number of shares of Common Stock to be sold, the names
of the Selling Debentureholders, the purchase price, the name of any such agent,
dealer or underwriter and any applicable commissions with respect to a
particular offer will be set forth in an accompanying Prospectus Supplement. The
aggregate proceeds to the Selling Debentureholders from the sale of the
Debentures and Common Stock offered by the Selling Debentureholders hereby will
be the purchase price of such Debentures and shares of Common Stock less any
commissions. There is no assurance that the Selling Debentureholders will sell
any or all of the Debentures or shares of Common Stock offered hereby.

The Debentures and the shares of Common Stock issued upon conversion of the
Debentures may be sold from time to time in one or more transactions at fixed
offering prices, which may be changed, or at varying prices determined at the
time of sale or at negotiated prices. Such prices will be determined by the

43
<PAGE>

holders of such securities or by agreement between such holders and underwriters
or dealers who may receive fees or commissions in connection therewith.

The Company does not intend to apply for listing of the Debentures on any
national securities exchange or on Nasdaq. The Company has been advised by
certain of the Initial Purchasers that they intend to make a market in the
Debentures; however, they are not obligated to do so and any such market making
may be discontinued at any time. It is unlikely that an active market for the
Debentures will develop.

In order to comply with the securities laws of certain states, if
applicable, the Debentures and shares of Common Stock will be sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the Debentures and shares of Common Stock may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.

The Selling Debentureholders and any broker-dealers, agents or underwriters
that participate with the Selling Debentureholders in the distribution of the
Debentures or shares of Common Stock may be deemed to be "underwriters" within
the meaning of the Securities Act, in which event any commissions received by
such broker-dealers, agents or underwriters and any profit on the resale of the
Debentures or shares of Common Stock purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.

The Debentures were originally sold to the Initial Purchasers on August 15,
1995 in a private placement at a purchase price of 100% of their principal
amount. The Company agreed to indemnify and hold the Initial Purchasers and
certain subsequent holders of the Debentures harmless against certain
liabilities under the Securities Act that could arise in connection with the
sale of the Debentures by the Initial Purchasers or such subsequent holders.

The Company will pay all expenses incident to the offering and sale of the
Debentures and Common Stock to the public other than underwriting discounts and
selling commissions and fees. See "Selling Debentureholders."

44
<PAGE>

DESCRIPTION OF DEBENTURES

The Debentures were issued under an Indenture dated as of August 15,1995
(the "Indenture") between the Company and Harris Trust and Savings Bank, as the
trustee under the Indenture (the "Trustee"). The terms of the Debentures include
those stated in the Indenture and those made a part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended. As of the date of this
Prospectus, the aggregate principle amount of Debentures outstanding is
$20,000,000.

The following is a summary of certain provisions of the Indenture and does
not purport to be complete and is qualified in its entirety by reference to the
detailed provisions of the Indenture, including the definitions of certain terms
therein to which reference is hereby made, for a complete statement of such
provisions. Wherever particular provisions or sections of the Indenture or terms
defined therein are referred to herein, such provisions or definitions are
incorporated herein by reference.

GENERAL

The Debentures are unsecured general obligations of the Company, subject to
the rights of holders of Senior Indebtedness of the Company, and will mature on
July 31, 2005. The Debentures are limited to $20,000,000 aggregate principal
amount and bear interest semiannually on January 31 and July 31 of each year
commencing January 31, 1996 at the rate per annum of 7.0%. The Company will pay
interest on the Debentures to the persons who are registered holders of
Debentures at the close of business on the January 15 or July 15 preceding the
interest payment date. Principal (and premium, if any) and interest will be
payable, the Debentures will be convertible and exchangeable, and transfers
thereof will be registerable, at the office or agency of the Company maintained
for such purposes, initially at the offices of the Trustee. The Company may pay
principal and interest by check and may mail an interest check to a holder's
registered address. Holders must surrender Debentures to a Paying Agent to
collect principal payments.

The Trustee currently acts as Paying Agent, Registrar and Conversion Agent.
The Company may change any Paying Agent, Registrar, Conversion Agent or co-
registrar upon prior written notice to the Trustee and may act in any such
capacity itself.

DELIVERY AND FORM OF DEBENTURES

Those Debentures initially sold to qualified institutional buyers (as
defined in Rule 144A under the Securities Act) were issued in global form (the
"Rule 144A Global Debentures") and were deposited on August 15, 1995 with the
Depository Trust Company (the "Depository") and registered in the name of Cede &
Co., as nominee of the Depository. Those Debentures that were initially sold to
institutional accredited investors (the "Accredited Investor Debentures") were
initially issued in fully registered form. The Rule 144A Global Debentures to be
resold as set forth herein will be initially issued in global form (the "New
Global Debentures") and will be deposited on or about the date of effectiveness
of this Registration Statement on behalf of the Depository and registered in the
name of Cede and Co. Beneficial interests in the Rule 144A Global Debentures and
the New Global Debentures may be exchanged for definitive securities in
accordance with the terms of the Indenture.

A holder may transfer or exchange Debentures in accordance with the
Indenture. No service charge will be made for any registration of transfer,
exchange or conversion of Debentures, except for any tax or other governmental
charges that may be imposed in connection therewith. The Registrar need not
transfer or exchange any Debentures selected for redemption. Also, in the event
of a partial redemption, it need not transfer or exchange any Debentures for a
period of 15 days before selecting Debentures to be redeemed. The Indenture does
not contain any provision requiring the Company to repurchase the Debentures at
the option of the holders thereof in the event of a leveraged buyout,
recapitalization or similar restructuring of the Company, even though the
Company's creditworthiness and the market value of the Debentures may decline
significantly

45
<PAGE>

as a result of such transaction. The Indenture does not protect holders of the
Debentures against any decline in credit quality, whether resulting from any
such transaction or from any other cause. The registered holder of a Debenture
may be treated as its owner for all purposes.

CONVERSION RIGHTS

The holders of the Debentures are entitled at any time after the
Registration Date and prior to maturity, subject to prior redemption, to convert
the Debentures or portions thereof (which are $1,000 or multiples thereof) into
shares of Common Stock at the conversion price set forth in the Debenture
(subject to adjustments as described below). No payment or adjustment will be
made for accrued interest on a converted Debenture. If any Debenture not called
for redemption is converted between a record date for the payment of interest
and the next succeeding interest payment date, such Debenture must be
accompanied by funds equal to the interest payable to the registered holder on
such interest payment date on the principal amount so converted. The Company
will not issue fractional interest in shares of Common Stock upon conversion of
the Debentures and, instead will deliver a check for the fractional share based
upon the market value of the Common Stock on the last trading day prior to the
conversion date. If the Debentures are called for redemption, conversion rights
will expire at the close of business on the redemption date, unless the Company
defaults in payment due upon such redemption.

The conversion price is subject to adjustments, as set forth in the
Indenture, in certain events, including the payment of dividends or
distributions on the Company's Common Stock in shares of capital stock;
subdivisions or combinations of the Common Stock into a greater or smaller
number of Shares; reclassification of the Shares resulting in an issuance of any
shares of the Company's capital stock; distribution of rights or warrants to all
holders of Common Stock entitling them for a period of 60 days to purchase
Common Stock at less than the then current price at that time; and the
distribution to all holders of Common Stock of assets, excluding certain cash
dividends and distributions, or debt securities or any rights or warrants to
purchase securities of the Company; provided, however, that no adjustment will
be required if holders of the Debentures received notice of and are allowed to
participate in such transactions. No adjustment will be required for rights to
purchase Common Stock pursuant to a Company plan for reinvestment of dividends
or interest, or for a change in the par value of the Common Stock. To the extent
that Debentures become convertible into cash, no adjustment will be required
thereafter as to cash. No adjustment in the conversion price need be made unless
such adjustment would require a change of at least 1% in the conversion price;
however, any adjustment that would otherwise be required to be made shall be
carried forward and taken into account in any subsequent adjustment. The Company
may voluntarily reduce the conversion price for a period of time.

If the Company pays dividends on the Common Stock in shares of capital
stock or subdivides or combines the Common Stock or issues by reclassification
of its Common Stock any shares of its capital stock or merges with, or transfers
or leases substantially all of its assets to, another corporation or trust, the
holders of the Debentures then outstanding will be entitled thereafter to
convert such Debentures into the kind and amount of shares of capital stock,
other securities, cash or other assets which they would have owned immediately
after such event had such Debentures been converted before the effective date of
the transaction.

Any Debentures called for redemption, unless surrendered for conversion on
or before the close of business on the redemption date, are subject to being
purchased from the holder of such Debentures at the redemption price by one or
more investment bankers or other purchasers who may agree with the Company to
purchase such Debentures and convert them into Common Stock of the Company.

In the event of a taxable distribution to holders of Common Stock which
results in an adjustment of the conversion price, the holders of the Debentures
may, in certain circumstances, be deemed to have received a distribution subject
to United States federal income tax as a dividend.

46
<PAGE>

SUBORDINATION OF DEBENTURES

The indebtedness evidenced by the Debentures is subordinated and junior in
right of payment to the extent set forth in the Indenture to the prior payment
in full of amounts then due on all Senior Indebtedness (as defined), and is
structurally subordinated to indebtedness of any subsidiary. No payment shall be
made by the Company on account of principal of (or premium, if any) or interest
on the Debentures or on account of the purchase or other acquisition of
Debentures, if there shall have occurred and be continuing a default with
respect to any Senior Indebtedness permitting the holders to accelerate the
maturity thereof, or with respect to the payment of any Senior Indebtedness and
such default shall be the subject of a judicial proceeding or the Company shall
have received notice of such default from certain authorized persons, unless and
until such default or event of default shall have been cured or waived or shall
have ceased to exist. By reason of these provisions, in the event of default on
any Senior Indebtedness, whether now outstanding or hereafter issued, payments
of principal of (and premium, if any) and interest on the Debentures may not be
permitted to be made until such Senior Indebtedness is paid in full, or the
event of default on such Senior Indebtedness is cured or waived.

Upon any acceleration of the principal of the Debentures or any
distribution of assets of the Company upon any receivership, dissolution,
winding-up, liquidation, reorganization or similar proceedings of the company,
whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts
due or to become due upon all Senior Indebtedness must be paid in full before
the holders of the Debentures or the Trustee are entitled to receive or retain
any assets so distributed in respect of the Debentures. By reason of this
provision, in the event of insolvency, holders of the Debentures may recover
less, ratably, than holders of Senior Indebtedness.

"Senior Indebtedness" is defined to mean the principal, premium, if any,
unpaid interest on and all other amounts payable under or in respect of
Indebtedness (as defined) of the Company for money borrowed. There is no limit
on the amount of Senior Indebtedness that the Company may incur. At March 31,
1996 the Company had approximately $10,439,000 in Senior Indebtedness, and there
was no indebtedness of any subsidiary.

OPTIONAL REDEMPTION

The Debentures are subject to redemption, as a whole or in part, at any
time or from time to time commencing July 31, 1998 at the option of the Company
on at least 30 days' and not more than 60 days' prior notice by mail at a
redemption price equal to 100% of the principal amount thereof plus interest
accrued to the date of redemption.

MODIFICATION OF THE INDENTURE

Under the Indenture, with certain exceptions, the rights and obligations of
the Company with respect to the Debentures and the rights of Holders of the
Debentures may only be modified by the Company and the Trustee with the written
consent of the Holders of 66-2/3% in principal amount of the outstanding
Debentures. However, without the consent of each Holder of any Debenture
affected, an amendment, waiver or supplement may not (a) reduce the amount of
Debentures whose holders must consent to an amendment; (b) reduce the rate or
change the time of payment of interest on any Debenture (c) reduce the principal
of or change the fixed maturity of any Debenture; (d) make any Debenture payable
in money other than that stated in the Debenture; (e) change the provisions of
the Indenture regarding the right of a majority of the Debentureholders to waive
defaults under the Indenture or impair the right of any Debentureholder to
institute suit for the enforcement of any payment of principal and interest on
the Debentures on and after their respective due dates; or (f) make any change
that adversely affects the right to convert any Debenture.

47
<PAGE>

EVENTS OF DEFAULT, NOTICE AND WAIVER

The following is a summary of certain provisions of the Indenture relating
to events of default, notice and waiver.

The following are Events of Default under the Indenture with respect to the
Debentures: (i) default in the payment of interest on the Debentures when due
and payable which continues for 30 days; (ii) default in the payment of
principal of (and premium, if any) on the Debentures when due and payable, at
maturity, upon redemption or otherwise; (iii) failure to perform any other
covenant of the Company contained in the Indenture or the Debentures which
continues for 60 days after notice as provided in the Indenture; (iv)
acceleration of any indebtedness for money borrowed (including obligations under
leases required to be capitalized on the balance sheet of the lessee under
generally accepted accounting principles but not including any indebtedness or
obligation for which recourse is limited to property purchased) in an aggregate
principal amount in excess of $1,000,000, whether existing on the date of the
execution of the Indenture or thereafter created, if such acceleration is not
annulled within 30 days after written notice to the Company by the Trustee or to
the Company and the Trustee by the Holders of at least 25% in principal amount
of outstanding Debentures; and (v) certain events of bankruptcy, insolvency or
reorganization relating to the Company.

If an Event of Default occurs and is continuing with respect to the
Debentures, either the Trustee or the Holders of at least 25% in principal
amount of the Debentures may declare all of the Debentures to be due and payable
immediately.

The Company will not (i) declare or pay any dividends or make any
distribution to holders of its capital stock or (ii) purchase, redeem or
otherwise acquire or retire for value any of its Common Stock, or any warrants,
rights or options, to purchase or acquire any shares of its Common Stock (other
than the Debentures or any other convertible indebtedness of the Company that is
neither secured nor subordinated to the Debentures), if at the time any of the
aforementioned Events of Default has occurred and is continuing or would exist
immediately after giving effect to such action.

The Trustee may require indemnity satisfactory to it before it enforces the
Indenture or the Debentures. Subject to certain limitations, holders of a
majority in principal amount of the Debentures may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Debentureholders
notice of any default (except a default in payment of principal or interest) if
it determines that withholding notice is in their interests. The Company is
required to file with the Trustee annually an officers' statement as to the
absence of defaults in fulfilling any of its obligations under the Indenture.

No consent of Debentureholders is required for the Company to consolidate
with or merge into or transfer or transfer substantially all of its assets to
another corporation or trust which assumes the obligations of the Company under
the Indenture and Debentures or for any reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code; nor is any such consent of
Debentureholders required for any amendment of the Indenture or the Debentures
by the Company and the Trustee to cure any ambiguity, defect or inconsistency,
or to provide for uncertificated Debentures in addition to certified Debentures,
or to make any change that does not adversely affect the right of any
Debentureholder.

The Debentures may not be sold or otherwise transferred except in
accordance with the provisions set forth in the Purchase Agreement and the
Indenture.

48
<PAGE>

CONSOLIDATION, MERGER, SALE OR CONVEYANCE

The Indenture provides that the Company may not merge or consolidate with,
or sell or convey all, or substantially all, of its assets to another person
unless such person is a company or a trust; such person assumes by supplemental
indenture all the obligations of the Company under the Debentures and the
Indenture; and immediately after the transaction no default or Event of Default
shall exist.

MARKETABILITY

The Debentures have no established trading market. The Company does not
intend to list the Debentures on Nasdaq or on any national securities exchange.
No assurance can be given as to the liquidity of the trading market for the
Debentures.

GOVERNING LAW

The Indenture and the Debentures will be governed by and construed in
accordance with the laws of the State of New York.

REGISTRATION RIGHTS AGREEMENT

The Company has agreed to use its best efforts, subject to the receipt of
necessary information from the Purchasers, to prepare and file with the
Commission a Registration Statement, of which this Prospectus is a part, with
respect to the resale of the Debentures and the Conversion Shares from time to
time in the over-the-counter market, in privately negotiated transactions or,
with respect to the Conversion Shares only, on the AMEX, as the case may be.
The Company has also agreed to prepare and file such amendments and supplements
to the Registration Statement as may be necessary to keep the Registration
Statement effective until all the Debentures and the Conversion Shares have been
sold thereby or until the Debentures and the Conversion Shares are no longer, by
reason of Rule 144(k) of the Commission or any other rule of similar effect,
required to be registered for the sale thereof by the Purchasers.

49
<PAGE>

LEGAL MATTERS

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

EXPERTS

The financial statements of the Predecessor and the Company included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Price Waterhouse LLP, independent auditors to the extent and for the periods
indicated in their reports, and are included herein and in the Registration
Statement in reliance on such reports, given upon the authority of said firm as
experts in accounting and auditing.

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.

50
<PAGE>

ASSISTED LIVING CONCEPTS, INC. ("The Company")
AND ASSISTED LIVING CONCEPTS GROUP ("Predecessor")

INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENTS SCHEDULES

<TABLE>
<S> <C>
1. FINANCIAL STATEMENTS: PAGE

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

2. Financial Statements Schedules:

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

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
authorized; 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, INC. ("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
------------------------------------- -----------------------------------
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>
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

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.

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.

F-12
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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 Option 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.

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).

F-13
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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 COURT HILLSIDE 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.

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.

F-14
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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.

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>

F-15
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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.

6. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 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

F-16
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.

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

F-17
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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>
Current:
Federal.............. $53 $70 $-- $--
State................ 13 16 -- --
Deferred:
Federal.............. 1 (1) -- --
State................ -- -- -- --
--- --- --- ---
$67 $85 $-- $--
=== === === ===
</TABLE>

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:

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY 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>
Statutory federal tax
rate................... 34.0% 34.0% 34.0% 34.0%
Increase (decrease) in
rate from:
State taxes, net of
federal tax benefits. 5.0 6.9 -- --
Benefit of operating
loss carryforwards... (10.3) -- -- --
Increase in valuation
reserve................ -- -- (34.0)% (34.0)%
Other................. (3.0) (4.1) -- --
----- ---- ----- -----
Effective tax rate...... 25.7% 36.8% -- --
===== ==== ===== =====
</TABLE>

F-18
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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 THE COMPANY
------------ ------------
DECEMBER 31, DECEMBER 31,
1994 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.

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 100% 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.

F-19
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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.

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

F-20
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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>
(Unaudited)
DECEMBER 31, MARCH 31,
ASSETS 1995 1996
---------- ----------
<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 authorized;
3,000,000 and 3,004,734 shares issued and outstanding 30 30
Additional paid-in-capital 16,492 16,538
Fair market value in excess of historical cost of acquired 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>
(Unaudited)
Three Months ended Three Months ended
March 31, 1995 March 31, 1996
------------------ ------------------
<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 29
Interest (income) (180) (20)
------ ------
Interest expense (income) - net (156) 9
------ ------
Net loss $ (27) $ (187)
====== ======

Net loss per common share $ (.01) $ (.06)
====== ======
Weighted average common shares outstanding 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>
(Unaudited)
Three Months ended Three Months ended
March 31, 1995 March 31, 1996
------------------ ------------------
<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 expenses 893 (1,809)
-------- --------
Net cash provided by (used for) operating 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 options 46
-------- --------
Net cash provided by (used for) financing activities (4) 5,885
-------- --------
Net decrease in cash and cash equivalents (2,276) (3,165)
Cash and cash equivalents, beginning of period 13,453 7,335
-------- --------

Cash and cash equivalents, end of period $ 11,177 $ 4,170
========= ========
Supplemental disclosure of cash flow information:
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

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 tenants.

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>

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 leased, 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
INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS IN CONNECTION WITH $20,000,000
THIS OFFERING MUST NOT BE RELIED UPON 7% CONVERTIBLE
AS HAVING BEEN AUTHORIZED BY THE SUBORDINATED DEBENTURES
COMPANY OR BY ANY SELLING DUE 2005
DEBENTUREHOLDER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A 1,333,333 SHARES
SOLICITATION OF AN OFFER TO BUY ANY OF COMMON STOCK
THE SECURITIES OFFERED HEREBY BY
ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION 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.

______________________ ASSISTED LIVING
CONCEPTS, INC.
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information............ 2
Prospectus Summary............... 3
Risk Factors..................... 7
Use of Proceeds.................. 13
Price Range of Common Stock...... 13
Dividend Policy.................. 14
Capitalization................... 14
Selected Financial Data.......... 15
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 16
Business......................... 25
Management....................... 33 ___________________
Certain Transactions............. 38
Principal Stockholders and PROSPECTUS
Management Ownership............ 39 ___________________
Selling Debentureholders......... 40
Description of Capital Stock..... 42
Shares Eligible for Future Sale.. 44 June __, 1996
Plan of Distribution............. 44
Description of Debentures........ 46
Legal Matters.................... 51
Experts.......................... 51
Index to Financial Statements.... F-1
</TABLE>
<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.................... $ 6,890
AMEX Listing Fee (Conversion Shares).... 10,000
Printing and Engraving Expenses......... 20,000
Legal Fees and Expenses................. 25,000
Accounting Fees and Expenses............ 30,000
Registrar and Transfer Agent Fees and
Expenses............................... 5,000
Miscellaneous Expenses.................. 5,100
--------
Total................................ 102,000
========

</TABLE>

All of the costs identified above will be paid by the Company.

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

II-1
<PAGE>

or matter as to which such person shall have been 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, (u) 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, (iii) if a majority vote of
a quorum of 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

II-2
<PAGE>

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.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

Exhibit No. Description of Exhibit
- ----------- ----------------------
<C> <S>
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).
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<C> <S>

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. 1-13498).

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 as of 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 Latham & Watkins

5.2 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.

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.

12.1 Computation of Earnings to Fixed Charges
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<C> <S>
23.1 Consent of Latham & Watkins (included in Exhibit 5.1)

23.2 Consent of Schreck, Jones, Bernhard, Woloson & Godfrey
(included in Exhibit 5.2)

23.3 Consent of Price Waterhouse LLP

23.4 Consent of KPMG Peat Marwick LLP

24.1 Power of Attorney (included on Page II-6)

25.1 Form T-1 Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 of the Trustee (filed under separate
cover)
</TABLE>

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 is 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) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;

(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;

provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the registration statement is on Form S-3, Form S-8
or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 that are
incorporated be reference in the registration statement.

II-5
<PAGE>

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

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.

(c) The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(d)(2) of
the Act.

II-6
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the 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 14th 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 Amendment
to the Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated:

Signatures Title Date
---------- ------- --------
<S> <C> <C>
/s/ Keren B. Wilson Director, President and June 14, 1996
- ----------------------------------- Chief Executive Officer
Keren B. Wilson (Principal Executive Officer)

/s/ Stephen Gordon Chief Administrative Officer June 14, 1996
- ----------------------------------- and Chief Financial
Stephen Gordon Officer (Principal Financial
and Accounting Officer)

* Chairman of the June 14, 1996
- ----------------------------------- Board of Directors
William McBride III

* Director June 14, 1996
- -----------------------------------
Andre C. Dimitriadis

Director June 14, 1996
- -----------------------------------
Richard C. Ladd

* Director June 14, 1996
- -----------------------------------
Bradley G. Razook
</TABLE>

* By: /s/ Keren B. Wilson
----------------------------
Attorney-in-Fact

II-7
<PAGE>

EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibit Page No.
- ------- ---------------------- -----------
<C> <S> <C>
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).
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibit Page No.
- ------- ---------------------- -----------
<C> <S> <C>
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 as of 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 Latham & Watkins

5.2 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.

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.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibit Page No.
- ------- ---------------------- -----------
<C> <S> <C>
12.1 Computation of Earnings to Fixed Charges

23.1 Consent of Latham & Watkins (included in Exhibit 5.1)

23.2 Consent of Schreck, Jones, Bernhard, Woloson & Godfrey
(included in Exhibit 5.2)

23.3 Consent of Price Waterhouse LLP

23.4 Consent of KPMG Peat Marwick LLP

24.1 Power of Attorney (included on Page II-6)

25.1 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of the Trustee (Previously filed)
</TABLE>

<PAGE>

[LETTERHEAD OF LATHAM & WATKINS]

EXHIBIT 5.1

June 11, 1996

Assisted Living Concepts, Inc.
9955 S.E. Washington
Suite 201
Portland, Oregon 97216

Re: $20,000,000 Aggregate Principal Amount of
7% Convertible Subordinated Debentures
due 2005; 1,333,333 Shares of Common Stock
-------------------------------------------

Gentlemen:

At your request, we have examined the registration statement on Form
S-1 (the "Registration Statement") being filed by you with the Securities and
Exchange Commission in connection with the registration, under the Securities
Act of 1933, as amended, of $20,000,000 aggregate principal amount of 7%
Convertible Subordinated Debentures due 2005 (the "Debentures") and 1,333,333
shares of common stock, par value $.01 per share, issuable upon conversion of
the Debentures (the "Common Stock") and together with the Debentures, the
"Securities"). We also have examined the form of indenture entered into by
Assisted Living Concepts, Inc. (the "Company"), and Harris Trust and Savings
Bank, as Trustee, relating to the Debentures (the "Indenture").

In our capacity as your counsel in connection with such registration,
we are familiar with the proceedings taken and proposed to be taken by the
Company in connection with the authorization and issuance of the Securities and
for the purposes of this opinion, have assumed such proceedings will be timely
completed in the manner presently proposed. In addition, we have made such
legal and factual examinations and inquiries, including an examination of
originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and instruments, as we have deemed necessary
or appropriate for purposes of this opinion.
<PAGE>

May 31, 1996
Page 2

In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity to authentic original documents of all documents submitted to us as
copies.

Subject to the foregoing and the other matters set forth herein, it is
our opinion that, as of the date hereof, the Debentures have been duly
authorized by the Company and constitute legally valid and binding obligations
of the Company.

The opinion rendered above is subject to the following exceptions,
limitations and qualifications: (1) the effect of bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to or affecting the rights and remedies of creditors; and (ii) the
effect of general principles of equity, whether enforcement is considered in a
proceeding in equity or law, the discretion of the court before which any
proceeding therefor may be brought.

To the extent that the obligations of the Company under the Indenture
may be dependent upon such matters, we assume for purposes of this opinion that
the Trustee is duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization; that the Trustee is duly qualified to
engage in the activities contemplated by the Indenture; that the Indenture has
been duly authorized, executed and delivered by the Trustee and constitutes the
legally valid, binding and enforceable obligation of the Trustee enforceable
against the Trustee in accordance with its terms; that the Trustee is in
compliance, generally with respect to acting as a trustee under the Indenture,
with all applicable laws and regulations; and that the Trustee has the requisite
organizational and legal power and authority to perform its obligations under
the Indenture.

We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the prospectus included therein.

Very truly yours,

/s/ LATHAM & WATKINS

<PAGE>

[LETTERHEAD OF SCHRECK, JONES, BERNHARD, WOLOSON & GODFREY]

EXHIBIT 5.2

May 31, 1996

ASSISTED LIVING CONCEPTS, INC.
9955 S.E. Washington, Suite 201
Portland, Oregon 97216

Re: ASSISTED LIVING CONCEPTS, INC.
REGISTRATION STATEMENT ON FORM S-1

Ladies and Gentlemen:

We have represented you, as your special Nevada counsel, in
connection with the 1,333,333 shares of common stock, $.01 par value (the
"Common Stock"), of Assisted Living Concepts, Inc., a Nevada corporation (the
"Company") issuable upon conversion of $20,000,000 aggregate principal amount of
7% Convertible Subordinated Debentures due 2005, in accordance with the
Company's Registration Statement on Form S-1, No. 33-80295, and all amendments
thereto (the "Registration Statement"), filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), on December 11, 1995.

In our capacity as such counsel, we are familiar with the
proceedings taken and to be taken by the Company in connection with the Common
Stock. In addition, we have made such legal and factual examinations and
inquiries, including an examination of originals or copies certified or
otherwise identified to our satisfaction as being true reproductions of
originals of such documents, corporate records and other instruments, and have
obtained from officers of the Company and agents thereof such certificates and
other representations and assurances as we have deemed necessary or appropriate
for the purposes of this opinion.

In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
legal capacity of natural persons executing such documents, the authenticity or
the conformity to authentic original documents of all documents submitted to us
as certified, photostatic or facsimile copies, and the accuracy and completeness
of all corporate records made available to us by the Company.
<PAGE>

ASSISTED LIVING CONCEPTS, INC.
May 31, 1996
Page 2

On the basis of the foregoing, such examinations of law and such
other information as we may deem relevant under the circumstances, we are of the
opinion that the Common Stock has been duly and validly authorized for
issuance, and when issued and sold in accordance with the Plan of Distribution
set forth in the Prospectus covering the Common Stock and forming a part of the
Registration Statement, will be fully paid and nonassessable.

Our opinion herein is limited to the effect on the subject
transaction of the laws of the State of Nevada. We express no opinion
concerning and assume no responsibility regarding the applicability to, or the
effect thereon, of the laws of any other jurisdiction, and we express no opinion
herein concerning any federal law, including any federal securities law, or any
state securities or blue sky laws.

We hereby consent to this filing of this opinion as an exhibit to
the Registration Statement and the reference to this firm in the Prospectus
forming a part of the Registration Statement under the heading "Legal Matters."
In giving this consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission promulgated thereunder.

Very truly yours,

SCHRECK, JONES, BERNHARD,
WOLOSON & GODFREY

<PAGE>

EXHIBIT 12.1

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(Dollars in thousands)

<TABLE>
<CAPTION>
Predecessor The Company The Company
----------------- ----------------------------- -----------------------------------
Eleven Months Month Ended Year Ended Three Months Three Months
ended November 31, December 31, December 31, Ended March 31, Ended March 31,
----------------- ------------ ------------ --------------- ---------------
1994 1994 1995/2/ 1995 1996
----------------- ------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Income before provision for
income taxes $ 231 $ (64) $ (575) $ (27) $ (187)
Add fixed charges
Interest expense including
amortization of debt issuance
costs 297 8 133 39 29
----------------- ------------ ------------ --------------- ---------------
Earnings 528 (56) (442) 12 (158)
================= ============ ============ =============== ===============
Fixed Charges
Interest expense including
amortization of debt issuance
costs 297 8 133 39 29
Capitalized interest 11 - 577 - 447
----------------- ------------ ------------ --------------- ---------------
Total fixed charges $ 308 $ 8 $ 710 $ 39 $ 476
================= ============ ============ =============== ===============

Ratio of earnings to fixed
charges 1.71 (7.00) (0.62) 0.31 (0.33)

Deficiency of Earnings to
cover fixed charges 220 (64) (1,152) (27) (634)

</TABLE>

(1) December 31, 1991 is unaudited

(2) Amortization of debt issuance costs is $37,000 for year ended December 31,
1995.

<PAGE>

EXHIBIT 23.3

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 reference to us under the heading "Experts"
in such Prospectus.

/s/ Price Waterhouse LLP

PRICE WATERHOUSE LLP

Portland Oregon
June 14, 1996

<PAGE>

[LETTERHEAD OF KPMG PEAT MARWICK LLP]

EXHIBIT 23.4

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 heading "Experts" in the Prospectus.

/s/ KPMG Peat Marwick LLP

Portland, Oregon
June 14, 1996