ASSISTED LIVING CONCEPTS INC, 424B2, 1997-10-21

ASSISTED LIVING CONCEPTS INC
424B2, 1997-10-21
SOCIAL SERVICES

Previous: ASSISTED LIVING CONCEPTS INC, 8-K, 1997-10-21

Next: ASSISTED LIVING CONCEPTS INC, 424B2, 1997-10-21

<PAGE>

FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 333-35409

PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 2, 1997)

3,600,000 SHARES
LOGO
COMMON STOCK

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

Assisted Living Concepts, Inc. ("ALC" or the "Company") is hereby offering
(the "Offering") 3,600,000 shares (the "Shares") of the Company's common
stock, $.01 par value per share (the "Common Stock"). The Common Stock is
listed on the American Stock Exchange ("AMEX") under the Symbol "ALF." On
October 20, 1997, the last sale price of the Common Stock was $18.625 per
share, as reported by the AMEX. See "Price Range of Common Stock."

Concurrently herewith, the Company is offering $75.0 million aggregate
principal amount of 6.0% Convertible Subordinated Debentures due 2002 (the
"Debentures") pursuant to an underwritten public offering (the "Concurrent
Offering"), excluding up to an additional $11.25 million aggregate principal
amount of Debentures for the purpose of covering over-allotments, if any. See
"Prospectus Summary--Concurrent Offering."

SEE "RISK FACTORS" COMMENCING ON PAGE S-7 FOR A DISCUSSION OF CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.

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

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................................... $18.50 $.925 $17.575
- ------------------------------------------------------------------------------------------------
Total(3)........................................... $66,600,000 $3,330,000 $63,270,000
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933.
(2) Before deducting expenses payable by the Company estimated at $300,000.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days hereof, to purchase up to an aggregate of 540,000 additional
shares of Common Stock at the price to the public less underwriting
discounts and commissions for the purpose of covering over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
the Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $76,590,000, $3,829,500 and $72,760,500, respectively. See
"Underwriting."

The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain prior conditions including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be made in New York, New York, on or about October 24, 1997.

SCHRODER & CO. INC.
MORGAN STANLEY DEAN WITTER
SMITH BARNEY INC.
J.C. BRADFORD & CO.
EQUITABLE SECURITIES CORPORATION
ADVEST, INC.
SUTRO & CO. INCORPORATED

October 21, 1997
<PAGE>

LOGO

[MAP HERE]

The above map indicates the locations, as of August 31, 1997,
of the Company's operating residences including owned
(44 residences), leased (53 residences) and managed (1
residence) assisted living residences and, in addition,
indicates those residences under construction (41 residences).
Operating residences include those residences which are
licensed or have received a certificate of occupancy. The
above map excludes residences associated with pending
acquisitions.

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

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS, AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<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 Supplement. Prospective investors should carefully
consider the information set forth under "Risk Factors." All references herein
to outstanding Common Stock give effect to the Company's two-for-one stock
split effected on June 30, 1997. Unless otherwise indicated, the information
contained in this Prospectus Supplement assumes that the Underwriters' over-
allotment option will not be exercised.

THE COMPANY

Assisted Living Concepts, Inc. ("ALC" or the "Company") operates, owns,
leases and develops free-standing assisted living residences, primarily in
small middle-market rural and suburban communities with a population typically
ranging from 10,000 to 40,000. Currently the Company has operations in Oregon,
Washington, Idaho, Texas, Ohio, New Jersey and Arizona. The Company also
provides personal care and support services and makes available routine nursing
services (as permitted by applicable regulations) designed to meet the health
care needs of its residents. The Company believes that this combination of
residential, personal care, support and health care 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.

The Company has experienced significant growth since the completion of its
initial public offering in November 1994, growing from a base of five
residences (137 units) primarily through the development of assisted living
residences. As of August 31, 1997, the Company owned, leased or managed a total
of 98 operating assisted living residences representing an aggregate of 3,602
units. Of these residences, the Company owned 44 residences (1,648 units),
leased 53 residences (1,915 units) and managed one residence (39 units). For
the six months ended June 30, 1997, the Company's 35 Stabilized Residences
(those residences that had been operating for nine months prior to the
beginning of the period or had achieved 95.0% occupancy within the first nine
months of operations) had an average occupancy rate of approximately 91.4% and
an average monthly rental rate of approximately $1,732 per unit. The Company's
79 residences (2,856 units) in operation as of June 30, 1997 had an average
occupancy rate of approximately 75.4% and an average monthly rental rate of
approximately $1,729 per unit.

The Company is currently developing and, to a lesser extent, seeking to
acquire additional assisted living residences in Arizona, Indiana, New Jersey,
Ohio, Pennsylvania, South Carolina, Washington and other states with regulatory
and reimbursement climates which the Company believes are favorable. As of
August 31, 1997, the Company had commenced construction on 41 residences
(approximately 1,646 units). In addition, at such date, the Company had
optioned or had entered into land purchase agreements for the development of 28
residences (1,119 units). For the eight months ended August 31, 1997, the
Company opened 31 residences (1,208 units) and intends to open approximately 19
to 29 residences in the remainder of 1997 and approximately 60 to 70 residences
in 1998. The Company generally does not acquire sites for development until it
has completed its feasibility analysis and appropriate zoning has been
obtained. Capital expenditures and related start-up costs for 1997 and 1998,
which relate primarily to the development of new residences, are estimated to
total approximately $250.0 to $300.0 million, of which approximately $60.0
million had been spent through June 30, 1997. Pursuant to its development
program, the Company has obtained approximately $93.0 million in financing
commitments from health care real estate investment trusts.

S-3
<PAGE>

The principal elements of the Company's operating and growth strategy are to:
(i) expand market penetration, (ii) service higher acuity residents, (iii)
selectively acquire or develop complementary businesses and (iv) pursue
strategic alliance/joint venture relationships. 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.

Pursuant to its growth strategy, the Company has entered into a definitive
merger agreement under which it will acquire Home and Community Care, Inc.
("HCI"), a privately held provider of home health care, hospice care and home
medical equipment and developer of assisted living residences which currently
has 39 assisted living residences (1,567 units) either under construction or
identified for possible development in five states. In addition, the Company
has also entered into a letter of intent to acquire Carriage House Assisted
Living, Inc. ("Carriage House"), a privately held developer and operator of
assisted living residences in Nebraska which operates four assisted living
facilities (156 units) and has an additional six facilities (198 units) under
construction. See "Business--Pending Acquisitions--HCI Acquisition" and "--
Carriage House Acquisition."

On October 3, 1997, Mr. William McBride III, Chairman of the Board of
Directors of the Company, who together with Dr. Wilson and others founded the
Company, became a full-time employee and was elected Chief Executive Officer of
the Company. Dr. Wilson, who was the President and Chief Executive Officer of
the Company, was elected President, Chief Operating Officer and Vice Chairman
of the Company.

S-4
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered............... 3,600,000 Shares
Common Stock to be Outstanding
after the Offering(1)(2).......... 14,643,512 Shares
Use of Proceeds.................... The net proceeds from the Offering will be
used for repayment of existing indebtedness
and to finance acquisitions and development
activities. See "Use of Proceeds."
AMEX Common Stock Symbol........... ALF
</TABLE>

- --------
(1) At June 30, 1997. Does not include 2,128,320 shares of Common Stock
reserved for issuance pursuant to the Company's stock option plan under
which options to purchase 1,148,846 have been granted at a weighted average
exercise price of $6.94 per share and under which 250,000 shares of
restricted Common Stock were awarded to two executives subsequent to June
30, 1997. Also does not include 1,855,333 shares, issuable at $7.50 per
share upon conversion of the Company's 7% Convertible Subordinated
Debentures due 2005 (the "7% Debentures")
(2) Does not include any Shares that may be reserved for issuance upon
conversion of the Debentures. Based on the initial conversion price of
$22.57, the Debentures will initially be convertible into 3,322,995 shares
of Common Stock.

CONCURRENT OFFERING

Concurrently herewith, the Company is offering $75.0 million aggregate
principal amount of Debentures ($86.3 million if the Underwriters' over-
allotment option is exercised in full). The Company intends to use the net
proceeds from the Concurrent Offering as described herein under "Use of
Proceeds." The consummation of the Concurrent Offering is not a condition to
the consummation of the Offering and the consummation of the Offering is not a
condition to the consummation of the Concurrent Offering. Except where
otherwise indicated, all information in this Prospectus Supplement assumes that
the underwriters of the Concurrent Offering will not exercise their over-
allotment option.

S-5
<PAGE>

SUMMARY FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

The summary financial data should be read in conjunction with the
consolidated financial statements of 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
Supplement.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------- ---------------
1995 1996 1996 1997
------- ------- ------ -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues.................................... $ 4,067 $18,949 $6,492 $20,092
Operating income (loss)..................... (1,058) 42 (271) 1,749
Net income (loss)........................... (575) 149 (171) 1,631
Net income (loss) per share (primary and
fully diluted)............................. $ (.10) $ .02 $ (.03) $ .15
Weighted-average primary shares outstanding. 6,000 9,000 6,027 11,584
Weighted-average fully diluted common shares
outstanding................................ -- 11,292 8,927 13,439

OPERATING DATA:
Capacity at period end:
Residences................................ 19 51 31 79
Units..................................... 595 1,768 1,009 2,856
Average units per residence............... 31 35 33 36
Residence ownership at period end:
Owned..................................... 10 20 6 33
Leased.................................... 9 31 25 46
Occupancy rates at period end:
Stabilized residences..................... 99.1% 96.5% 97.5% 91.4%
Start-up residences....................... 77.3% 76.9% 78.1% 64.0%
Total..................................... 82.3% 80.4% 83.8% 76.0%
Source of revenue:
Private................................... 69.0% 78.6% 77.6% 82.8%
Medicaid state portion.................... 21.4% 13.8% 14.6% 11.1%
Medicaid resident portion................. 9.6% 7.6% 7.8% 6.1%
</TABLE>

<TABLE>
<CAPTION>
AT JUNE 30, 1997
------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED(1) ADJUSTED(2)
-------- -------------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $(50,639) $ (2,169) $ 70,006
Total assets............ 164,790 181,060 256,060
Long-term debt,
excluding current
portion................ 32,625 32,625 107,625
Stockholders equity..... 60,763 123,733 123,733
</TABLE>

- --------
(1) As adjusted to reflect the issuance and sale of the 3,600,000 shares of
Common Stock offered hereby at an offering price of $18.50 per share and
the application of the estimated net proceeds as set forth under "Use of
Proceeds."

(2) As further adjusted to reflect the sale of the $75.0 million aggregate
principal amount of the Debentures and the application of the estimated net
proceeds as set forth under "Use of Proceeds."

S-6
<PAGE>

RISK FACTORS

In addition to the other information contained in this Prospectus
Supplement, prospective investors should consider carefully the following
factors before purchasing any of the securities offered hereby. Certain
information contained in this Prospectus Supplement and the accompanying
Prospectus constitutes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The following factors constitute cautionary statements
identifying important factors, including certain risks and uncertainties, with
respect to such forward-looking statements that could cause actual results to
differ materially from those reflected in such forward-looking statements.

ANTICIPATED OPERATING LOSSES FOR NEW RESIDENCES

The Company anticipates that each residence will have an operating loss
(prior to depreciation, rent or interest, if any) of up to $20,000 for the
first four months of operation. To the extent the Company sells a residence
and leases it back or otherwise finances a residence, the aggregate loss for
the first four months of operation may increase up to $100,000. The Company
currently plans to open 50 to 60 residences in 1997, of which 31 had received
certificates of occupancy by August 31, 1997. The Company estimates that the
aggregate losses to be incurred during 1997 due to start-up residences could
range from $1.0 million to $3.2 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 intends to open approximately 19 to 29
residences in the remainder of 1997 and approximately 60 to 70 residences in
1998, there can be no assurance that such residences will be completed. The
success of the Company's growth strategy will also 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 residences
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

S-7
<PAGE>

inability of the general contractor or subcontractors to perform under their
contracts, strikes, adverse weather conditions and change 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 residences
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.

NEED FOR ADDITIONAL FINANCING TO FUND FUTURE DEVELOPMENT AND ACQUISITIONS;
LEVERAGE

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 during the 18 months ended December 31,
1998 is between $190.0 million and $240.0 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.

The Company's aggregate annual fixed debt and lease payment obligations as
of August 31, 1997 totaled approximately $18.4 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. In
addition, the Company anticipates 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.

At June 30, 1997, after giving effect to the Offering and the Concurrent
Offering and the application of the estimated net proceeds therefrom as set
forth under "Use of Proceeds," the Company would be highly leveraged with
approximately $107.6 million of total long term indebtedness outstanding. The
degree to which the Company is leveraged could have important consequences to
holders of the securities offered hereby, including the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii)
the Company must pay interest on the Debentures and interest and principal on
its other indebtedness, leaving less funds for other purposes; (iii) the
Company may be at a disadvantage to less leveraged competitors; and (iv) the
Company could be more vulnerable to a downturn in general economic conditions.

SUBORDINATION OF DEBENTURES

The Debentures will be unsecured and subordinated in right of payment in
full to all existing and future Senior Indebtedness (as defined in the
accompanying Prospectus) of the Company. As a result of such subordination, in
the event of bankruptcy, liquidation or reorganization of the Company, or upon
the acceleration of any Senior Indebtedness, the assets of the Company will be
available to pay obligations on the Debentures only after all Senior
Indebtedness has been paid in full, and there may not be sufficient assets
remaining to pay amounts due on any or all of the Debentures then

S-8
<PAGE>

outstanding. The Company expects from time to time to incur additional
indebtedness, including indebtedness that would constitute Senior
Indebtedness. The Debentures are also structurally subordinated to the
liabilities, including trade payables, of the Company's subsidiaries. In
addition, certain of the Company's operations are conducted by subsidiaries
and, subject to stockholder approval, the Company is exploring the creation of
a holding company structure which could result in substantially all of the
Company's assets and operations being held in operating subsidiaries. As a
result of this action, the Debentures would be effectively subordinated to the
liabilities of such subsidiaries. The Indenture (as defined in the
accompanying Prospectus) does not prohibit or limit the incurrence of
additional indebtedness, including Senior Indebtedness, by the Company or its
subsidiaries and the incurrence of additional indebtedness by the Company or
its subsidiaries could adversely affect the Company's ability to pay its
obligation on the Debentures. As of August 31, 1997, the Company's outstanding
Senior Indebtedness totaled approximately $90.9 million and liabilities of the
Company's subsidiaries totaled approximately $21.6 million.

GEOGRAPHIC CONCENTRATION; DEPENDENCE ON STATE MEDICAID WAIVER PROGRAMS

As of August 31, 1997, approximately 37.8% of the Company's properties were
located in the State of Texas; approximately 20.4% were located in the State
of Oregon; approximately 15.3% were located in the State of Ohio and
approximately 12.2% were located in the State of Washington. Consequently, the
Company is dependent on the economies of Texas, Oregon, Ohio and Washington
and, to a certain extent, on the continued funding of state Medicaid waiver
programs. During the six months ended June 30, 1997 and the years ended 1996
and 1995, direct payments received from state Medicaid agencies accounted for
approximately 11.1%, 13.8% and 21.4%, respectively, of the Company's revenue
while the tenant-paid portion of Medicaid residents accounted for
approximately 6.1%, 7.6% and 9.6%, respectively, 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 other states. 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.

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. For the six months ended June 30, 1997 and years ended December 31,
1996 and 1995, the Company received, as a percentage of total revenue, under
Medicaid programs 11.1%, 13.8% and 21.4%, respectively. Furthermore, there can
be no assurance that the Company's 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 AND THE BURDENS OF COMPLIANCE

Federal and state governments regulate various aspects of the Company's
business. The development and operation of assisted living facilities and the
provision of health care services are subject to federal, state and local
licensure, certification and inspection laws that regulate, among other

S-9
<PAGE>

matters, the number of licensed beds, the provision of services, equipment,
staffing (including professional licensing), operating policies and
procedures, fire prevention measures, environmental matters, resident
characteristics, physical design and compliance with building and safety
codes. Failure to comply with these laws and regulations could result in the
denial of reimbursement, the imposition of fines, suspension or
decertification from the Medicare and Medicaid program and, in extreme cases,
the revocation of a facility's license or closure of a facility. There can be
no assurance that federal, state, or local governments will not impose
additional restrictions on the Company's activities that could materially
adversely affect the Company.

State and local laws regulating the Company's operations vary significantly
from one jurisdiction to another. In certain states in which the Company is
currently developing assisted living facilities, a certificate of need ("CON")
or other similar approval may be required for the acquisition or construction
of new facilities, the expansion of the number of licensed units or beds or
services, or the opening of a home health care agency or hospice. The Company
could be adversely affected by the failure or inability to obtain such
approval, changes in the standards applicable for such approval and possible
delays and expenses associated with obtaining such approval.

The Company's proposed acquisition of HCI would include HCI's home health
care and hospice operations. In addition to federal and state regulation of
health care providers generally, home health care and hospice operations are
subject to federal and state laws covering the repackaging and dispensing of
drugs and regulating interstate motor-carrier transportation, pharmacies,
nursing services and certain types of home health agency and hospice
activities. Certain of HCI's employees are subject to state laws and
regulations governing the ethics and professional practice of, among others,
medicine, respiratory therapy, pharmacy and nursing. Home health care and
hospice operations are subject to periodic survey by governmental and private
accrediting entities to assure compliance with applicable state licensing,
Medicare and Medicaid certification and accreditation standards, as the case
may be. From time to time in the ordinary course of business, HCI, like other
health care companies, has received survey reports containing deficiencies for
alleged failure to comply with applicable requirements. HCI reviews such
reports and attempts to take appropriate corrective action. The failure to
effect such action or to obtain, renew or maintain any of the required
regulatory approvals, certifications or licenses could adversely affect HCI's
business, results of operations or financial condition and could prevent the
programs involved from offering products and services to patients.

Federal and state fraud and abuse laws, such as "anti-kickback" laws and
"self-referral" laws, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients
to such providers. Although the Company has established policies and
procedures that it believes are sufficient to ensure that its facilities will
operate in substantial compliance with applicable regulatory requirements,
there can be no assurance that such fraud and abuse laws will be interpreted
in a manner consistent with the practices of the Company.

PRICING PRESSURES

The health care services industry is currently experiencing market-driven
reforms from forces within and outside the industry that are exerting pressure
on health care and related companies to reduce health care costs. These
market-driven reforms are resulting in industry-wide consolidation that is
expected to increase the downward pressure on health care service providers'
margins, as larger buyer and supplier groups exert pricing pressure on health
care providers. The ultimate timing or effect of market-driven reforms cannot
be predicted. No assurance can be given that any such reforms will not have a
material adverse effect on the Company's business, results of operations,
financial condition and prospects.

S-10
<PAGE>

HEALTH CARE REFORM

Health care and related services is an area of extensive and dynamic
regulatory change. Changes in the law, new interpretations of existing laws,
or changes in payment methodology, may have a dramatic effect on the
definition of permissible or impermissible activities, the relative costs
associated with doing business and the amount of reimbursement by both
government and other third-party payors and may be applied retroactively.

The Balanced Budget Act of 1997 signed by President Clinton on August 5,
1997 (the "Act"), enacted significant changes to the Medicare and Medicaid
programs designed to "modernize" payment and health care delivery systems
while achieving substantial budgetary savings. In seeking to limit Medicare
reimbursement for home health services, Congress has established a prospective
payment system to replace the current cost-based reimbursement system. The
cost based system reimburses providers for reasonable direct and indirect
allowable costs incurred in providing "routine services" (as defined by the
program) as well as capital costs and ancillary costs. Cost based
reimbursement has been subject to limits fixed for the particular geographic
area served by a provider. The prospective payment system will be implemented
beginning in September 1999. In addition to establishing new prospective
payment systems, the Act eliminated certain periodic interim payments advanced
to home health agencies.

Under provisions of the Act, states will be provided additional flexibility
in managing their Medicaid programs while achieving in excess of $13 billion
in federal budgetary savings over five years. Among other things, the Act
repealed the Boren Amendment payment standard, which had required states to
pay "reasonable and adequate" payments to cover the costs of efficiently and
economically operated hospitals, nursing facilities, and certain intermediate
care facilities. States, however, will be required to use a public notice and
comment process in determining rates for such facilities. States also will be
required to take into account during rate-setting procedures the situation of
facilities that serve a disproportionate number of low-income patients with
special needs. The Department of Health and Human Services is required to
study and report to Congress within four years concerning the effect of state
rate-setting methodologies on access to and the quality of services provided
to Medicaid beneficiaries.

The Act also provides the federal government with expanded enforcement
powers to combat waste, fraud and abuse in health care. In this regard,
provisions of the Act significantly expand the scope and coverage of civil
monetary penalties for violations of Medicare rules. Specific to home health
services, the Act establishes guidelines for the frequency and duration of
home health services; clarifying the definition of part-time or intermittent
nursing care in order to clarify the scope of the Medicare benefit and make it
easier to identify inappropriate services. The Act also requires home health
agencies to bill for services based on the location of service delivered
rather than the location of the agency, in an effort to limit high urban
reimbursement rates for care delivered in low-cost areas.

In addition to the reforms enacted and considered by Congress from time to
time, state legislatures periodically consider various health care reform
proposals. Congress and state legislatures can be expected to continue to
review and assess alternative health care delivery systems and payment
methodologies and public debate of these issues can be expected to continue in
the future. The ultimate timing or effect of legislative efforts cannot be
predicted and may impact the Company in different ways. There can be no
assurances that either the states or the federal government will not impose
additional regulations upon the activities of the Company or HCI which might
adversely affect their businesses, financial condition, results of operations
and prospects.

HOME HEALTH MEDICARE CERTIFICATION MORATORIUM AND SPECIFIC PROGRAM REFORM

The general accounting office ("GAO") reported to Congress in July 1997,
that federal regulators are failing to adequately police home health agencies,
resulting in extensive and expensive problems

S-11
<PAGE>

in Medicare's home-health program. In response to the GAO report, the federal
government announced on September 15, 1997, that home health care providers
will be targeted in a growing federal crackdown. The announced federal
compliance program will institute a three-step process in an effort to prevent
unscrupulous operators from becoming Medicare providers and significantly
increase the level of scrutiny to which existing companies in the program are
subjected. The first step in this program was to institute an immediate
moratorium on the admission of new home health care agencies to Medicare.
During the moratorium on new providers, HCFA will develop strict new
conditions of participation. HCFA also will double the number of audits of
home health agencies it performs each year and increase substantially the
number of claims reviews.

Under the new home health regulations to be proposed, HCFA will require
periodic recertification of home health agencies to determine if they meet the
beefed-up conditions of participation. As part of the re-certification
process, agencies will have to submit an independent audit of their records
and practices. If the provider does not meet the strict new enrollment
requirements, they will not be renewed as providers in Medicare. In addition,
home health agencies will be required to post surety bonds of at least $50,000
before they can enroll or re-enroll in Medicare. A related rule will require
new agencies to have enough funds on hand to operate for the first three to
six months.

To the extent the Company expands into home health care, the regulations to
be proposed by HCFA may require the restructuring of the operations of home
health agencies to conform to the new Medicare conditions of participation
ultimately adopted. In addition, the Medicare moratorium on new home health
care agencies may require expansion to be achieved through acquisitions rather
than through the development of new agencies.

OPERATION RESTORE TRUST

Under Operation Restore Trust ("ORT"), a two year demonstration project, the
Office of the Inspector General of the U.S. Department of Health and Human
Services (the "OIG"), in cooperation with other federal and state agencies,
has focused on the activities of home health agencies, hospices, durable
medical equipment suppliers and nursing homes in certain states, including
Texas, in which HCI currently operates. Because of the success of ORT, the
next phase of ORT has been expanded to numerous other states and to additional
health care providers including ancillary nursing home services. The
legislation adopted in 1996 expanding ORT also created a stable source of
funding for fraud control activities.

As part of ORT, hospice programs have been audited. According to public
reports, the OIG audits have focused on the hospice eligibility of long stay
patients (those who are in a hospice program for longer than 210 days). The
ultimate disposition of an OIG review and its possible impact on HCI cannot
currently be predicted and there can be no assurance that an OIG review will
not have a material adverse effect on the Company's business, results of
operations or financial condition.

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 low-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

S-12
<PAGE>

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. To the extent such growth is attributable to
acquisitions of existing facilities or businesses, the Company's success will
depend partly on its ability to integrate effectively such facilities and
businesses into the Company's management, information and operating systems.
If the Company is unable to manage its growth effectively, its business,
financial condition and results of operations could be adversely affected.

DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL

The Company depends, and will continue to depend, upon the services of Mr.
McBride, its Chief Executive Officer, Dr. Wilson, its Chief Operating Officer
and President, Connie Baldwin, its Director of Operations, Stephen Gordon, its
Chief Administrative Officer and Chief Financial Officer and Rhonda Marsh, its
Chief Accounting Officer. The Company has entered into employment agreements
with Mr. McBride and Dr. Wilson and has obtained a $500,000 key employee
insurance policy covering Dr. Wilson's 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.

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

S-13
<PAGE>

management to devote time to matters unrelated to the operation of the
Company's business. In addition, the Company's insurance policies must be
renewed annually. There can be no assurance that the Company will be able to
obtain liability insurance coverage in the future or that, if such coverage is
available, it will be available on acceptable terms.

ENVIRONMENTAL RISKS

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

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the securities offered hereby could be subject to
significant fluctuations in response to various factors and events, including
the liquidity of the market for the securities offered hereby, 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 securities.

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.

S-14
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the offering of the 3,600,000 shares of
Common Stock offered hereby are estimated to be $63.0 million ($72.5 million
if the Underwriters' over-allotment option is exercised in full). The net
proceeds to the Company from the Concurrent Offering are estimated to be
approximately $72.2 million ($83.0 million if the Underwriters' over-allotment
option is exercised in full). If both the Offering and the Concurrent Offering
are completed, the total net combined proceeds to the Company are estimated to
be $135.2 million (assuming no exercise of the Underwriters' over-allotment
options) and, assuming concurrent consummation of pending acquisitions (See
"Business--Pending Acquisitions"), will be applied in the order indicated as
follows:

<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Acquisition of HCI, including repayment of approximately $5.7
million of HCI indebtedness which bears interest at
approximately 10.0% and matures on or before December 31, 1997
.............................................................. $10,600
Repayment of Carriage House construction financing which bears
interest at a rate of 10.5% and matures upon completion of
construction ranging from December 1997 to August 1998........ 3,900
Repayment of loans incurred to develop and construct 21
assisted living facilities, which loans bear interest at rates
ranging between 9.9% and 10.44% and mature on December 31,
1997; such loans can be refinanced upon completion of
construction pursuant to sale/leaseback financing commitments
provided by REITs............................................. 46,700
</TABLE>

If the proceeds from the Offering and the Concurrent Offering, if any, are
insufficient, the Company will repay the construction loans only to the extent
of remaining available proceeds. To the extent the Company has any excess
proceeds from the Offering or the Concurrent Offering, the Company intends to
use such proceeds for the development and construction of additional assisted
living facilities.

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 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>
Year Ended December 31, 1995:
1st Quarter................................................. $ 4.63 $ 3.75
2nd Quarter................................................. 5.94 4.19
3rd Quarter................................................. 8.25 5.00
4th Quarter................................................. 7.94 6.19
Year Ended December 31, 1996:
1st Quarter................................................. $10.06 $ 6.63
2nd Quarter................................................. 11.13 8.88
3rd Quarter................................................. 10.25 8.25
4th Quarter................................................. 9.94 7.19
Year Ending December 31, 1997:
1st Quarter................................................. $10.68 $ 7.13
2nd Quarter................................................. 14.50 9.88
3rd Quarter................................................. 19.75 13.25
4th Quarter (through October 20, 1997)...................... 19.25 15.75
</TABLE>

On October 20, 1997, the closing sale price of the Common Stock, as reported
by AMEX, was $18.625 per share.

S-15
<PAGE>

CAPITALIZATION

The following table sets forth at June 30, 1997, (i) the actual consolidated
capitalization of the Company, (ii) such capitalization as adjusted to give
effect to the sale by the Company of 3,600,000 shares of Common Stock in the
Offering at the offering price of $18.50 per share and the application of the
estimated net proceeds therefrom as set forth under "Use of Proceeds,"
(iii) such capitalization as further adjusted to give effect to the sale by
the Company of Debentures having an aggregate principal amount of $75.0
million in the Concurrent Offering and the application of the estimated net
proceeds therefrom as set forth under "Use of Proceeds" and (iv) as further
adjusted to give effect to the assumed 100% conversion of the Company's
outstanding 7% Debentures and the Debentures offered in the Concurrent
Offering. The table does not assume the exercise by the Underwriters of their
over-allotment options with respect to the Offering or the Concurrent
Offering. See "Use of Proceeds." The capitalization table should be read in
connection with the Company's consolidated financial statements and related
notes thereto included elsewhere in this Prospectus Supplement.

<TABLE>
<CAPTION>
AT JUNE 30, 1997
---------------------------------------
AS ASSUMING
AS FURTHER 100%
ACTUAL ADJUSTED ADJUSTED CONVERSION
------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Construction financing(1).............. $51,900 $ -- $ -- $ --
======= ======== ======== ========
Mortgages payable, excluding current
portion............................... 18,710 18,710 18,710 18,710
7% Convertible Subordinated Debentures
due 2005.............................. 13,915 13,915 13,915 --
6% Convertible Subordinated Debentures
due 2002.............................. -- -- 75,000 --
------- -------- -------- --------
Total long-term debt, excluding
current portion................... 32,625 32,625 107,625 18,710
------- -------- -------- --------
Stockholders' equity:
Preferred Stock, $.01 par value;
1,000,000 shares authorized; none
issued and outstanding.............. -- -- -- --
Common Stock, $.01 par value;
80,000,000 shares authorized;
11,043,512 shares issued and
outstanding; 14,643,512 shares
issued and outstanding as adjusted;
14,643,512 shares issued and
outstanding as further adjusted;
19,821,840 shares issued and
outstanding assuming 100%
conversion(2)....................... 110 146 146 179
Additional paid-in-capital........... 59,751 122,685 122,685 208,192
Fair market value in excess of
historical cost of acquired net
assets attributable to related party
transactions........................ (239) (239) (239) (239)
Retained earnings.................... 1,141 1,141 1,141 1,141
------- -------- -------- --------
Total stockholders' equity......... 60,763 123,733 123,733 209,273
------- -------- -------- --------
Total capitalization............... $93,388 $156,358 $231,358 $227,983
======= ======== ======== ========
</TABLE>

- --------
(1) As a result of repayments subsequent to June 30, 1997, construction
financing outstanding as of August 31, 1997 was $46.7 million, which the
Company intends to repay with the proceeds from the Offering and the
Concurrent Offering, if any.

(2) Does not include: (i) 2,128,320 shares of Common Stock reserved for
issuance pursuant to the Company's stock option plan, under which options
to purchase 1,148,846 shares have been granted at a weighted average
exercise price of $6.94 per share and under which 250,000 shares of
restricted Common Stock were awarded to two executives subsequent to June
30, 1997 and (ii) 1,855,333 shares of Common Stock issuable at $7.50 per
share upon conversion of the Company's 7% Debentures. See "Management--
Employment and Severance Arrangements."

S-16
<PAGE>

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

The following table presents selected historical condensed financial data
for the Company and the Predecessor as of the dates and for the periods
indicated. The Predecessor consisted 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 six-month periods ended June 30, 1996 and 1997, as
well as the related balance sheet data at such dates, 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, as well as the related balance sheet data at
such dates, were audited by Price Waterhouse LLP, independent accountants. The
financial statements of the Company for the years ended December 31, 1995 and
1996, as well as the related balance sheet data at such dates, have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.
The selected financial data for the six-month periods ended June 30, 1996 and
1997 were derived from unaudited financial statements of the Company. The
unaudited financial statements include all adjustments, consisting of only
normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. The selected historical financial data below should be read in
conjunction with the financial statements of the 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 Supplement.

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------------------------- ---------------------------------------------
YEAR ENDED ELEVEN MONTHS ONE MONTH YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED ENDED DECEMBER 31, ENDED JUNE 30,
-------------- NOVEMBER 30, DECEMBER 31, ---------------- ---------------
1992 1993 1994(1) 1994(2) 1995 1996 1996 1997
------ ------ ------------- ------------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $1,377 $1,884 $1,841 $ 212 $ 4,067 $18,949 $6,492 $20,092
Operating expenses:
Residence operating
expenses............. 908 1,090 1,127 125 2,779 12,116 4,276 12,249
Management fees....... 69 92 93 -- -- -- -- --
Corporate general and
administrative....... -- -- -- 152 1,252 1,649 608 1,317
Building rentals...... -- -- -- 42 798 4,152 1,495 3,569
Depreciation and
amortization......... 93 132 105 13 296 990 384 1,208
------ ------ ------ ----- ------- ------- ------ -------
Total operating
expenses............ 1,070 1,314 1,325 332 5,125 18,907 6,763 18,343
------ ------ ------ ----- ------- ------- ------ -------
Operating income (loss). 307 570 516 (120) (1,058) 42 (271) 1,749
Interest and other
(expense) income, net.. (247) (309) (285) 56 483 107 100 350
------ ------ ------ ----- ------- ------- ------ -------
Income (loss) before
taxes.................. 60 261 231 (64) (575) 149 (171) 2,099
Provision for income
taxes(3)............... -- 67 85 -- -- -- -- 468
------ ------ ------ ----- ------- ------- ------ -------
Net income (loss)(3).... $ 60 $ 194 $ 146 $ (64) $ (575) $ 149 $ (171) $ 1,631
====== ====== ====== ===== ======= ======= ====== =======
Net income (loss) per
share (primary and
fully diluted)(4)...... -- -- -- $(.01) $ (.10) $ .02 $ (.03) $ .15
Weighted-average primary
shares outstanding..... -- -- -- 6,000 6,000 9,000 6,027 11,584
Weighted-average fully
diluted common shares
outstanding............ -- -- -- -- -- 11,292 8,927 13,439
</TABLE>

S-17
<PAGE>

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
---------------------------- -------------------------------------------------------------
AT JUNE 30, 1997
-----------------------------
AT DECEMBER 31, AT AT AT DECEMBER 31, AS
--------------- NOVEMBER 30, DECEMBER 31, ----------------- AS FURTHER
1992 1993 1994 1994 1995 1996 ACTUAL ADJUSTED ADJUSTED
------- ------- ------------ ------------ ------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 109 $ 351 $ 299 $13,122 $(5,320) $(26,372) $(50,639) $ (2,169) $ 70,006
Total assets............ 3,965 4,110 5,699 17,903 53,546 130,507 164,790 181,060 256,060
Long-term debt,
excluding current
portion................ 3,703 3,700 5,266 1,101 24,553 32,683 32,625 32,625 107,625
Stockholders equity..... 105 263 197 16,219 15,644 59,059 60,763 123,733 123,733
</TABLE>

- -------
(1) Includes approximately one month of operations for Hillside House, which
opened in October 1994.
(2) The Company commenced operating 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. Accordingly, the
financial data for the Predecessor reflects the income tax expenses that
would have been recorded had the Predecessor not been exempt from paying
such income taxes, including the effect of the Company adopting Statement
of Financial Accounting Standards (SFAS) No. 109.
(4) In accordance with APB-15, the Company is required to give pro forma
effect to the Offering and the application of the estimated net proceeds
therefrom to repay temporary construction financing as of the beginning of
the respective periods. For the year ended December 31, 1996 and the six
months ended June 30, 1997, the Company's pro forma net income per share
would have been $.01 and $.11 per share, respectively. Such pro forma data
excludes the effect of the capitalization of the interest on the
indebtedness to be repaid.

S-18
<PAGE>

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

OVERVIEW

The Company derives its revenues primarily from resident fees for the
delivery of assisted living services. Resident fees typically are paid monthly
by residents, their families, state Medicaid agencies or other responsible
parties. 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. Operating expenses include
(i) residence operating expenses, such as staff payroll, food, property taxes,
utilities, insurance and other direct residence operating expenses,
(ii) general and administrative expenses consisting of corporate and support
functions such as legal, accounting and other administrative expenses, (iii)
building rentals and (iv) depreciation and amortization.

PREDECESSOR

The historical financial statements for the eleven months ended November 30,
1994 and years ended December 31, 1993 and 1992 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 now operated by the Company.

THE COMPANY

At the closing of its initial public offering in November, 1994, the Company
began operating five assisted living residences located in Oregon. As of June
30, 1997, the Company was operating or had received a Certificate of Occupancy
on 93 residences of which 79 had operating results.

Operating results for the six months ended June 30, 1997, including the
operating results of 79 residences and the Company's corporate overhead, are
not necessarily indicative of the Company's future operating financial
performance as the Company intends to significantly expand its operating base
of residences through the end of 1997 and 1998. Based on the Company's
development schedule, the number of residences planned to open in 1997 ranges
from 50 to 60, of which 31 had been completed through August 31, 1997. The
Company anticipates that each residence will have an operating loss (prior to
depreciation, rent or interest, if any) of up to $20,000 for the first four
months of operation. To the extent the Company sells and leases back or
otherwise finances a residence, the aggregate loss for the first four months
of operations may increase up to $100,000. The Company estimates that the
aggregate losses to be incurred during 1997 due to the opening of buildings
will range from $1.0 million to $3.2 million.

S-19
<PAGE>

The estimated cost to complete construction and fund start up losses for the
new residences that are currently planned to be developed during the 18 months
ending December 31, 1998 is between $190.0 million and $240.0 million. The
Company anticipates that it will use a combination of proceeds from the
Offering and the Concurrent Offering, construction lines of credit, sale and
leaseback transactions and cash generated from operations to fund this
development activity. The total capitalized cost to develop, construct and
open a new residence, including land acquisition and construction costs
currently ranges from approximately $1.6 million to $3.5 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 to Fund Future Development and Acquisitions; Leverage."

In April 1997, in order to mitigate the impact of start-up losses associated
with the opening of newly constructed residences, the Company entered into a
joint venture agreement with a third party investor to operate certain new
assisted living residences owned and developed by the Company. Pursuant to the
joint venture agreement, the Company has acquired a 10% interest for $200,000
and the joint venture partner has acquired a 90% interest for $2.0 million in
the joint venture. The joint venture concurrently entered into a non-
cancellable management agreement with the Company pursuant to which the
Company will manage the properties operated by the joint venture for an amount
equal to the greater of 8% of gross revenues or $2,000 per month per property.
As of June 30, 1997, five residences owned by the Company were being operated
by the joint venture. The revenues and expenses of the joint venture are
consolidated with those of the Company. In addition, the Company will
recognize 10% of the losses or profits, if any, of the joint venture, net of
the effect of management fees paid to the Company. The Company may seek to
acquire the joint venture partner's 90% interest in the future, but has no
contractual right to purchase such interest. While the use of such joint
venture agreements is intended to mitigate the impact on the Company of start-
up losses associated with the opening of new residences or otherwise, the
Company may, to the extent it does not acquire the partner's interest, forgo a
portion of future operating profits, if any, from the residences operated by
the joint venture. The Company expects it will, from time to time, enter into
up to five to ten additional partnering arrangements per quarter, which may be
similar to the current structure, for some of its future development projects.
There can be no assurance that the Company will be able to enter into any such
future arrangements or, if entered into, that such arrangements will achieve
the desired results.

Assuming it completes the Offering, the Concurrent Offering and the HCI and
Carriage House acquisitions, the Company expects to retain ownership of a
greater number of its assisted living residences as well as to accelerate its
development program. Historically, the Company has relied extensively on
sale/leaseback financings from REITs to finance its development efforts. The
Company also expects to make additional investments in its management
infrastructure to further support its growth strategy. While the Company
believes that the resulting effects of the proposed offerings, the increased
focus on asset ownership, its accelerated development program and anticipated
additions to its corporate infrastructure will negatively impact its earnings
prospects over the next 18 to 24 months, it believes that these measures will
positively affect its long-term prospects.

S-20
<PAGE>

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. 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."

YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ ------------------
1995 1996 1996 1997
----- ----- -------- --------
<S> <C> <C> <C> <C>
TOTAL RESIDENCES
Residences operated (end of period)........ 19 51 31 79
Units operated (end of period)............. 595 1,768 1,009 2,856
Average occupancy rate..................... 82.3% 80.4% 83.8% 75.4%
Sources of revenue:
Medicaid state portion................... 21.4% 13.8% 14.6% 11.1%
Medicaid resident portion................ 9.6% 7.6% 7.8% 6.1%
Private.................................. 69.0% 78.6% 77.6% 82.8%
----- ----- -------- --------
Total.................................. 100.0% 100.0% 100.0% 100.0%
===== ===== ======== ========
</TABLE>

The following table set 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. Stabilized
Residences are defined as those residences which were operating for more than
nine months prior to the beginning of the period or had achieved a 95%
occupancy rate as of the beginning of the reporting period.

YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ ------------------
1995 1996 1996 1997
----- ----- -------- --------
<S> <C> <C> <C> <C>
STABILIZED RESIDENCES
Residences operated (end of period)........ 5 7 9 35
Units operated (end of period)............. 137 204 264 1,163
Average occupancy rate..................... 99.1% 96.5% 97.5% 91.4%
Sources of revenue:
Medicaid state portion................... 23.9% 19.9% 18.3% 13.4%
Medicaid resident portion................ 11.3% 11.5% 10.2% 7.5%
Private.................................. 64.8% 68.6% 71.5% 79.1%
----- ----- -------- --------
Total.................................. 100.0% 100.0% 100.0% 100.0%
===== ===== ======== ========
</TABLE>

S-21
<PAGE>

The following table sets forth, for the periods presented for Start-up
Residences, the total number of residences and units operated, average
occupancy rates and the sources of revenue for the Company. 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 as of the beginning of the reporting period.

YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------- ----------------
1995 1996 1996 1997
------ ------ ----- ---------
<S> <C> <C> <C> <C>
START-UP RESIDENCES
Residences operated (end of period)............ 14 44 22 44
Units operated (end of period)................. 458 1,564 745 1,693
Average occupancy rate......................... 77.3% 76.9% 78.1% 64.0%
Sources of revenue:
Medicaid state portion....................... 16.4% 11.2% 10.6% 8.1%
Medicaid resident portion.................... 6.3% 6.0% 5.4% 4.2%
Private...................................... 77.3% 82.8% 84.0% 87.7%
------ ------ ----- -----
Total...................................... 100.0% 100.0% 100.0% 100.0%
====== ====== ===== =====
</TABLE>

The following table sets forth, for the periods presented for Same Store
Residences, the total number of residences and units operated, average
occupancy rates and the sources of revenues for the Company. Same Store
Residences are defined as those residences which were operating throughout
comparable periods.

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------ --------------
1995 1996 1996 1997
----- ----- ----- -------
<S> <C> <C> <C> <C>
SAME STORE RESIDENCES
Residences operated (end of period).............. 5 5 19 19
Units operated (end of period)................... 137 137 595 605
Average occupancy rate........................... 99.1% 97.8% 83.8% 95.0%
Sources of revenue:
Medicaid state portion......................... 23.9% 21.7% 15.8% 15.2%
Medicaid resident portion...................... 11.3% 11.7% 8.7% 8.7%
Private........................................ 64.8% 66.6% 75.5% 76.1%
----- ----- ----- -----
Total........................................ 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>

S-22
<PAGE>

The following tables relating to Stabilized Residences, Start-up Residences
and Same Store Residences exclude the effects of corporate level expenses,
including general and administrative expenses and corporate level interest
expense. In addition, the following tables exclude the effect of the
capitalization of corporate and property level interest expense.

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

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------- --------------
1995 1996 1996 1997
------ ------ ------ -------
<S> <C> <C> <C> <C>
STABILIZED RESIDENCES
Revenues....................................... $2,699 $4,084 $2,688 $11,361
Residence operating expenses................... 1,667 2,412 1,536 6,338
------ ------ ------ -------
Residence operating income................... 1,032 1,672 1,152 5,023
Building rentals............................... 500 780 598 2,284
Depreciation and amortization.................. 116 120 91 340
------ ------ ------ -------
Total other operating expenses............... 616 900 689 2,624
------ ------ ------ -------
Operating income........................... 416 772 463 2,399
Other interest (income) expense net............ 147 217 173 681
------ ------ ------ -------
Income (loss) before income taxes.............. $ 269 $ 555 $ 290 $ 1,718
====== ====== ====== =======
</TABLE>

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

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------- --------------
1995 1996 1996 1997
------ ------- ------ ------
<S> <C> <C> <C> <C>
START-UP RESIDENCES
Revenues.................................... $1,368 $14,865 $4,462 $8,732
Residence operating expenses................ 1,112 9,704 3,334 5,923
------ ------- ------ ------
Residence operating income................ 256 5,161 1,128 2,809
Building rentals............................ 298 3,372 1,140 1,286
Depreciation and amortization............... 180 809 251 825
------ ------- ------ ------
Total other operating expenses............ 478 4,181 1,391 2,111
------ ------- ------ ------
Operating income (loss)................. (222) 980 (263) 698
Other interest (income) expense net......... 4 603 150 1,044
------ ------- ------ ------
Income (loss) before income taxes........... $ (226) $ 377 $ (413) $ (346)
====== ======= ====== ======
</TABLE>

S-23
<PAGE>

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

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------- -------------
1995 1996 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
SAME STORE RESIDENCES
Revenues........................................ $2,669 $2,823 $5,067 $6,118
Residence operating expenses.................... 1,667 1,641 3,141 3,405
------ ------ ------ ------
Residence operating income.................... 1,032 1,182 1,926 2,713
Building rentals................................ 500 533 1,100 1,116
Depreciation and amortization................... 116 115 229 222
------ ------ ------ ------
Total other operating expenses................ 616 648 1,329 1,338
------ ------ ------ ------
Operating income............................ 416 534 597 1,375
Other interest (income) expense net............. 147 217 322 398
------ ------ ------ ------
Income before taxes............................. $ 269 $ 317 $ 275 $ 977
====== ====== ====== ======
</TABLE>

RESULTS OF OPERATIONS

Six Months Ended June 30, 1997 as Compared to Six Months Ended June 30, 1996

The Company had net income of $1.6 million, or $.15 per share, on revenue of
$20.1 million for the six months ended June 30, 1997 compared to a net loss of
$171,000, or $.03 per share, on revenues of $6.5 million for the six-months
ended June 30, 1996.

Revenues. For the six months ended June 30, 1997, revenues were $20.1
million as compared to $6.5 million for the six months ended June 30, 1996, an
increase of $13.6 million. Of this increase, $12.5 million or 92% related to
the opening of an additional 48 operating residences (1,847 units) since June
30, 1996. The remaining $1.1 million or 8% of the increase was attributable to
the Same Store Residences. For the six months ended June 30, 1997, revenues
for the Same Store Residences were $6.1 million as compared to $5.0 million
for the six months ended June 30, 1996, an increase of 20.7%. Substantially
all of this increase was attributable to an increase in average occupancy to
95.0% from 83.8%.

Residence operating expenses. For the six months ended June 30, 1997,
residence operating expenses were $12.2 million as compared to $4.3 million
for the six months ended June 30, 1996, an increase of $7.9 million. Of this
increase, $7.7 million or 97% related to the opening of an additional 48
operating residences (1,847 units) since June 30, 1996. The remaining $264,000
or 3% of the increase was attributable to the Same Store Residences. For the
six months ended June 30, 1997, residence operating expenses for the Same
Store Residences were $3.4 million as compared to $3.1 million for the six
months ended June 30, 1996, an increase of 9.7%. This increase for the Same
Store Residences was primarily attributable to higher staffing levels required
to accommodate higher occupancies at the residences.

Corporate general and administrative. For the six months ended June 30,
1997, corporate general and administrative expenses were $1.3 million as
compared to $608,000 for the six months ended June 30, 1996, an increase of
$709,000 or 117%. This increase was primarily the result of additional
staffing needed to cover the increase in corporate activity as well as the
continued investment in the establishment of regional offices in Oregon, Texas
and Ohio.

Building rentals. Building rentals increased to $3.6 million in the six
months ended June 30, 1997 from $1.5 million in 1996. The increase in building
rentals is directly related to the increase in the

S-24
<PAGE>

number of leases entered into by the Company between January 1, 1996 and June
30, 1997. The Company had 47 operating leases at June 30, 1997 compared to 29
at June 30, 1996. Building rentals for the 19 residences which operated for
the entire period of 1997 and 1996 remained relatively unchanged.

Depreciation and amortization. Depreciation and amortization expense was
$1.2 million in the six month period ended June 30, 1997 compared to $384,000
in the 1996 period, an increase of $824,000 or 215%. The increase in
depreciation and amortization is directly related to the 48 new residences
that opened subsequent to January 1, 1996. Depreciation and amortization
expense for the 19 residences which operated for the entire six month periods
in 1997 and 1996 stayed relatively unchanged.

Interest and other expense (income), net. Interest expense, net of
capitalized interest, was $408,000 for the six month period ended June 30,
1997 compared to $51,000 in the corresponding 1996 period, an increase of
$357,000. The Company's gross interest expense was $3.4 million for the six
month period ended June 30, 1997 compared to $1.1 million in the corresponding
1996 period, an increase of $2.3 million. The increase in interest expense is
due to temporary construction financing to fund development activity.
Capitalized interest for the six month period ended June 30, 1997 was
$2.9 million compared to $1.0 million in the corresponding 1996 period, an
increase of $1.9 million.

Interest income was $276,000 for the six month period ended June 30, 1997
compared to $69,000 in the corresponding 1996 period, an increase of $207,000.
The increase in interest income is directly related the fluctuation in the
amounts invested.

Other income was $482,000 for the six month period ended June 30, 1997
compared to $82,000 in the corresponding 1996 period, an increase of $400,000.
Approximately $357,000 of other income for the six months ended June 30, 1997
represents that portion of the net operating losses of a joint venture
(including management fees paid to the Company) attributable to the Company's
joint venture partner. The remaining $125,000 related to development fees
received by the Company from outside developers. The $82,000 for the six month
period ended June 30, 1996 was from a gain on the sale of real property.

Income (loss) before taxes. Income before taxes for the six months ended
June 30, 1997 was $2.1 million compared to a loss before taxes of $171,000
during the corresponding period in 1996, an increase of $2.3 million. The
Company's income before taxes has continued to increase as the number of
operating residences increases. As the Company has matured in certain of its
regions and occupancy has increased, the operating income of the residences
has been able to cover general corporate overhead plus provide additional
income.

Provision for income taxes. The Company's provision for income taxes for the
six months ended June 30, 1997 was $468,000 compared to $0 for the
corresponding period in 1996. The Company has been utilizing its operating
loss carryforwards from previous periods to offset current income tax
provisions. As of June 30, 1997, the Company had extinguished its
carryforwards and in future periods expects to experience a tax rate of
approximately 38%.

Net income (loss). Net income for the six months ended June 30, 1997 was
$1.6 million compared to net loss of $171,000 during the corresponding period
in 1996. The Company has generated income due to the increased number of
residences operating as compared to the corresponding period in 1996. This has
been partially offset by the increase in corporate overhead, including
additional staffing, necessary to accommodate the Company's expansion plans.

Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995

The Company had net income of $149,000 or $.02 per share, on revenue of
$18.9 million for the year ended December 31, 1996, compared to a net loss of
$575,000 or $.10 per share, on revenues

S-25
<PAGE>

of $4.1 million for the year ended December 31, 1995. The Company incurred a
one-time charge of $426,000 during 1996 for the exchange of 811,332 shares of
Common Stock on $6.1 million of 7% Debentures. The Company's net income for
1996 prior to this one-time charge was $574,000 or $.07 per share.

Revenues. For the year ended December 31, 1996, revenues were $18.9 million
as compared to $4.1 million for the year ended December 31, 1995, an increase
of $14.8 million. Of this increase, $14.7 million or 99% related to the
opening of an additional 32 operating residences (1,173 units) since December
31, 1995. The remaining $154,000 or 1% of the increase was attributable to the
Same Store Residences. For the year ended December 31, 1996, revenues for the
Same Store Residences were $2.8 million as compared to $2.7 million for the
year ended December 31, 1995, an increase of $154,000 or 5.8%. This increase
for the Same Store Residences was primarily attributable to increases in
average monthly rents to $1,756 from $1,704 during the period. Of the $18.9
million in revenues reported for the year ended December 31, 1996, $4.1
million or 22% was attributable to Stabilized Residences and $14.9 million or
78% was attributable to Start-Up Residences.

Residence operating expenses. For the year ended December 31, 1996,
residence operating expenses were $12.1 million as compared to $2.8 million
for the year ended December 31, 1995, an increase of $9.3 million.
Substantially all of this increase was attributable to the addition of 32
operating residences (1,173 units) since December 31, 1995. For the year ended
December 31, 1996, residence operating expenses for the Same Store Residences
were relatively unchanged at approximately $1.6 million. Of the $12.1 million
in residence operating expenses reported for the year ended December 31, 1996,
$2.4 million or 19.8% was attributable to Stabilized Residences and $9.7
million or 80.2% was attributable to Start-Up Residences.

Corporate general and administrative. Corporate general and administrative
expenses for the year ended December 31, 1996 were $1.6 million compared to
$1.3 million for 1995. This increase is a direct result of additional staffing
to cover the increase in corporate activity, travel associated with new
residences located in other states and the establishment of regional offices.

Building rentals. Building rentals for the year ended December 31, 1996 were
$4.2 million, compared to $798,000 for the year ended December 31, 1995 which
represents an increase of 426%. The increase in building rentals is directly
related to the additional twenty-two sale leaseback transactions completed
during 1996. The Company ended the year with thirty-one leases compared to the
nine leases at the end of 1995.

Depreciation and amortization. Deprecation and amortization for the year
ended December 31, 1996 was $990,000, compared to the depreciation for the
year ended December 31, 1995 of $296,000 which represents an increase of 234%.
This increase is the result of additional facilities developed and owned by
the Company during 1996.

Interest and other expense (income). For the year ended December 31, 1996,
net interest expense was $0 compared to $96,000 for the year ended December
31, 1995. Gross interest expense for 1996 was $2.2 million as compared to
$673,000 for 1995, an increase of $1.5 million. Of the increase, $1.4 million
or 93.3% was attributable to the full year effect of interest expense
associated with the 7% Debentures and the balance of $100,000 or 6.7% was
attributable to mortgage bond financing. The Company capitalized $2.2 million
of interest expense for 1996 compared to $577,000 for the comparable period in
1995. Interest income for the year ended December 31, 1996 was $455,000 as
compared to $579,000 in 1995. In addition, in September 1996, the Company
incurred a one-time charge of $426,000 relating to the conversion of $6.1
million of its $20.0 million of the 7% Debentures.

S-26
<PAGE>

Net income (loss). The Company achieved net income of $149,000, or $.02 per
share for the year ended December 31, 1996, compared a net loss of $575,000,
or $.10 per share for the year ended December 31, 1995. This is due to the
number of residences opened in 1996 and the stabilization of those residences
opened in 1995.

Year Ended December 31, 1995 as Compared to One Month Ended December 31, 1994

The Company incurred a net loss of $575,000 or $.10 per share, on revenue of
$4.1 million for the year ended December 31, 1995. These losses resulted
primarily from an increase in corporate overhead, including additional
staffing necessary to accommodate the Company's expansion plan to develop
additional residences in 1995 and 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 $.01 per share,
on revenues of $212,000.

Revenues. Revenue was $4.1 million for the year ended December 31, 1995
compared to $212,000 for the one month December 31, 1994 and $1.8 million for
the eleven months ended November 31, 1994 for a combined total of $2.0
million, which represents an increase of 98% which is the direct result of the
additional fourteen residences which commenced operations during 1995. The
average rate per month for the five facilities which were open for one year or
more 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 rate for all residences
for the year ended December 31, 1995 was $1,588, which reflects the effects of
the additional fourteen residences opened by the Company during 1995. The
payments from Medicaid programs comprised approximately 21.4% of the Company's
revenue for the year ended December 31, 1995.

Residence operating expenses. Residences operating expenses were $2.8
million for the year ended December 31, 1995 compared to $125,000 for the one
month ended December 31, 1994 and $1.1 million for the eleven months ended
November 31, 1994 for a combined total of $1.2 million 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 14 additional residences
which commenced operations during 1995. At December 31, 1995 the Company
operated 25 residences with 19 experiencing operating results compared to the
five operating residences at December 31, 1994.

Corporate general and administrative. Corporate general and administrative
expenses for the year ended December 31, 1995 was $1.3 million compared to the
one month ended December 31, 1994 of $152,000. This increase is a direct
result of additional staffing to cover the increase in development activity,
travel associated with new residences located in other states, and the
establishment of the corporate office.

Building rentals. Building rentals were $798,000 for the year ended December
31, 1995 which represents rental on nine residences of which four were owned
by the Predecessor and now are leased by the Company. Five of the nine
residences were sold in sale and leaseback transactions during 1995.

Depreciation and amortization. Depreciation 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 which represents an increase
of 151%. This increase is the result of additional 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 experienced
two months and one month, respectively, of depreciation.

S-27
<PAGE>

Interest and other expense (income). 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 investment of corporate cash from the proceeds of the initial
public offering in 1994 and the Company's private placement in August of 1995.

The Company incurred a net loss of $575,000 or $.10 per share for the year
ended December 31, 1995. This is due to the number of residences opened in
1995 and the level of development activity currently being experienced by the
Company. The Company anticipates an initial loss of $30,000 to $50,000 per
residence to be incurred within the first three to four months of the
residence opening.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1997, the Company had negative working capital of approximately
of $50.6 million. Included in this amount was approximately $14.1 million of
construction payables that the Company accrued in June 1997 which were not
payable until July 1997. The Company completed the sale and leaseback of two
properties for $5.1 million and closed on five permanent mortgage financings
with the states of Idaho and Washington for $9.1 million subsequent to June
30, 1997. At June 30, 1997, the Company had $51.9 million of temporary
construction financing of which $46.7 million is currently outstanding. The
Company intends to repay up to such amount with the net proceeds of the
Offering and Concurrent Offering, if any. Excluding the construction payables
and temporary construction financing, the Company had positive working capital
of $15.4 million.

Net cash provided by operating activities was approximately $2.7 million
during the six month period ended June 30, 1997. The primary source of funds
was from net income of $1.6 million and the add back of depreciation and
amortization of $1.2 million. Other operating type items netted to a use of
cash of $100,000. As of June 30, 1997, unrestricted cash balances were $8.8
million.

Net cash used in investing activities totaled $26 million during the six
month period ended June 30, 1997. The primary use of cash was $61.4 million
related to the development of new assisted living residences in Oregon,
Washington, Texas, New Jersey, Idaho, Ohio and Arizona. This was offset by
proceeds of $35.6 million related to the sale of 15 residences, 13 of which
were leased back and two of which are being managed by the Company.

Net cash provided by financing activities totaled $30.1 million during the
six month period ended June 30, 1997. The Company entered into 19 additional
construction financing loans which netted the Company $43.2 million, paid off
four construction loans for $10.2 million, experienced a decline in
construction draws of $1.9 million and incurred approximately $1.1 million in
debt issuance costs related to temporary construction financing and bond
issuance costs.

Capital expenditures for 1997 and 1998 are estimated to approximate $250.0
million to $300.0 million, related primarily to the development of additional
residences, of which approximately $60.0 million had been spent through
June 30, 1997. As of June 30, 1997, the Company had started construction or
had purchased land for development on 35 parcels of land in Oregon,
Washington, Texas, Ohio, Idaho, New Jersey and other states. The Company had
also entered into agreements pursuant to which it may purchase, subject to
completion of due diligence and various other conditions, 25 undeveloped
sites. The Company expects the 35 properties under construction and
development to open through the third and fourth quarter of 1997 and the first
quarter of 1998. The Company intends to utilize current working capital
resources, including the net proceeds of the Offering and the Concurrent
Offering, if any, to develop additional residences. In addition, as of August
31, 1997, the Company had outstanding $93 million in commitments from several
health care REITs to finance additional residences through sale and leaseback
transactions. The Company also anticipates being able to continue to utilize
tax-exempt bond financing for approximately $20.9 million from the states of
Ohio, Idaho and Washington. The Company does not anticipate any significant
capital expenditures

S-28
<PAGE>

within the foreseeable future with respect to the residences developed in
1994, 1995, 1996 and those currently operating or those pending licensure as
of June 30, 1997.

If the pending acquisitions of HCI and Carriage House are consummated, the
Company will require additional capital expenditures for 1998. Currently, HCI
has three residences under construction (100 units) and Carriage House has six
residences (198 units) under construction.

The Company expects that its cash on hand, the net proceeds from the
Offering and the Concurrent Offering, if any, together with cash flow from
operations and available REIT financing, will be sufficient to meet its
operating requirements and to fund its anticipated growth for at least the
next 12 to 18 months. The Company expects to use a wide variety of financing
sources to fund its future growth, including public and private debt and
equity, conventional mortgage financing, unsecured bank financing, among other
sources. There can be no assurances that financing from such sources will be
available in the future, or if available that such financing will be available
on terms acceptable to the Company.

As of June 30, 1997, 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,
permanent mortgage financing and long-term state bond financing and to the
extent available, cash generated from operations.

INFLATION

Management believes that the Company's operations have not been materially
adversely affected by inflation. The Company expects salary and wage increases
for its skilled staff will continue to be higher than average salary and wage
increases, as is common in the health care industry. The Company expects that
it will be able to offset the effects of inflation on salaries and other
operating expenses by increases in rental and service rates, subject to
applicable restrictions with respect to services that are provided to
residents eligible for Medicaid reimbursement.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share" and
SFAS No. 129 "Disclosure of Information about Capital Structure." SFAS No. 128
establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS No. 128, the Company will be required, and has complied in
the current financial statements presentation, to present both basic net
income per share and diluted net income per share. Basic net income per share
is expected to be comparable or slightly higher than the previously presented
net income per share as the effect of dilutive stock options will not be
considered in computing basic net income per share. Diluted net income per
share is expected to be comparable or slightly lower than the currently
presented net income per share. SFAS No. 129 established standards for
disclosing information about a Company's capital structure. The Company will
adopt both SFAS No. 128 and SFAS No. 129 in the fourth quarter of 1997 and at
that time all historical net income (loss) per share data will be restated to
conform to the provisions of these Statements.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which established requirements for
disclosure of comprehensive income. The objective of SFAS No. 130 is to report
all changes in equity that result from transactions and economic events other
than transactions with owners. Comprehensive income is the total of net

S-29
<PAGE>

income and all other non-owner changes in equity. The Company does not
anticipate any significant impact on reported results of operations due to the
adoption of SFAS No. 130. The Company plans to adopt SFAS No. 130 in the first
quarter of 1998 and at that time earlier financial statements will be
reclassified for comparative purposes.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information," which
changes the way segment information is reported for public companies and
requires those companies to report selected segment information in interim
financial reports to stockholders. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1997. The Statement
was only recently issued, and although the Company has not fully determined
its complete impact, the Company does not foresee any material change due to
adoption of this disclosure on its financial presentation to stockholders. The
Company plans to adopt SFAS No. 131 in the first quarter of 1998 and at that
time earlier financial statements will be reclassified for comparative
purposes if necessary.

S-30
<PAGE>

BUSINESS

OVERVIEW

The Company operates, owns, leases and develops free-standing assisted
living residences, primarily in small middle-market rural and suburban
communities with a population typically ranging from 10,000 to 40,000.
Currently the Company has operations in Oregon, Washington, Idaho, Texas,
Ohio, New Jersey and Arizona. The Company also provides personal care and
support services and makes available routine nursing services (as permitted by
applicable regulations) designed to meet the health care needs of its
residents. The Company believes that this combination of residential, personal
care, support and health care 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.

The Company has experienced significant growth since the completion of its
initial public offering in November 1994, growing from a base of five
residences (137 units) primarily through the development of assisted living
residences. As of August 31, 1997, the Company owned, leased or managed a
total of 98 operating assisted living residences representing an aggregate of
3,602 units. Of these residences, the Company owned 44 residences (1,648
units), leased 53 residences (1,915 units) and managed one residence (39
units). For the six months ended June 30, 1997, the Company's 35 Stabilized
Residences (those residences that had been operating for nine months prior to
the beginning of the period or had achieved 95.0% occupancy within the first
nine months of operations) had an average occupancy rate of approximately
91.4% and an average monthly rental rate of approximately $1,732 per unit. The
Company's 79 residences (2,856 units) in operation as of June 30, 1997 had an
average occupancy rate of approximately 75.4% and an average monthly rental
rate of approximately $1,729 per unit.

The Company is currently developing and, to a lesser extent, seeking to
acquire additional assisted living residences in Arizona, Indiana, New Jersey,
Ohio, Pennsylvania, South Carolina, Washington and other states with
regulatory and reimbursement climates which the Company believes are
favorable. As of August 31, 1997, the Company had commenced construction on 41
residences (approximately 1,646 units). In addition, at such date, the Company
had optioned or had entered into land purchase agreements for the development
of 28 residences (1,119 units). For the eight months ended August 31, 1997,
the Company opened 31 residences (1,208 units) and intends to open
approximately 19 to 29 residences in the remainder of 1997 and approximately
60 to 70 residences in 1998. The Company generally does not acquire sites for
development until it has completed its feasibility analysis and appropriate
zoning has been obtained. Capital expenditures and related start-up costs for
1997 and 1998, which relate primarily to the development of new residences,
are estimated to total approximately $250.0 to $300.0 million, of which
approximately $60.0 million had been spent through June 30, 1997. Pursuant to
its development program, the Company has obtained approximately $93.0 million
in financing commitments from health care real estate investment trusts.

The principal elements of the Company's operating and growth strategy are
to: (i) expand market penetration, (ii) service higher acuity residents, (iii)
selectively acquire or develop complementary businesses and (iv) pursue
strategic alliance/joint venture relationships. 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.

S-31
<PAGE>

INDUSTRY BACKGROUND

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 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. Estimates of
annual expenditures in the assisted living sector of the senior living and
health care services industry for 1996 range from $12.0 billion to $14.0
billion and include facilities ranging from "board and care" (generally 12 or
fewer units with little or no services) to full-service assisted living
residences.

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 United States Census Bureau, the
population of seniors aged 75 or older is expected to increase from
approximately 13.2 million in 1990 to over 16.6 million by 2000, an increase
of 26%. The population of seniors aged 85 or older is expected to increase
from approximately 3.1 million in 1990 to over 4.3 million by 2,000, an
increase of 39%. It is further estimated, according to the United States
General Accounting Office, that there are approximately 6.5 million people
aged 65 and older in the United States who need assistance with the activities
of daily living, and the number of people needing such assistance is expected
to double by the year 2020. According to the Alzheimer's Association, the
number of persons afflicted with Alzheimer's disease is expected to grow from
the current 4.0 million to 14.0 million by the year 2050.

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 a similar level of
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 six months ended June 30, 1997, the
Company's 35 Stabilized Residences annualized revenue per resident was
approximately $20,800.

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

S-32
<PAGE>

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 skilled nursing facilities. These
changes have generally been prompted by the cost-containment pressures
discussed above and by 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. 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 setting, 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. In addition, by focusing its marketing
effort primarily in these smaller communities, the Company believes it will be
able to maintain high occupancy levels, as well as reduce the level of
competition it encounters. 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 age and
income qualified 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.

S-33
<PAGE>

Serve 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 those instances in which the Company does
not directly provide services, 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.

Selectively Acquire or Develop Complementary Businesses. Although the
Company intends to focus its growth efforts primarily on the development of
free-standing assisted residences, it may selectively acquire or develop
complementary businesses as a means to facilitate entry into targeted markets
or expand its presence into existing markets. Pursuant to this strategy, the
Company may seek (i) to acquire other entities engaged in the development and
operation of free-standing assisted living residences, (ii) to develop or
acquire providers of ancillary services, such as home health care, hospice,
pharmacy and durable medical equipment services, and (iii) to develop or
acquire other businesses that the Company believes are complementary to its
operations and growth strategy.

Pursue Strategic Alliance/Joint Venture Relationships. Where appropriate,
the Company seeks to strengthen its presence in existing markets or facilitate
entry into new markets by entering into relationships with local and regional
hospital systems, managed care organizations and other referral sources. The
Company believes that such relationships will allow it to offer additional
services and generate additional resident referrals thereby retaining existing
residents for longer periods of time as well as attracting new residents to
existing assisted living residences.

RESIDENCES

The following chart sets forth, as of August 31, 1997, the location, number
of units, date of licensure, ownership status and occupancy rates for the
Company's residences.

<TABLE>
<CAPTION>
AVERAGE OCCUPANCY
DATE OCCUPANCY AT
LOCATION UNITS LICENSED OWNERSHIP(1)(2) 12/31/96 8/31/97
- -------- ----- -------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Oregon
Astoria.................... 28 8/96 Owned 65.1% 100.0%
Bend....................... 46 11/95 Owned 82.7 100.0
Brookings.................. 36 7/96 Owned 83.6 86.1
Canby...................... 25 12/90 Leased 99.0 100.0
Estacada................... 30 1/97 Owned -- 80.0
Eugene..................... 47 8/97 Owned -- 21.3
Grants Pass................ 45 11/96 Leased 11.9 75.6
Hood River................. 30 10/95 Owned 89.9 100.0
Klamath Falls.............. 35 10/96 Leased 17.1 62.9
Lincoln City............... 33 10/94 Owned 96.1 90.9
Madras..................... 27 3/91 Owned 98.6 100.0
Myrtle Creek............... 34 3/96 Leased 63.7 88.2
Newberg.................... 26 10/92 Leased 99.8 100.0
Newport.................... 36 6/96 Owned 81.0 94.4
Pendleton.................. 26 4/91 Leased 96.2 100.0
Prineville................. 30 10/95 Owned 90.4 93.3
Redmond.................... 37 3/95 Leased 91.0 100.0
Silverton.................. 30 7/95 Owned 96.8 100.0
Sutherlin.................. 30 1/97 Leased -- 66.7
Talent..................... 36 10/96 Owned 11.8 88.9
</TABLE>

S-34
<PAGE>

Idaho
Burley..................... 35 8/97 Owned -- 8.6
Caldwell................... 35 8/97 Owned -- 11.4
Garden City................ 48 4/97 Owned -- 16.7
Hayden..................... 39 11/96 Leased 6.1 41.0
Idaho Falls................ 39 1/97 Owned -- 38.5
Moscow..................... 39 4/97 Owned -- 34.3
Nampa...................... 39 2/97 Owned -- 51.3
Rexburg.................... 35 8/97 Owned -- 5.7
Twin Falls................. 39 9/97 Owned -- --

Texas
Abilene.................... 38 10/96 Leased 42.1 55.3
Amarillo................... 50 3/96 Leased 99.5 100.0
Athens..................... 30 11/95 Leased 86.2 100.0
Beaumont................... 50 4/96 Leased 62.5 78.0
Big Springs................ 38 5/96 Leased 29.1 52.6
Bryan...................... 30 6/96 Leased 61.6 100.0
Canyon..................... 30 6/96 Leased 84.6 100.0
Carthage................... 30 10/95 Leased 74.4 93.3
Cleburne................... 30 1/96 Owned 76.5 97.2
College Station............ 36 10/96 Leased 10.6 74.4
Conroe..................... 39 7/96 Leased 98.0 100.0
Denison.................... 38 1/96 Owned 56.7 90.0
Gainsville................. 30 1/96 Leased 54.2 100.0
Greenville................. 30 11/95 Leased 84.8 96.7
GunBarrel City............. 30 10/95 Leased 86.1 100.0
Henderson.................. 30 9/96 Leased 98.8 96.7
Jacksonville............... 39 12/95 Leased 74.9 94.9
Levelland.................. 30 1/96 Leased 61.8 96.7
Longview................... 30 9/95 Leased 95.3 100.0
Lubbock.................... 50 7/96 Leased 66.7 100.0
Lufkin..................... 39 5/96 Leased 70.1 92.3
Marshall................... 40 7/95 Leased 97.0 100.0
McKinney................... 39 1/97 Owned -- 84.6
Mesquite................... 50 7/96 Leased 81.1 78.0
Midland.................... 50 12/96 Owned 6.0 70.0
Mineral Wells.............. 30 7/96 Leased 66.3 80.0
Nagadoches................. 30 6/96 Leased 69.5 86.7
Orange..................... 36 3/96 Leased 55.2 100.0
Pampa...................... 36 8/96 Leased 92.9 97.2
</TABLE>

S-35
<PAGE>

<TABLE>
<CAPTION>
AVERAGE
DATE OCCUPANCY OCCUPANCY
LOCATION UNITS LICENSED OWNERSHIP(1)(2) 12/31/96 AT 8/31/97
- -------- ----- -------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Texas (continued)
Plainview................ 36 7/96 Leased 92.2% 100.0%
Port Arthur.............. 50 5/96 Owned 77.0 100.0
Rowlett.................. 36 10/96 Owned 7.3 100.0
Sherman.................. 30 10/95 Leased 91.1 96.7
Sulphur Springs.......... 30 1/96 Owned 69.3 83.3
Sweetwater............... 30 3/96 Leased 89.8 100.0
Temple................... 40 1/97 Leased -- 55.0
Wichita Falls............ 50 10/96 Leased 2.9 52.0

Ohio
Bellefontaine............ 35 3/97 Owned -- 45.7
Bucyrus.................. 35 1/97 Owned -- 57.1
Cambridge................ 39 Pending Owned -- 2.6
Celina................... 39 4/97 Owned -- 43.6
Defiance................. 35 2/97 Owned -- 51.4
Findlay.................. 39 3/97 Owned -- 7.7
Fremont.................. 39 7/97 Leased -- 25.6
Greenville............... 39 2/97 Owned -- 33.3
Kenton................... 35 3/97 Owned -- 14.3
Lima..................... 39 6/97 Owned -- 38.5
Marion................... 39 4/97 Owned -- 41.0
Newark................... 39 Pending Owned -- 2.6
Tiffin................... 39 6/97 Leased -- 28.2
Troy..................... 39 3/97 Managed -- 30.8
Wheelersburg............. 39 Pending Owned -- --

New Jersey
Glassboro................ 39 3/97 Leased -- 92.3
Millville................ 39 5/97 Leased -- 51.3
Vineland................. 39 1/97 Leased -- 94.9

Arizona
Bullhead City............ 40 8/97 Owned -- 25.0
Lake Havasu.............. 36 4/97 Leased -- 33.3
-----
TOTAL RESIDENCES........ 3,602
</TABLE>
- --------
(1) The initial lease terms range from ten to twenty years. The Company is
responsible for all costs including repairs to the residences, 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) At August 31, 1997 all but eleven of the Company's owned properties
secured outstanding indebtedness. At August 31, 1997, the Company was
committed to enter into sale/leaseback financing transactions with REITs
with respect to six owned properties. Does not include four residences
(156 units) in Nebraska which are being operated by Carriage House.

The Company also leases approximately 8,000 square feet of office space for
its corporate and regional offices in Portland, Oregon, Dallas, Texas and
Dublin, Ohio.

S-36
<PAGE>

CONSTRUCTION AND DEVELOPMENT ACTIVITIES

The Company is developing additional residences in Arizona, Indiana, New
Jersey, Ohio, Pennsylvania, South Carolina and Washington. As of August 31,
1997, the Company had commenced construction on 41 residences with a total of
1,646 units. The following sets forth the location, number of units and
estimated quarter of completion for these residences.

<TABLE>
<CAPTION>
ESTIMATED
LOCATION UNITS QUARTER OF COMPLETION(1)
-------- ----- ------------------------
<S> <C> <C>
Arizona
Mesa...................................... 50 Q3 1997
Apache Junction........................... 48 Q4 1997
Yuma...................................... 48 Q4 1997
Peoria.................................... 48 Q1 1998

Indiana
Elkhart................................... 39 Q3 1997
Madison................................... 39 Q3 1997
Warsaw.................................... 39 Q3 1997
Muncie.................................... 39 Q4 1997
New Castle................................ 39 Q4 1997
Bedford................................... 39 Q4 1997
Bloomington............................... 39 Q4 1997
Franklin.................................. 39 Q4 1997
Huntington................................ 39 Q4 1997
Kenderville............................... 39 Q4 1997
Logansport................................ 39 Q4 1997
Marion.................................... 39 Q4 1997
New Albany................................ 39 Q4 1997
Seymour................................... 39 Q4 1997
Shelbyville............................... 39 Q1 1998

New Jersey
Burlington................................ 39 Q3 1997
Pennsville................................ 39 Q3 1997
Rio Grande................................ 39 Q3 1997
Bridgeton................................. 39 Q1 1998
Egg Harbor................................ 39 Q1 1998

Ohio
Zainesville............................... 39 Q3 1997
Sandusky.................................. 39 Q4 1997

Pennsylvania
Butler.................................... 39 Q3 1997
Indiana................................... 39 Q3 1997
Latrobe................................... 39 Q3 1997
New Kensington............................ 39 Q4 1997
Sharon.................................... 39 Q4 1997
New Castle................................ 39 Q4 1997
Penshill.................................. 39 Q4 1997
Uniontown................................. 39 Q4 1997
</TABLE>

S-37
<PAGE>

<TABLE>
<CAPTION>
ESTIMATED
LOCATION UNITS QUARTER OF COMPLETION(1)
-------- ----- ------------------------
<S> <C> <C>
South Carolina
Clinton.................................. 39 Q3 1997
Greenwood................................ 39 Q3 1997
Summerville.............................. 39 Q4 1997
Aiken.................................... 39 Q4 1997
Goosecreek............................... 39 Q1 1998

Washington
Port Townsend............................ 39 Q4 1997
Sumner................................... 48 Q4 1997
-----
Total................................... 1,646
</TABLE>
- --------
(1) The quarter in which the residence expects to receive its certificate of
occupancy. The Company anticipates that the residence will receive its
license within one to two months of receiving its certificate of
occupancy. See "Risk Factors--No Assurances as to Ability to Develop or
Acquire Additional Living Residences."

The foregoing table does not include three facilities in Iowa (100 units)
which are currently being constructed by HCI and six facilities (198 units) in
Nebraska which are being constructed by Carriage House for a total of 1,944
units under construction after giving effect to pending acquisitions.

As of August 31, 1997, the Company had optioned or had entered into land
purchase agreements for the development of 28 sites (1,119) units. 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. In addition, as of
August 31, 1997, HCI had identified 36 assisted living residence sites for
possible development in five states. See "Summary--Recent Developments--HCI
Acquisition."

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 studio units averaging 320 square feet and one
bedroom units averaging 450 square feet of private living space.

The Company retains outside developers to construct residences under
development services agreements. The Company approves all aspects of
development including, among other things, market feasibility, 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
licensed, it takes approximately nine months 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 up to $20,000 for the first four months of operation. To
the extent the Company sells and leases back or otherwise finances a
residence, the aggregate loss for the first four months of operation may
increase up to $100,000.

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.

S-38
<PAGE>

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 resident's 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 provides or 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 nursing hours vary depending on the residents' needs.
The Company consults with outside providers, such as registered nurses,
pharmacists, and dietitians, for purposes of medication review, menu planning
and responding to any special dietary needs of its residents. Personal care,
dietary services, housekeeping and laundry services are performed primarily by
personal service assistants who are full-time employees of the Company.
Maintenance services are performed by full and 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 has established an infrastucture that includes regional
operational managers who oversee the overall performance and finances of each
region, operational managers who oversee the day to day operations of up to
ten to fifteen residences, and team leaders who provide peer support for up to
three to four 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 and three regional offices. Corporate and
regional 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.

S-39
<PAGE>

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 residents 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

Assisted living residents or their families generally pay the cost of care
from their own financial resources. Depending on the nature of an individual's
health insurance program or long-term care insurance policy, the individual
may receive reimbursement for costs of care under an "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 Company believes 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 health care 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 and other states currently have operating Medicaid
Waiver Programs that allow them to pay for assisted living care. Without a
Medicaid Waiver Program, states can only use federal Medicaid funds for long-
term care in nursing facilities.

S-40
<PAGE>

During the year ended December 31, 1996 and the six months ended June 30,
1997, direct payments received from state Medicaid agencies accounted for
approximately 13.8% and 11.1%, respectively of the Company's revenue while the
tenant-paid portion of Medicaid residents accounted for approximately 7.6% and
6.1%, of the Company's revenue during these periods. The Company believes that
state Medicaid reimbursement programs will continue to constitute a
significant source of revenue for the Company in the future.

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. As of August 31, 1997, the Company has obtained
licenses in Oregon, Washington, Texas, Idaho, Ohio, New Jersey and Arizona 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 such regulatory actions are
currently pending on any of the Company's residences.

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 attempts to comply with applicable fraud and abuse laws. There can be
no assurance that administrative or judicial interpretation of existing laws
or regulations or enactment's 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.

Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist that also may require modifications to planned facilities to
create access to the properties by disabled persons. Although the Company
believes that its facilities currently under development are substantially in
compliance with present requirements or are exempt therefrom, if required
changes involve a greater expenditure than anticipated or must be made on a
more accelerated basis than anticipated, additional costs would be incurred by
the Company. Further legislation may impose additional burdens or restrictions
with respect to access by disabled persons, the costs of compliance with which
could be substantial.

S-41
<PAGE>

EMPLOYEES

As of August 31, 1997, the Company had approximately 1,600 employees, of
which approximately 700 were employed as full-time employees and 900 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.

PENDING ACQUISITIONS

HCI Acquisition

In October 1997, the Company entered into a definitive merger agreement
pursuant to which it will acquire HCI for a purchase price of approximately
$4.9 million in cash. Pursuant to such agreement, ALC will assume HCI's debt
(approximately $5.7 million at August 31, 1997) and HCI will become a wholly
owned subsidiary of ALC. Following the acquisition, HCI stockholders will be
entitled to receive certain "earnout" payments over a two-year period based on
the number of HCI's assisted living residence sites which ALC elects to
complete. For each completed residence, HCI stockholders will receive an
additional $7,500 per unit (approximately $300,000 per residence) in cash. HCI
currently has 39 assisted living residence sites (1,567 units) either under
construction or identified for possible development in five states. These
residences are very similar in design to the Company's existing residences and
are located in local markets which are similar to those targeted by the
Company. Consummation of the HCI merger is subject to receipt of regulatory
and third party consents. While it is anticipated that the merger will occur
in late October 1997, there is no assurance that the HCI acquisition will
close or if it closes that it will close on the terms described above.

HCI currently operates three home health care agencies, one home health care
branch agency and one hospice agency and five home medical equipment offices
primarily in Texas. The Company's home health agencies provide home care to
residents in eight of the Company's assisted living residences, as well as to
persons living in surrounding communities. The Company intends to expand its
home health care operations primarily through the acquisition of existing home
health agencies. Home health care generally encompasses a broad array of
nursing, therapy and personal care services offered at home or in home-like
settings, such as assisted living facilities and retirement centers. Services
and products typically provided in home health care include (i) general and
specialty nursing services; (ii) rehabilitation therapy services including
physical, occupational, speech and medical social services; (iii) personal
care services and assistance with activities of daily living; and (iv) a
comprehensive range of home infusion and enteral therapies. Home health care
services will allow ALC to expand the range of care offered, which ALC
believes will enable it to retain its residents as they age in place.

HCI currently provides hospice care through its hospice care agency serving
the greater Dallas-Fort Worth area and also provides management services to
two independent hospice companies in Mississippi and Georgia. The Company
intends to provide additional hospice care services through the establishment
of additional hospice agencies in ALC's assisted living facilities. Hospice
care is provided to terminally ill patients to allow them to carry on a pain-
free life and to manage symptoms so that their last days may be spent with
dignity and quality. Hospice services are provided by a team of trained
professionals who provide medical care and support services not only to the
patient, but to the patient's family and caregivers. To qualify for hospice
care, a patient must have a life expectancy of six months or less and no
longer be able to benefit from curative treatment.The patient is usually
referred for hospice services by their primary physician. Referrals can also
be made by family members, friends, clergy or other health professionals.

Certain members of the Board of Directors of the Company serve as directors
of or are stockholders of HCI. Mr. McBride, the recently elected Chief
Executive Officer of the Company, and

S-42
<PAGE>

Mr. Andre Dimitriadis, until recently a director of the Company, each owns
13.9% of HCI's common stock. Mr. Dimitriadis serves as a director and officer
of HCI; Mr. McBride resigned as an officer and director of HCI on October 3,
1997. Dr. Wilson, President and Chief Operating Officer of the Company,
together with her spouse, owns 4.7% of HCI's common stock. The proposed HCI
merger has been approved by the independent members of the Company's Board of
Directors.

Carriage House Acquisition

Effective as of September 30, 1997, the Company entered into a letter of
intent pursuant to which it proposes to acquire Carriage House in exchange for
337,460 shares of Common Stock. Pursuant to such letter of intent, ALC will
assume approximately $3.9 million of Carriage House's debt and Carriage House
will become a wholly-owned subsidiary of ALC. At August 31, 1997, Carriage
House operated four assisted living facilities (156) units and had an
additional six facilities (198 units) under construction. All units are
located in Nebraska. Consummation of the merger is subject to the satisfaction
or waiver of certain conditions, including approval by the Carriage House
stockholders and satisfactory completion of ALC's due diligence investigation
of Carriage House and its properties. In addition, Carriage House has the
right to terminate the transaction if the closing price of the Company's
Common Stock is less than $14 per share at any time prior to the closing. The
Company has agreed to file a registration statement with the Securities and
Exchange Commission covering the resale of the shares of Common Stock to be
issued to the Carriage House stockholders. Messrs. McBride and Dimitriadis
each own approximately 10% of Carriage House's common stock. Mr. Dimitriadis
serves as a director of Carriage House and on October 3, 1997, Mr. McBride
resigned as a director of Carriage House. The proposed Carriage House
acquisition has been approved by the independent members of the Company's
Board of Directors.

S-43
<PAGE>

MANAGEMENT

The following table sets forth certain information concerning the directors,
executive officers and certain other key employees of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<C> <C> <S>
DIRECTORS AND EXECUTIVE OFFICERS
William McBride III............. 37 Chairman of the Board of Directors and
Chief Executive Officer
Keren Brown Wilson.............. 49 Chief Operating Officer, President and
Vice-Chairman of the Board of Directors
Stephen Gordon.................. 48 Chief Financial Officer, Chief
Administrative Officer and Secretary
Gloria Cavanaugh................ 54 Director
Richard C. Ladd................. 58 Director
Bradley G. Razook............... 41 Director
CERTAIN KEY EMPLOYEES
Connie J. Baldwin............... 52 Director of Operations
Rhonda S. Marsh................. 31 Controller and Chief Accounting Officer
</TABLE>

William McBride III is a co-founder of the Company, has been Chairman of the
Board since its formation and was appointed Chief Executive Officer effective
October 3, 1997. From August 1992 to September 1997, Mr. McBride served as
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 co-founding
LTC, Mr. McBride was a Vice President, Controller and Chief Accounting Officer
with Beverly Enterprises, Inc., a publicly-traded national long term care
company (BEV:NYSE), from April 1988 to July 1992. Mr. McBride also serves on
the Board of Directors of Malan Realty Investors, Inc. (MAL:NYSE) and NewCare
Health Corporation (NWCA:NASDAQ).

Dr. Keren Brown Wilson, a co-founder of the Company, has been the President
and a director of the Company since its formation in July 1994 and was
appointed Chief Operating Officer effective October 3, 1997. Dr. Wilson also
served as the Chief Executive Officer from the Company's formation until
September 1997. Dr. Wilson has over twenty years of experience in aging
service delivery systems and has, for the past twelve 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.
Dr. Wilson holds a doctorate in gerontology and has been responsible for
designing, developing and managing the state of Oregon's first assisted living
residence along with the state's first Medicaid-eligible assisted living
residence.

Stephen Gordon has been the Chief Administrative Officer since July 1995 and
CFO since December 1995 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.

Gloria Cavanaugh was appointed as a director of the Company on September 7,
1997. Ms. Cavanaugh has been the executive director of the American Society on
Aging since 1975. From 1968 to 1975, she was Director of Continuing Education
at the Andrus Gerontology Center, University of Southern California. Ms.
Cavanaugh has almost thirty years experience developing and offering
educational programming on aging issues, including such areas as aging in
place/housing and assisted living. Ms. Cavanaugh serves on the Board of
Directors of Generations United, The National Alliance for Caregiving, The
National Policy and Resource Center on Women and Aging and the Center for
Assistive Technology, State University of New York at Buffalo.

S-44
<PAGE>

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. Mr. Ladd currently serves on the U.S. Advisory Panel on
Quality of Care in Board and Care Facilities. He is also a member of the
executive committee of the National Academy of State Health Policy.

Bradley G. Razook has been a director of the Company since August 1994. Mr.
Razook is currently Managing Director and Head of the Health Care Industry
Group of Schroder & Co. Inc. From 1990 to July, 1997, Mr. Razook was Executive
Vice President of National Westminster Bank PLC, New York Branch (NatWest
Markets) and prior to being appointed Executive Vice President, Mr. Razook
held the position of Managing Director. 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 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.

Rhonda S. Marsh joined the Company as Controller in November 1995 and since
January 1997 has served as Chief Accounting Officer. 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 L.L.P. From 1989 to October 1992,
she was the Corporate Controller of Evergreen International Aviation, Inc. Ms.
Marsh is a certified public accountant.

In addition, if the HCI acquisition is consummated, the Company anticipates
that Carol Eldridge, an executive of HCI, will become Director of Home Health
Care Operations of the Company.

EMPLOYMENT AND SEVERANCE ARRANGEMENTS

Mr. McBride and Dr. Wilson entered into employment contracts with the
Company in October 1997, providing for Mr. McBride's services as Chief
Executive Officer and Dr. Wilson's services as President and Chief Operating
Officer. Each contract is for a four-year period; provided, however, that the
term of each agreement will be automatically extended until the date (if any)
which is the fourth anniversary of the Company's notice, or the six months
after the employee's notice, of a desire to terminate the contract.
Notwithstanding such "evergreen" provisions of the contract, it may be
terminated by the Company for cause or by the employee for "Good Reason." The
latter is defined in the contracts as material diminution of title, duties, or
salary, reduction in benefit not generally applicable to senior executive
personnel, or a direction by the Board of Directors to report to any person or
group other than the Board of Directors. In the event of a termination of
either contract for any reason other than a termination by the Company for
cause or termination by the employee for other than "Good Reason," the
employee shall be entitled to the payment of an amount equal to four times his
or her annual salary. In the event of a termination for any reason other than
the death or disability of the employee or a termination by the Company for
cause and such termination takes place within one year of a change in control
(as defined in the contract), Mr. McBride shall be entitled to a $4.0 million
termination payment and Dr. Wilson shall be entitled to a $3.0 million
termination payment. The contracts also contain "gross-up" provisions to
compensate the employees in the event that any payment under such contracts is
subject to an excise tax imposed under Section 4999 of the Internal

S-45
<PAGE>

Revenue Code. Mr. McBride and Dr. Wilson are currently being paid compensation
at the annual rate of $265,000 and $200,000, respectively. Pursuant to the
employment agreements, Mr. McBride and Dr. Wilson were awarded, without cost
to them, 200,000 and 50,000 shares of "restricted stock," respectively, under
the Company's Amended and Restated 1994 Stock Option Plan. The restrictions
applicable to such shares lapse, and such shares would no longer be subject to
forfeiture in the event of termination of employment, at the rate of 25% per
year commencing on the fourth anniversary of the date of award, subject to
acceleration in the event of a change in control.

The Company has also entered in agreements with Mr. McBride and Dr. Wilson
to provide indemnification to the fullest extent allowed by the Nevada
Corporation Code. The Nevada Corporation Code 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 no reasonable cause to believe was unlawful. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 (the
"Securities Act") may be permitted to directors and officers of the Company
pursuant to the foregoing provisions or otherwise, the Company has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.

S-46
<PAGE>

UNDERWRITING

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

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Schroder & Co. Inc. ............................................... 816,000
Morgan Stanley & Co. Incorporated.................................. 816,000
Smith Barney Inc. ................................................. 816,000
J.C. Bradford & Co. ............................................... 360,000
Equitable Securities Corporation................................... 360,000
Advest, Inc. ...................................................... 108,000
McDonald & Company Securities, Inc. ............................... 108,000
Sutro & Co. Incorporated........................................... 108,000
Wheat, First Securities, Inc. ..................................... 108,000
---------
Total............................................................ 3,600,000
=========
</TABLE>

The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby, if any such shares
are purchased.

The Underwriters have advised the Company that they propose to offer the
shares of Common Stock directly to the public, initially at the public
offering price set forth on the cover page of this Prospectus Supplement; that
the Underwriters propose initially to allow a concession not in excess of
$0.55 per share to certain dealers; and that the Underwriters and such dealers
may initially allow a concession not in excess of $0.10 per share to other
dealers. After the initial offering of the shares of Common Stock, the public
offering price and such concessions may be changed by the Underwriters.

The Company has granted an option to the Underwriters, exercisable for 30
days from the date of this Prospectus Supplement, to purchase up to 540,000
additional shares of Common Stock at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus
Supplement. The Underwriters may exercise such option only to cover over-
allotments in connection with the sale of the Common Stock offered hereby.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.

The Company and its executive officers and directors have agreed with the
Underwriters that, for a period of 90 days following the Offering, they will
not offer, sell, contract to sell, grant an option to purchase, or otherwise
dispose (or announce any offer, sale, grant of any option, or other
distribution) of any shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock without the prior written consent
of the Underwriters other than (i) the issuance by the Company of Common Stock
upon exercise of outstanding options and grants of employee stock options and
(ii) the sale by Dr. Wilson of up to 100,000 shares of Common Stock and the
gift by Dr. Wilson of up to an additional 100,000 shares of Common Stock to
trusts for the benefit of her immediate family.

The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with
Regulation M under the Exchange Act. Overallotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specific maximum. Syndicate
covering transactions involve purchases of the securities in the open market
after the distribution has been completed in order to cover

S-47
<PAGE>

syndicate short positions. Penalty bids permit the Underwriters to reclaim a
selling concession from a syndicate member when the securities originally sold
by such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the securities
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the AMEX or otherwise and, if commenced,
may be discontinued at any time.

Smith Barney Inc., Equitable Securities Corporation, and an affiliate of
Morgan Stanley & Co. Incorporated acted as representatives of the underwriters
in connection with previous public offerings by the Company. Certain of the
Representatives are acting as representatives of the underwriters in the
Concurrent Offering. Mr. Bradley Razook, a director of the Company, is a
Managing Director of Schroder & Co. Inc.

LEGAL MATTERS

Certain legal matters will be passed upon for the Company by Latham &
Watkins, Los Angeles, California and for the Underwriters by Stroock & Stroock
& Lavan LLP, Los Angeles, California. The validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Schreck Morris,
Las Vegas, Nevada.

S-48
<PAGE>

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

INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Auditors.......................................... F-2
Consolidated Balance Sheets of Assisted Living Concepts, Inc. as of
December 31, 1996 and 1995.............................................. F-5
Consolidated Statements of Operations of Assisted Living Concepts Inc.
for the years ended December 31, 1996 and 1995, and the one month ended
December 31, 1994 and Assisted Living Concepts Group (Predecessor) for
the eleven months ended November 30, 1994............................... F-6
Consolidated Statements of Changes in Stockholders' Equity of Assisted
Living Concepts, Inc. for the period July 19, 1994 to December 31, 1996. F-7
Statements of Changes in Partners' and Stockholders' Equity for Assisted
Living Concepts Group (Predecessor) for the period December 31, 1993 to
November 30, 1994....................................................... F-8
Consolidated Statements of Cash Flows of Assisted Living Concepts, Inc.
for the years ended December 31, 1996 and 1995, and the one month ended
December 31, 1994 and Assisted Living Concepts Group (Predecessor) for
the eleven months ended November 30, 1994............................... F-9
Notes to Consolidated Financial Statements............................... F-10
Unaudited Condensed Consolidated Balance Sheets of Assisted Living
Concepts, Inc. and Subsidiary as of June 30, 1997 and December 31, 1996. F-23
Unaudited Condensed Consolidated Statements of Operations of Assisted
Living Concepts, Inc. and Subsidiary for the three and six months ended
June 30, 1997 and June 30, 1996......................................... F-24
Unaudited Condensed Consolidated Statements of Cash Flows of Assisted
Living Concepts, Inc. and Subsidiary for the three and six months ended
June 30, 1997 and June 30, 1996......................................... F-25
Notes to Condensed Consolidated Financial Statements (Unaudited) ........ F-26
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of Assisted
Living Concepts, Inc. as of December 31, 1996 and 1995, and the related
statements of operations, changes in stockholders' equity, and cash flows for
the years 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 audits.

We conducted our audits 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 audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Assisted
Living Concepts, Inc. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Portland, Oregon
February 28, 1997,
except for note 12,
as to which the date is
March 14, 1997

F-2
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying statements of operations and of cash flows
present fairly, in all material respects, the results of operations and
cashflows of Assisted Living Concepts, Inc. (the "Company" -formerly Assisted
Living Concepts Group) 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 audit 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 audit provides 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, except for Note 14 as to which the date is June 30, 1997.

F-3
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying combined statements of operations and of
cash flows presents fairly, in all material respects, the results of
operations and cash flows 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, for the eleven
month period ended November 30, 1994 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 audit. We conducted our audit 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 audit provides 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.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 2,105 $ 7,335
Funds held in trust (Note 3)....................... 8,515 --
Accounts receivable, net of allowance for doubtful
accounts of $33 at 1996 and $0 at 1995............ 730 136
Other current assets (Note 6)...................... 1,043 558
-------- -------
Total current assets............................. 12,393 8,029
-------- -------
Property and equipment (Notes 2, 5 and 7)............ 59,574 28,446
Construction in progress (Note 5).................... 53,458 13,075
-------- -------
Total property and equipment....................... 113,032 41,521
Less accumulated depreciation...................... 674 163
-------- -------
Property and equipment--net........................ 112,358 41,358
-------- -------
Goodwill (Note 2).................................... 362 393
Other assets (Note 6)................................ 5,394 3,766
-------- -------
Total assets..................................... $130,507 $53,546
======== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable................................... $ 1,864 $ 998
Construction payable............................... 16,002 7,250
Accrued expenses................................... 1,395 4,706
Other current liabilities.......................... 544 348
Construction financing (Note 7).................... 18,850 --
Current portion of long-term debt (Note 7)......... 110 47
-------- -------
Total current liabilities........................ 38,765 13,349
Long-term debt (Note 7).............................. 18,768 4,553
Convertible subordinated debentures.................. 13,915 20,000
-------- -------
Total liabilities................................ 71,448 37,902
-------- -------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued or outstanding
Common Stock, $.01 par value; 80,000,000 shares
authorized; 11,030,500 and 6,000,000 shares issued
and outstanding................................... 110 60
Additional paid-in capital......................... 59,678 16,462
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions (Note 2)............................. (239) (239)
Accumulated deficit................................ (490) (639)
-------- -------
Total stockholders' equity....................... 59,059 15,644
-------- -------
Total liabilities and stockholders' equity....... $130,507 $53,546
======== =======
</TABLE>

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

F-5
<PAGE>

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

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

<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------ -------------
YEARS ENDED ONE MONTH ELEVEN MONTHS
DECEMBER 31, ENDED ENDED
---------------- DECEMBER 31, DECEMBER 31,
1996 1995 1994 1994
------- ------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue........................... $18,949 $ 4,067 $ 212 $1,841
------- ------- ----- ------
Operating expenses:
Residence operating expenses.... 12,116 2,779 125 1,127
Management fees from related
party (Note 9)................. 93
Corporate general and
administrative................. 1,649 1,252 152
Building rentals................ 3,240 64 5
Building rentals from related
party (Note 9)................. 912 734 37
Depreciation and amortization
(Notes 3 and 5)................ 990 296 13 105
------- ------- ----- ------
Total operating expenses.......... 18,907 5,125 332 1,325
------- ------- ----- ------
Operating income (loss)........... 42 (1,058) (120) 516
------- ------- ----- ------
Interest expense (Note 7)......... -- 96 8 297
Other Interest (income)........... (107) (579) (64) (12)
------- ------- ----- ------
Interest expense and other
interest (income)--net........... (107) (483) (56) 285
------- ------- ----- ------
Net income (loss)................. $ 149 $ (575) $ (64) $ 231
======= ======= ===== ======
Unaudited pro forma data:
Net income...................... $ 231
Provision for income taxes...... 85
------
Pro forma net income............ $ 146
======
Net income per common share
(primary)........................ $ .02 $ (.10) $(.01)
Weighted-average common shares
outstanding (primary)............ 9,000 6,000 6,000
Weighted-average common shares
outstanding (fully-diluted)...... 11,292
</TABLE>

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

F-6
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE PERIOD JULY 19, 1994 TO DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN FAIR MARKET ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL VALUE IN EXCESS DEFICIT EQUITY
------ ------ ---------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares to
founders............... 2,000 $ 20 $ 80 $ 100
Net proceeds from public
offering............... 4,000 40 16,382 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)
------ ---- ------- ----- ----- -------
Stockholders' equity,
December 31, 1994...... 6,000 $ 60 $16,462 $(239) $ (64) $16,219
Net loss................ (575) (575)
------ ---- ------- ----- ----- -------
Stockholders' equity,
December 31, 1995...... 6,000 $ 60 $16,462 $(239) $(639) $15,644
Net proceeds from
secondary public
offering............... 4,192 42 37,299 37,341
Exercised of employee
stock options.......... 28 -- 132 132
Conversion of
subordinated
debentures............. 810 8 5,785 5,793
Net income.............. 149 149
------ ---- ------- ----- ----- -------
Stockholders' equity,
December 31, 1996...... 11,030 $110 $59,678 $(239) $(490) $59,059
====== ==== ======= ===== ===== =======
</TABLE>

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

F-7
<PAGE>

ASSISTED LIVING CONCEPTS GROUP ("THE PREDECESSOR")

STATEMENTS OF CHANGES IN PARTNERS' AND STOCKHOLDERS' EQUITY

FOR THE PERIOD DECEMBER 31, 1993 TO NOVEMBER 30, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
<S> <C>
Partners' and stockholders' equity, December 31, 1993.................... $ 263
Capital contributions.................................................... --
Capital distributions.................................................... (297)
Net income............................................................... 231
-----
Partners' and stockholders' equity, November 30, 1994.................... $ 197
=====
</TABLE>

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

F-8
<PAGE>

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
-------------------------------------- -------------
ONE MONTH ELEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, NOVEMBER 30,
1996 1995 1994 1994
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........ $ 149 $ (575) $ (64) $ 231
Adjustment to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and
amortization.......... 990 296 13 105
Allowance for doubtful
accounts.............. 33 -- -- --
Gain on sale of
property.............. (82) -- -- --
Changes in other non-cash
items:
Accounts receivable.... (627) (78) (58) (9)
Other current assets... (485) (254) (307) (22)
Other assets........... (1,868) (2,828) (264) 31
Accounts payable....... 9,618 8,071 177 4
Accrued expenses....... (3,311) 4,350 356 96
Accounts payable to
related party......... -- -- -- (7)
Other current
liabilities........... 196 157 38 (5)
--------- -------- ------- -------
Net cash provided by
(used in) operating
activities.............. 4,613 9,139 (109) 424
--------- -------- ------- -------
INVESTING ACTIVITIES:
Purchase of investment
securities.............. (8,500) -- -- --
Proceeds from sale and
leaseback transactions.. 50,045 8,067 -- --
Purchases of property and
equipment............... (121,556) (45,901) (3,069) (1,688)
--------- -------- ------- -------
Net cash used in
investing activities.... (80,011) (37,834) (3,069) (1,688)
--------- -------- ------- -------
FINANCING ACTIVITIES:
Proceeds from short-term
construction borrowings
expected to be
refinanced.............. 18,850 1,600
Proceeds from long-term
debt.................... 14,365 3,505
Payments on long-term
debt.................... (88) (18) (1) (33)
Proceeds from issuance of
common stock............ 37,473 16,522
Debt issuance costs...... (432)
Proceeds from convertible
subordinated debentures. 19,200
Capital distributions.... (297)
--------- -------- ------- -------
Net cash provided by
(used in) financing
activities.............. 70,168 22,687 16,521 1,270
--------- -------- ------- -------
Net increase (decrease)
in cash and cash
equivalents............. (5,230) (6,008) 13,343 6
Cash and cash
equivalents, beginning
of period............... 7,335 13,343 -- 357
--------- -------- ------- -------
Cash and cash
equivalents, end of
period.................. $ 2,105 $ 7,335 $13,343 $ 363
========= ======== ======= =======
Supplemental disclosure
of cash flow
information:
Cash payments for
interest.............. $ 2,201 $ 154 $ 8 $ 297
</TABLE>

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

F-9
<PAGE>

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

NOTES TO CONSOLIDATED 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 and initially capitalized through the
sale of 1,000,000 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 stockholder 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
1,000,000 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 stockholder 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 4,000,000 shares of common stock at
$4.63 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. At December 31, 1996 and 1995, the Company had sixty-
seven and twenty-five residences, respectively with licenses or certificates
of occupancy. Residences owned and leased was thirty-six and thirty-one,
respectively as of December 31, 1996, and sixteen and nine, respectively as of
December 31, 1995.

On July 3, 1996, the Company sold 4,192,500 shares of common stock at $9.50
in an underwritten public offering realizing net proceeds of $37,341,000,
after underwriter discounts and commission, of. The Company utilized the
proceeds to finance additional assisted living residences during 1996.

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 CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

BASIS OF PRESENTATION

The financial statements as of and for the years ended December 31, 1996 and
December 31, 1995 and the one month ended December 31, 1994, are those of the
Company. The financial statements for the eleven months ended November 30,
1994, are those of the Predecessor before its business and substantially all
of its 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 has sold or leased the assets to the Company. All
significant inter-company accounts and transactions have been eliminated.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Assisted
Living Concepts, Inc. and its wholly owned subsidiaries (the "Company"). All
material intercompany balances and transactions have been eliminated in
consolidation.

REVENUE

Revenue is recognized when services are rendered and consists of residents'
fees for basic housing and support services and fees associated with
additional services such as routine 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 provision for estimated malpractice claims includes estimates of the
ultimate costs for both reported claims and claims incurred but not reported.
The Company currently has no claims pending and does not expect any future
claims to exceed the current insurance coverage, therefore no provision has
been recorded in the accompanying 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.

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, and the reported amounts of revenue and
expenses during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.

F-11
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

RECLASSIFICATIONS

Certain reclassifications have been made in the prior year's financial
statements to conform with the current year's presentation. Such
reclassifications had no effect on previously reported net income (loss) or
stockholders' and partners' 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 $2,188,000, $577,000 and $11,000 for
the years ended December 31, 1996 and 1995 and the eleven months ended
November 30, 1994. There was no interest capitalized during for the month
ended December 31, 1994.

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

Asset impairment is analyzed by 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 is recognized. For those assets the Company
intends to hold and use, the fair value of the asset is used in its
calculation of the impairment loss. There were no impairment losses for any of
the periods presented.

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.

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 effective
interest method.

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, construction financing and convertible subordinated
debentures 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

F-12
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

than the carrying value, a write down would be required, measured by the
difference between the present value of the anticipated future cash flows and
the carrying value of the goodwill.

INCOME TAXES

The Company uses the asset and liability method of accounting for income
taxes under which deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to the differences between the
financial statement carrying amounts of the existing assets and liabilities
and their respective tax bases. 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.

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
stockholders 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 INCOME (LOSS) PER COMMON SHARE

Net income (loss) per common share has been calculated by dividing the net
income (loss) for the period by the weighted average common shares outstanding
and dilutive common equivalent shares assumed to be outstanding using the
treasury stock method. Common stock equivalent shares consist of options to
purchase common stock during the period. Fully diluted earnings per share is
not presented since it approximates income (loss) per share.

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 continues 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. (See Note 11.)

CONCENTRATION OF CREDIT RISK

State Medicaid reimbursement programs constitute a significant source of
revenue for the Company. The Company intends to continue developing and
operating assisted living residences in states other than Texas, Washington
and Oregon including Idaho, New Jersey and Ohio. Adverse changes in general
economic factors affecting these states' respective health care industries or
in these states' laws and regulatory environment, including Medicaid
reimbursement rates, could have a material adverse effect on the Company's
financial condition and results of operations.

F-13
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. ACQUISITION OF RESIDENCES

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

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

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

The Company's president beneficially owned 48% of the common stock of the
Company prior to the purchase of these residences and was the sole stockholder
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 stockholders' 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
stockholders' 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 $33,000, $28,000 and $2,000 for the years ended December 31, 1996
and 1995 and the month ended December 31, 1994, respectively.

3. FUND HELD IN TRUST

The Company issued $8,500,000 in tax-exempt bonds to provide permanent
financing on five Washington residences. These properties are currently under
construction and are estimated to be completed towards the end of the second
quarter of 1997. The funds are being held in trust by a national bank on
behalf of the Company and are invested in "GIC" (Guaranteed Investment
Certificates) that are 100% collaterilized. The funds are restricted for
construction and are expected to be released to the Company as the individual
residences are completed and licensed.

F-14
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. LEASES

During the last three years, the Company has entered into agreements to
lease six assisted living residences in Oregon one of which was completed in
1996. The leases, which have fixed terms of ten years, have been accounted for
as operating leases (the "Oregon Leases"). Aggregate deposits on these
residences as of December 31, 1996 and 1995 were $224,000 and $59,000,
respectively which is reflected in other assets in the accompanying financial
statements. In addition during 1996 and 1995, the Company completed the sale
of twenty-five and five residences under sale and leaseback arrangements,
respectively. The Company sold the residences for approximately $50 million in
1996 and $8.1 million in 1995 and leased them back over initial terms ranging
from twelve to twenty years. Four of the twenty-five properties were
repurchased for $7.6 million, in connection with a $50.2 million sale and
leaseback commitment with LTC, Properties, Inc. The properties were
repurchased at cost. The twenty-one remaining residences completed during 1996
have initial annual rent payments of $4.3 million. Nine of the twenty-one
residences were sold and leased back from LTC, Properties, Inc. for $18.5
million with annual rentals of approximately $2.0 million. The residences were
sold at approximately cost and any nominal difference is being amortized over
the life of the lease. 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 6 and 7) to which the lessor is a party.

As of December 31, 1996, future minimum lease payments under operating
leases are as follows (in thousands):

<TABLE>
<S> <C>
1997............................................................... $ 6,131
1998............................................................... 6,131
1999............................................................... 6,135
2000............................................................... 6,138
2001............................................................... 6,138
Thereafter......................................................... 55,060
-------
$85,733
=======
</TABLE>

5. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Land..................................................... $ 3,850 $ 1,747
Buildings................................................ 53,839 25,804
Equipment................................................ 613 214
Furniture................................................ 1,272 681
Construction in progress................................. 53,458 13,075
-------- -------
Sub-total.............................................. 113,032 41,521
Less accumulated depreciation............................ 674 163
-------- -------
Total.................................................. $112,358 $41,358
======== =======
</TABLE>

F-15
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Land and buildings and certain furniture and equipment relating to six
Oregon residences serve as collateral for long-term debt (see Note 7).
Depreciation expense was $598,000, $200,000, $8,000 and $105,000 for the years
ended December 31, 1996 and 1995, the one month ended December 31, 1994 and
the eleven months ended November 30, 1994.

Construction In Progress

As of December 31, 1996, the Company has entered into agreements pursuant to
which it may purchase, subject to completion of due diligence and various
other conditions, twenty-one undeveloped sites in Idaho, New Jersey, Ohio and
other states for an aggregate purchase price of approximately $3.3 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 thirty-one other sites identified and has either purchased the
land or begun construction to develop assisted living residences.

As of December 31, 1996 and 1995, the Company had capitalized all costs
incurred in connection with the development of these properties, consisting of
the following (in thousands):

<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Land purchased............................................ $ 5,644 $ 2,402
Earnest money deposits.................................... 119 61
Construction and other costs including legal fees,
building permits and other development costs............. 47,695 10,612
------- -------
Total................................................... $53,458 $13,075
======= =======
</TABLE>

6. OTHER ASSETS

Pursuant to lease agreements, residents are required to provide security
deposits, and in certain cases, the last month's 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 $61,000 and $42,000 as of December
31, 1996 and 1995, respectively and have been classified as other assets and
are restricted as to use by the Company (Note 7). 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,
1996 and 1995, the contingency escrow reserve for the State of Oregon loans
held in the Company's name was $373,000 and $100,000.

F-16
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. INDEBTEDNESS

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

<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Trust Deed Notes, payable to the State of Oregon
Housing and Community Services Department............... $10,378 $4,600
Multifamily Revenue Bonds, payable to the Washington
State
Housing Finance Commission Department................... 8,500 --
------- ------
Total long-term debt..................................... $18,878 $4,600
Less current portion..................................... (110) (47)
------- ------
$18,768 $4,553
======= ======
</TABLE>

The Trust Deed Notes payable to the State of Oregon Housing and Community
Services Department are secured by buildings, land, furniture and fixtures of
six Oregon residences, payable in monthly installments including interest at
effective rates ranging from 7.375% to 11.80%. These notes have scheduled
maturity dates ranging between January 2021 and October 2028. The Multifamily
Revenue Bonds are payable to the Washington State Housing Finance Commission
Department and are currently secured by a letter of credit for $8,500,000. The
bonds were issued to provide permanent financing for five Washington
residences which are still under development. The Bonds are variable rate
bonds maturing on January 1, 2017. As of December 31, 1996, the following
annual principal payments are scheduled (in thousands):

<TABLE>
<S> <C>
1997............................................................... $ 110
1998............................................................... 382
1999............................................................... 401
2000............................................................... 429
2001............................................................... 454
Thereafter......................................................... 17,102
-------
Total............................................................ $18,878
=======
</TABLE>

Indebtedness of the Predecessor used to finance Huffman House, Juniper
House, Rackleff House, and Brookside remained an obligation of previous owners
and was not assumed by the Company. The Company has entered into a lease
approval agreement with OHCS and the lessor of the Oregon Leases which
obligates the Company to comply with the terms and conditions of the
underlying trust deed and regulatory agreements relating to the leased
buildings. In addition during 1996, the Company entered a lease agreement with
ALF for another Oregon residence with the same terms as the previous four
agreements. 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, 1996 and 1995, was $61,000 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
$373,000 and $100,000 as of December 31, 1996 and 1995 and is reflected in
other assets in the accompanying financial statements (See Note 6).
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.

F-17
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

As of December 31, 1996 and 1995, the Company was restricted from paying
dividends on $401,000 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.

During 1996, the Company received $18,850,000 of mortgage financing on eight
residences to be converted to sale leaseback transactions by June of 1997 from
LTC Properties, Inc. Interest is paid on a monthly basis ranging from 9.9% to
10.4% per annum with all principal and interest due on June 30, 1997. These
mortgage financing agreements are in connection with a $50.2 million
commitment with LTC Properties Inc. to provide financing through sale and
leaseback arrangements.

In September 1996, $6,085,000 of the $20,000,000 7% Convertible Subordinated
Debentures due August 15, 2005 were converted to 811,332 shares of the
Company's common stock. The debentures are convertible at any time at or prior
to maturity, unless previously redeemed, at a conversion price of $7.50 per
share, subject to adjustments under certain circumstances. The Company
incurred a one-time charge of $426,000 in connection with the conversion.

8. INCOME TAXES

At December 31, 1996, the Company had net operating loss carryforwards of
approximately $2.1 million, for income tax purposes. This loss will be carried
forward and expires in the years 2009 through 2011. As such, no provision for
income taxes has been recorded.

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

F-18
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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

<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
-------------------------------------- --------------------------
ELEVEN MONTHS
YEAR ENDED YEAR ENDED MONTH ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1994 1993
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Statutory federal tax
rate................... 34.0 % 34.0 % 34.0 % 34.0% 34.0%
Increase (decrease) in
rate from:
State taxes, net of
federal tax benefits. -- -- -- 6.9 5.0
Benefit of operating
loss carryforwards..... -- -- -- -- (10.3)
Change in valuation
reserve................ (34.0)% (34.0)% (34.0)% --
Other................... -- -- -- (4.1) (3.0)
----- ----- ----- ---- -----
Effective tax rate...... -- -- -- 36.8% 25.7%
===== ===== ===== ==== =====
</TABLE>

An analysis of the significant components at December 31, 1996, 1995 and
1994 for deferred tax assets and liabilities, consists of the following (in
thousands):

<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ----
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss..................................... $ 837 $ 231 $ 55
Deferred revenue....................................... -- 59 --
Other.................................................. 45 43 --
Deferred tax liabilities:
Depreciation........................................... (195) (92) --
Deferred loss on sale leaseback........................ (304)
Prepaid expenses....................................... (140)
Other.................................................. (149)
Net deferred asset valuation allowance................... (95) (241) (55)
----- ----- ----
Deferred tax asset (liability)........................... $ -- $ -- $--
===== ===== ====
</TABLE>

The valuation allowance for deferred tax assets as of December 31, 1996 and
1995 was $95 and $241, respectively. The net change in the total valuation
allowance for the years ended December 31, 1996 and 1995 was ($146) and $186,
respectively.

9. RELATED PARTY TRANSACTIONS

THE COMPANY

The Company leases five 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 years ended December 31, 1996 and 1995 and the
month ended December 31, 1994, the Company paid ALF aggregate lease deposits
of $35,700, $0 and $75,000, respectively and aggregate rentals of 912,000,
$734,000 and, $37,000, respectively.

In December 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

F-19
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

Concepts in Community Living, Inc. (CCL) is a company that is owned 100% by
the president's spouse. CCL provided services to several of the developers
that contracted with the Company to build and develop assisted living
facilities. CCL 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.

In October of 1995, the Company sold two Texas properties for $3.2 million
to LTC and leased them back for twelve year terms at an initial annual lease
payment of $352,000. The transactions resulted in a gain of $82,000 which was
deferred and is being amortized over the lease period. (See Note 10 for
additional transactions occurring subsequent to year-end.) LTC Properties,
Inc.'s (LTC) President and Chairman of the Board are members on the Company's
Board of Directors, and the President is the Company's Chairman. In addition,
three executive officers of LTC Properties, Inc. own approximately 16% of
ALC's common stock as of December 31, 1995.

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.

10. TRANSACTIONS WITH LTC PROPERTIES, INC.

During 1995, the Company sold and leased back from LTC Properties, Inc. two
Texas residences for $3.2 million with annual lease payments of $328,000. The
residences were sold at approximately cost with any nominal difference being
amortized over the life of the lease. In July 1996, in connection with a
commitment of $50.2 million to sell and leaseback 20 residences, LTC
Properties, Inc. agreed to sell back to the Company four Texas properties for
approximately $7.6 million. The four residences were purchased at cost. In
addition, LTC Properties, Inc. provided $18.9 million in mortgage financing on
eight residences which will be converted to sale and leaseback arrangements
under the $50.2 million commitment. During 1996, the Company sold and leased
back thirteen residences for $26.2 million with a combined total of 472 units.
As of December 31, 1996, the Company sold and leased back from LTC Properties,
Inc. eleven residences with 386 units for $24.3 million with annual rental
payments of $2.3 million ($1.3 million in rent was paid in 1995). The
residences were sold at approximately cost with any nominal difference being
amortized over the life of the lease. Currently, two of the Company's Board of
Directors serve as executive officers of LTC Properties, Inc. and three
executive officers of LTC Properties, Inc. own approximately 5.5% of the
Company's common stock.

11. 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 of the Board of Directors 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.

F-20
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Under the 1994 Stock Option Plan, the Company may grant options to its
employees for up to 600,000 shares of common stock. The exercise price of each
option equals the market price of the Company's stock on the date of grant.
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 by the Compensation Committee upon changes in the Company's
capitalization. The Board of Directors, at its option, may discontinue the
Plan or amend the Plan at any time.

The per share weighted-average fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1996 and 1995,
respectively: dividend yield of zero percent, expected volatility of 36.61%,
risk-free interest rate has been fixed at 6.69% based on the 10-year treasury
rate on March 11, 1997 and term of 10 years.

The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS 123, the
Company's net income would have been reduced to the proforma amounts indicated
below:

<TABLE>
<CAPTION>
1996 1995
---- -----
<S> <C> <C>
Net income (loss) as reported................................... $149 $(575)
Net income (loss) pro forma..................................... 50 (575)
Net income (loss) per common share as reported.................. .02 (.10)
Net income (loss) per common share as pro forma................. -- (.10)
</TABLE>

Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation costs for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the option's vesting period
of three years and compensation cost for options prior to January 1, 1995 is
not considered.

A summary of the status of the Company's stock option plan as of December
31, 1996 and 1995 and changes during the years ending on those dates is
presented below:

<TABLE>
<CAPTION>
1996 1995
-------------------- ------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year... 806,068 $5.43 440,000 $4.625
Granted................................ 563,400 8.21 430,500 6.172
Exercised.............................. (28,170) 4.68 -- --
Canceled............................... (236,094) 8.79 (64,434) 4.877
--------- -------
Outstanding at end of the year......... 1,105,204 $6.15 806,066 $5.431
========= =======
Options exercisable at end of year..... 382,044 146,670
Weighted-average fair value of options
granted during the year............... $4.99 $3.69
</TABLE>

F-21
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table summarized information about fixed stock options
outstanding at December 31, 1996.

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ---------------------
WEIGHTED- WEIGHTED-
NUMBER WEIGHTED-AVERAGE AVERAGE NUMBER AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
AT 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE
----------- ---------------- --------- ----------- ---------
RANGE OF EXERCISE PRICES
- ------------------------
<S> <C> <C> <C> <C> <C>
$ 9.250................. 395,500 3.51 $ 4.63 265,176 $4.63
$ 9.875 to 12.750...... 91,936 4.27 5.76 31,210 5.74
$13.000 to 13.000...... 245,468 4.33 6.50 82,616 6.50
$13.375 to 14.625...... 13,500 4.54 6.88 2,504 6.76
$14.750 to 14.750...... 286,200 4.81 7.38 -- --
$14.875 to 19.625...... 60,600 4.86 8.52 538 7.63
$19.750 to 19.750...... 4,000 4.82 9.88 -- --
$20.125 to 20.125...... 2,000 4.81 10.06 -- --
$21.500 to 21.500...... 2,000 4.73 10.75 -- --
$22.000 to 22.000...... 4,000 4.72 11.00 -- --
--------- ---- ------ ------- -----
$ 9.250 to $22.000...... 1,105,204 4.19 $ 6.15 382,044 $5.14
========= ==== ====== ======= =====
</TABLE>

12. SUBSEQUENT EVENTS

The Company received mortgage financing on an additional sixteen residences
for $36.4 million dollars from LTC Properties, Inc. with interest payable on a
monthly basis at 9.9% per annum. These loans are to be repaid or converted to
sale leaseback transactions by June 30, 1997.

13. 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, 1994, as if the acquisition of the
Predecessor's assets and the initial public offering had occurred at January
1, 1994 (in thousands except per share amounts):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Revenues...................................................... $2,053
Operating income.............................................. (402)
Interest expense--net......................................... 84
Net loss...................................................... (486)
Loss per common share......................................... $ (.08)
Weighted average common shares................................ 6,000
</TABLE>

14. SUBSEQUENT EVENT

The Company's Board of Directors declared a two for one stock split on the
Company's Common Stock and dividend distribution of one Preferred Share
Purchase Right on each outstanding share of the Company's Common Stock. The
record date for the stock split and the Preferred Share Purchase Right
distribution is June 30, 1997 and the stock split occurred immediately prior
to the Preferred Share Purchase Right distributions. All share and per share
information in the accompanying financial statement has been restated to
reflect the effects of the stock split.

F-22
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS) (UNAUDITED)

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 8,828 $ 2,105
Investments........................................... 8,688 8,515
Accounts receivable................................... 1,083 730
Other current assets.................................. 2,164 1,043
-------- --------
Total current assets................................ 20,763 12,393
-------- --------
Property and equipment.................................. 77,246 59,574
Construction in process (Note 2)........................ 61,333 53,458
-------- --------
Total property and equipment.......................... 138,579 113,032
Less accumulated depreciation......................... 1,331 674
-------- --------
Property and equipment--net........................... 137,248 112,358
Goodwill................................................ 348 362
Other assets............................................ 6,431 5,394
-------- --------
Total assets........................................ $164,790 $130,507
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses................. $ 5,297 $ 3,803
Construction payables................................. 14,082 16,002
Construction financing (Note 2)....................... 51,910 18,850
Current portion of long-term debt..................... 113 110
-------- --------
Total current liabilities........................... 71,402 38,765
Mortgages payable....................................... 18,710 18,768
Convertible subordinated debt........................... 13,915 13,915
-------- --------
Total liabilities................................... 104,027 71,448
-------- --------
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding..............
Common Stock, $.01 par value; 80,000,000 shares
authorized; 11,043,512 and 11,030,500 shares issued
and outstanding...................................... 110 110
Additional paid-in capital............................ 59,751 59,678
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions......................................... (239) (239)
Retained Earnings (Accumulated deficit)............... 1,141 (490)
-------- --------
Stockholders' equity.................................. 60,763 59,059
-------- --------
Total liabilities and stockholders' equity.......... $164,790 $130,507
======== ========
</TABLE>

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

F-23
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

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

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
---------------
1997 1996
------- ------
<S> <C> <C>
Revenues....................................................... $20,092 $6,492
------- ------
Operating expenses:
Residence operating expenses................................. 12,249 4,276
Corporate general and administrative......................... 1,317 608
Building rentals............................................. 2,870 1,051
Building rentals--related party.............................. 699 444
Depreciation and amortization................................ 1,208 384
------- ------
Total operating expenses................................... 18,343 6,763
------- ------
Operating income (loss)...................................... 1,749 (271)
------- ------
Interest expense............................................. (408) (51)
Interest income.............................................. 276 69
Other income................................................. 482 82
------- ------
Other income--net............................................ 350 100
------- ------
Income (loss) before taxes................................... 2,099 (171)
Provision for income taxes................................... 468 --
------- ------
Net income (loss)............................................ $ 1,631 $ (171)
======= ======
Net income (loss) per common share (primary)................. $ .15 $ (.03)
======= ======
Net income (loss) per common share (fully-diluted)........... $ .15 $ (.03)
======= ======
Weighted-average primary common shares outstanding........... 11,584 6,027
Weighted-average fully-diluted common shares outstanding..... 13,439 8,927
</TABLE>

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

F-24
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,631 $ (171)
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of asset................................... (36) (82)
Depreciation and amortization........................... 1,208 384
Changes in other non-cash items:
Accounts receivable..................................... (353) (316)
Other current assets.................................... (1,121) (235)
Other assets............................................ (168) (1,283)
Accounts payable and accrued expenses................... 1,495 (2,068)
-------- --------
Net cash provided by (used in) operating activities....... 2,656 (3,771)
-------- --------
INVESTING ACTIVITIES:
Funds held in trust....................................... (173) --
Proceeds from sale of land and residences................. 35,568 38,290
Purchases of property and equipment....................... (61,410) (45,665)
-------- --------
Net cash used for investing activities.................... (26,015) (7,375)
-------- --------
FINANCING ACTIVITIES:
Proceeds from short-term construction borrowings ......... 43,210 --
Payoff of construction financing.......................... (10,150) --
Construction payables..................................... (1,919) --
Proceeds from long-term debt.............................. -- 5,865
Payments on long-term debt................................ (55) (46)
Proceeds from issuance of common stock.................... 73 --
Debt issuance costs....................................... (1,077) 123
-------- --------
Net cash provided by financing activities................. 30,082 5,942
-------- --------
Net increase (decrease) in cash and cash equivalents...... 6,723 (5,204)
Cash and cash equivalents, beginning of period............ 2,105 7,335
-------- --------
Cash and cash equivalents, end of period.................. $ 8,828 $ 2,131
======== ========
Supplemental disclosure of cash flow information:
Cash payments for interest.............................. $ 3,267 $ 1,005
======== ========
</TABLE>

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

F-25
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Basis of Presentation

These condensed consolidated 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, 1996.

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 and six-month periods ended
June 30, 1997 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 June 30, 1997 the Company had begun construction or had purchased land
to begin construction on 35 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, 25 additional sites.

As of June 30, 1997 the Company had capitalized all costs incurred in
connection with the development of these properties and, accordingly,
construction in process consisted of the following (in thousands):

<TABLE>
<S> <C>
Land purchased...................................................... $ 7,995
Construction costs and architectural fees........................... 42,400
Other costs, including legal fees, building permits and other
development costs.................................................. 10,938
-------
$61,333
=======
</TABLE>

During the quarter ended June 30, 1997, the Company capitalized $1,606,000
of interest cost relative to financing of construction in process. Of the 93
residences the Company had opened or had received certificates of occupancy,
46 were leased (15 in the Northwest, 29 in the Southwest and 2 in the East)
and 47 were owned (23 in the Northwest, 10 in the Southwest and 14 in the
East).

F-26
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

3. LEASES

During the quarter ended June 30, 1997, the Company completed the sale of 13
residences (4 in the Northwest, one in the East and 8 in the Southwest) under
sale and leaseback arrangements. In addition, the Company sold one residence
in the East and is operating the residence under a six month management
agreement and also has entered into a agreement to lease the property after
the management agreement expires. The Company sold the residences for
approximately $32,978,000 which approximates cost, and leased them back over
initial terms ranging from 12 to 15 years. The residences were leased back at
an initial annual lease rate of approximately $3,313,000.

4. STOCK SPLIT AND ADOPTION OF STOCKHOLDERS RIGHTS PLAN

5. SUBSEQUENT EVENTS

The Company has agreed, in principle, to acquire Carriage House Assisted
Living Inc., a privately held developer and operator of assisted living
facilities. It is contemplated that the transaction will be completed by
September 30, 1997 for approximately $6 million in the Company's stock.
Completion of the transaction is subject to negotiation of a satisfactory
definitive agreement and receipt of normal regulatory and third party consents
and approvals. Currently Carriage House operates 4 facilities with 156 units
and has an additional 6 facilities with 198 units under construction. All
units are located in Nebraska.

F-27
<PAGE>

PROSPECTUS

SECURITIES

ASSISTED LIVING CONCEPTS, INC.

Assisted Living Concepts, Inc., a Nevada Corporation (the "Company"), may
offer from time to time, in one or more series, its debt securities (the "Debt
Securities"), shares of its preferred stock, $.01 par value per share (the
"Preferred Stock"), and shares of its common stock, $.01 par value per share
(the "Common Stock"). The Debt Securities, Preferred Stock and Common Stock
are collectively referred to herein as the "Securities." The Securities will
have an aggregate offering price of up to $150,000,000 and will be offered on
terms to be determined at the time of the offering.

In the case of Debt Securities, the specific title, the aggregate principal
amount, the ranking, the purchase price, the maturity, the rate and time of
payment of any interest, any redemption or sinking fund provisions, any
conversion provisions and any other specific term of the Debt Securities will
be set forth in an accompanying supplement to this Prospectus (the "Prospectus
Supplement"). In the case of Preferred Stock, the specific number of shares,
designation, stated value per share, liquidation preference per share,
issuance price, dividend rate (or method of calculation), dividend payment
dates, any redemption or sinking fund provisions, any conversion rights and
other specific terms of the series of Preferred Stock will be set forth in an
accompanying Prospectus Supplement. In the case of Common Stock, the specific
number of shares and issuance price per share will be set forth in an
accompanying Prospectus Supplement. The Prospectus Supplement will also
disclose whether the Securities will be listed on a national securities
exchange and, if they are not to be listed, the possible effects thereof on
their marketability.

The Securities may be sold: (i) directly by the Company; (ii) through
underwriting syndicates represented by one or more managing underwriters, or
through one or more underwriters without a syndicate; and (iii) through agents
designated from time to time. The names of any underwriters or agents of the
Company involved in the sale of the Securities in respect of which this
Prospectus is being delivered and any applicable commissions or discounts will
be set forth in an accompanying Prospectus Supplement. See "Plan of
Distribution." The net proceeds to the Company from such sale will be set
forth in the Prospectus Supplement.

The Company's Common Stock is traded on the American Stock Exchange (the
"AMEX") under the symbol "ALF." On October 1, 1997, the closing sale price of
the Common Stock on the AMEX was $15.75 per share.

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.

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

THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.

The date of this Prospectus is October 2, 1997.
<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, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. 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 Commission also maintains a World Wide Web Site that
contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with
the Commission, at http://www.sec.gov.

The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Securities offered hereby.
The Prospectus and any accompanying Prospectus Supplement do not contain all
of the information included in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
Securities, reference is hereby made to the Registration Statement including
the exhibits and schedules thereto. Statements contained in this Prospectus
and any accompanying Prospectus Supplement concerning the provisions or
contents of any contract, agreement or any other document referred to herein
are not necessarily complete. With respect to each such contract, agreement or
document filed as an exhibit to the Registration Statement, reference is made
to such exhibit for a more complete description of the matters involved, and
each such statement shall be deemed qualified in its entirety by such
reference to the copy of the applicable document filed with the Commission.
The Registration Statement including the exhibits and schedules thereto, may
be inspected without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. and copies of it or any part thereof may be
obtained from such office, upon payment of the fees prescribed by the
Commission.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, which have been filed by the Company with the
Commission, are incorporated herein by reference: (i) the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, (ii) the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997,
(iii) the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, (iv) the Company's Current Report on Form 8-K dated July 24, 1997,
(v) the Company's Current Report on Form 8-K dated October 2, 1997 and (vi)
the description of the Company's Capital Stock contained in the Company's
Registration Statement on Form 8-A dated November 17, 1994. In addition, each
document filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus and prior to
termination of the offering of Securities offered hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from
the date such document is filed with the Commission.

Any statement contained herein, or any document, all or a portion of which
is incorporated or deemed to be incorporated by reference herein, shall be
deemed to be modified or superseded for purposes of the Registration Statement
and this Prospectus to the extent that a statement contained herein, or in any
subsequently filed document that also is or is deemed to be incorporated by
reference herein, or in any subsequently filed document that also is or is
deemed to be incorporated by reference

2
<PAGE>

herein, modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute part of the Registration Statement or this Prospectus. All
information appearing in this Prospectus is qualified in its entirety by the
information and financial statements (including notes thereto) appearing in
the documents incorporated herein by reference. This Prospectus incorporates
documents by reference which are not presented herein or delivered herewith.
These documents (other than exhibits to such documents which are not
specifically incorporated by reference into such documents) are available
without charge, upon written or oral request by any person to whom this
Prospectus has been delivered, from Stephen Gordon, Chief Financial Officer,
9955 S.E. Washington, Suite 201, Portland, Oregon 97216.

3
<PAGE>

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 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 is a Nevada corporation and its principal executive offices are
located at 9955 S.E. Washington, Suite 201, Portland, Oregon 97216, telephone
number (503) 252-6233.

RATIO OF EARNINGS TO FIXED CHARGES

Set forth below is the ratio of earnings to fixed charges for the Company
and its predecessor for the periods indicated:

<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------------------- -------------------------------------
YEARS ENDED ELEVEN MONTHS YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED MONTH ENDED DECEMBER 31, ENDED
----------- NOVEMBER 30, DECEMBER 31, ------------- JUNE 30,
1992 1993 1994 1994 1995 1996 1997
----- ----- ------------- ------------ ------ ------ ----------
<C> <C> <S> <C> <C> <C> <C>
1.08x 1.74x 1.71x (2) (2) (2) (2)
</TABLE>
- --------
(1) The earnings do not include Preferred Stock dividends as no shares of
Preferred Stock were outstanding for the periods presented.

(2) For the one month period ended December 31, 1994, the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997 fixed charges
exceeded earnings by $64,000, $1,152,000, $2,051,000 and $845,000,
respectively.

4
<PAGE>

USE OF PROCEEDS

Unless otherwise specified in the Prospectus Supplement which accompanies
this Prospectus, the net proceeds from the sale of the Securities offered from
time to time hereby will be used for repayment of outstanding amounts under
the Company's temporary construction financing arrangements and the
development, construction and acquisition of additional health care
facilities.

DESCRIPTION OF THE COMPANY'S CAPITAL STOCK

The summary of the terms of the capital stock of the Company set forth below
does not purport to be complete and is subject to and qualified in its
entirety by reference to the Articles of Incorporation (the "Charter") and By-
Laws of the Company, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. See "Available
Information."

GENERAL

The Company's Charter authorizes 80,000,000 shares of Common Stock, par
value $.01 per share, and 1,000,000 shares of Preferred Stock, par value $.01
per share. As of July 31, 1997, the Company had 11,043,512 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 stockholders, and a majority vote is
required for all action to be taken by stockholders. 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 stockholder. 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

Shares of Preferred Stock may be issued from time to time by the Board of
Directors of the Company, without stockholder approval, in such series and
with such preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or other provisions,
as may be fixed by the Board of Directors when designating any such series.

The Preferred Stock and the variety of characteristics available for it
offers the Company flexibility in financing and acquisition transactions. An
issuance of Preferred Stock could dilute the book value or adversely affect
the relative voting power of the Common Stock. The issuance of such shares
could be used to enable the holder to block such a transaction. Although the
Board of Directors is required

5
<PAGE>

when issuing such stock to act based on its judgment as to the best interests
of the stockholders of the Company, the Board could act in a manner which
would discourage or prevent a transaction some stockholders might believe is
in the Company's best interests or in which stockholders could or would
receive a premium for their shares of Common Stock over the market price.

The Company's Board of Directors has authority to classify or reclassify
authorized but unissued shares of Preferred Stock by setting or changing the
preferences, conversion and other rights, voting powers, restrictions and
limitations as to dividends, qualifications and terms and conditions of
redemption of stock.

RIGHTS PLAN

On June 12, 1997, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (each a "Right" and collectively the
"Rights") on each outstanding share of Common Stock, payable to stockholders
of record on June 30, 1997. Each Right will entitle the holder thereof after
the Rights become exercisable and until June 30, 2007 (or the earlier
redemption, exchange of termination of the Rights), to buy one one-hundredth
of a share of Series A Junior Participating Preferred Stock (the "Series A
Preferred Stock") at an exercise price of $54.00, subject to certain anti-
dilution adjustments (the "Purchase Price"). The Rights will be represented by
the Common Stock certificates and will not be exercisable or transferable
apart from the Common Stock until the earlier of (i) the tenth day after the
public announcement that a Person (defined as any individual or entity) or
group has become an Acquiring Person (a Person who has acquired, or obtained
the right to acquire, beneficial ownership of 15% or more of the Common Stock)
or (ii) the tenth day after a Person or group commences, or announces an
intention to commence, a tender or exchange offer, the consummation of which
would result in the beneficial ownership by a Person or group of 15% or more
of the Common Stock (the earlier of (i) and (ii) is referred to herein the
"Distribution Date"). Prior to the Distribution Date, the Company's Board of
Directors has the power, under certain circumstances, to postpone the
Distribution Date. Separate certificates representing the Rights will be
mailed to holders of the Common Stock as of the Distribution Date. The Rights
will first become exercisable on the Distribution Date, unless earlier
redeemed or exchanged, and may then begin trading separately from the Common
Stock. The Rights will at no time have any voting rights.

In the event that a Person becomes an Acquiring Person (except pursuant to
certain cash offers for all outstanding Common Stock approved by the Board of
Directors of the Company) or if the Company were the surviving corporation in
a merger and its Common Stock were not changed or exchanged, each holder of a
Right, other than Rights that are or were acquired or beneficially owned by
the Acquiring Person (which Rights will thereafter be void), will thereafter
have the right to receive upon exercise that number of shares of Common Stock
having a market value of two times the then-current exercise price of one
Right. With certain exceptions, in the event that (i) the Company were
acquired in a merger or other business combination transaction in which the
Company is not the surviving corporation or its Common Stock is changed or
exchanged (other than a merger which follows certain cash offers for all
outstanding Common Stock approved by the Board of Directors of the Company) or
(ii) more than 50% of the Company's assets or earning power were sold, proper
provision shall be made so that each holder of a Right (except Rights which
previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise thereof, that number of shares of common stock
of the acquiring company which at the time of such transaction would have a
market value of two times the then-current exercise price of one Right.

At any time after a Person has become an Acquiring Person and prior to the
acquisition of 50% or more of the then-outstanding Common Stock by such
Acquiring Person, the Board of Directors of the Company may cause the Company
to acquire the Rights (other than Rights owned by an Acquiring

6
<PAGE>

Person which have become void), in whole or in part, in exchange for that
number of shares of Common Stock having an aggregate value equal to the excess
of the value of the Common Stock issuable upon exercise of a Right after a
Person becomes an Acquiring Person over the Purchase Price.

The Rights are redeemable at $0.01 per Right prior to the first date of
public announcement that a Person or group has become an Acquiring Person.
Prior to the expiration of the period during which the Rights may be redeemed,
the Board of Directors of the Company has the power, under certain
circumstances, to extend the redemption period. The Rights will expire on June
12, 2007 (unless earlier redeemed or exchanged). American Stock Transfer &
Trust Company is the Rights Agent. Under certain circumstances set forth in
the Rights Agreement, the decision to redeem or to lengthen or shorten the
redemption period shall require the concurrence of a majority of the
Continuing Directors (as defined below).

The term "Continuing Directors" means any member of the Board of Directors
of the Company who was a member of the Board of Directors prior to the time
that any Person becomes an Acquiring Person, and any person who is
subsequently elected to the Board of Directors if such person is recommended
or approved by a majority of the Continuing Directors. Continuing Directors do
not include an Acquiring Person, or an affiliate or associate of an Acquiring
Person, or any representative of the foregoing.

The Purchase Price payable, and the number of shares of Series A Preferred
Stock or other securities or property issuable upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event
of a stock dividend on, or a subdivision, combination or reclassification of,
the Series A Preferred Stock, (ii) upon the grant to holders of the Series A
Preferred Stock of certain rights or warrants to subscribe for or purchase the
Series A Preferred Stock or convertible securities at less than the current
market price of the Series A Preferred Stock or (iii) upon the distribution to
holders of the Series A Preferred Stock of evidences of indebtedness, cash,
securities or assets (excluding regular periodic cash dividends at a rate not
in excess of 125% of the last regular periodic cash dividend theretofore paid,
or in case regular periodic dividends have not theretofore been paid, at a
rate not in excess of 50% of the average net income per share of the Company
for the four quarters ended immediately prior to the payment of such dividend,
or dividends payable in the Series A Preferred Stock) or of subscription
rights or warrants (other than those referred to above). No adjustments in the
Purchase Price will be required until cumulative adjustments require an
adjustment of at least 1% in such Purchase Price.

As of June 30, 1997, after giving effect to the stock split described above,
there were 11,043,512 shares of Common Stock outstanding. One Right was
distributed to stockholders of the Company for each share of Common Stock
owned of record by them on June 30, 1997 after giving effect to the stock
split described above. As long as the Rights are attached to the Common Stock,
the Company will issue one Right with each new share of Common Stock so that
all such shares will have attached Rights. The Company has reserved 800,000
shares of Series A Preferred Stock for issuance upon exercise of the Rights.

The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors, except pursuant to an offer
conditioned on a substantial number of Rights being acquired. The Rights
should not interfere with any merger or other business combination approved by
the Board of Directors prior to the time that a Person or group has become an
Acquiring Person, as the Rights may be redeemed by the Company at $.01 per
Right prior to such time.

7
<PAGE>

RESTRICTIONS ON BUSINESS COMBINATIONS AND CORPORATE CONTROL

The Nevada General Corporation Law ("NGCL") contains provisions restricting
the ability of a corporation to engage in business combinations with an
"interested stockholder." Under the NGCL, except under certain circumstances,
business combinations are not permitted for a period of three years following
the date such stockholder became an interested stockholder. The NGCL defines
an "interested stockholder," 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 Charter limits the liability of directors and officers to the Company or
its stockholders to the fullest extent permitted by the NGCL. The inclusion of
this provision in the Charter may have the effect of reducing the likelihood
of derivative litigation against directors and may discourage or deter
stockholders 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 stockholders.

DESCRIPTION OF DEBT SECURITIES

The Debt Securities are to be issued under an indenture (the "Indenture") to
be executed by the Company and Harris Trust and Savings Bank, as trustee (the
"Trustee"), a form of which has been filed as an exhibit to the Registration
Statement. The following summaries of certain provisions of the Indenture and
the Debt Securities do not purport to be complete. These summaries are
qualified in their entirety by reference to all of the provisions of the
Indenture to which reference is hereby made for a full description of such
provisions, including the definitions therein of certain terms and other
information regarding the Debt Securities. Whenever particular sections or
defined terms of the Indenture are referred to, it is intended that such
sections or defined terms shall be incorporated herein by reference. Copies of
the form of the Indenture are available for inspection during normal business
hours at the principal executive offices of the Company, 9955 SE Washington,
Suite 201, Portland, Oregon 97216.

GENERAL

The Indenture does not limit the aggregate principal amount of Debt
Securities that may be issued thereunder and provides that Debt Securities may
be issued from time to time in one or more series. The Prospectus Supplement
will describe certain terms of any Debt Securities offered thereby, including
(i) the title of such Debt Securities; (ii) any limit on the aggregate
principal amount of such Debt Securities and their purchase price; (iii) the
date or dates on which such Debt Securities will mature; (iv) the rate or
rates per annum (or manner in which interest is to be determined) at which
such Debt Securities will bear interest, if any, and the date from which such
interest, if any, will accrue; (v) the dates on which such interest, if any,
on such Debt Securities will be payable and the regular record dates for such
interest payment dates; (vi) any mandatory or optional sinking fund or
analogous provisions; (vii) additional provisions, if any, for the defeasance
of such Debt Securities; (viii) the date, if any, after which and the price or
prices at which such Debt Securities may, pursuant to any optional

8
<PAGE>

or mandatory redemption or repayment provisions, be redeemed and the other
detailed terms and provisions of any such optional or mandatory redemption or
repayment provisions; (ix) whether such Debt Securities are to be issued in
whole or in part in registered form represented by one or more registered
global securities (a "Registered Global Security") and, if so, the identity of
the depository for such Registered Global Security or Debt Securities; (x)
certain applicable United States federal income tax consequences; (xi) any
provisions relating to security for payments due under such Debt Securities;
(xii) any provisions relating to the conversion or exchange of such Debt
Securities into or for shares of Common Stock or Debt Securities of another
series; (xiii) any provisions relating to the ranking of such Debt Securities
in right of payment as compared to other obligations of the Company; (xiv) the
denominations in which such Debt Securities are authorized to be issued; (xv)
the place or places where principal of, premium, if any, and interest, if any,
on such Debt Securities will be payable; and (xvi) any other specific term of
such Debt Securities, including any additional events of default or covenants
provided for with respect to such Debt Securities, and any terms that may be
required by or advisable under applicable laws or regulations.

CONVERSION RIGHTS

The terms, if any, on which Debt Securities of any series may be exchanged
for or converted into shares of Common Stock or Debt Securities of another
series will be set forth in the Prospectus Supplement relating thereto.

The conversion price will be subject to adjustment under certain conditions,
including (i) the payment of dividends (and other distributions) in shares of
Common Stock on any class of capital stock of the Company; (ii) subdivisions,
combinations and reclassifications of the Common Stock; (iii) the issuance to
all or substantially all holders of Common Stock of rights or warrants
entitling them to subscribe for or purchase shares of Common Stock at a price
per share (or having a conversion price per share) less than the then current
market price; and (iv) distributions to all or substantially all holders of
shares of Common Stock of evidences of indebtedness or assets (including
securities, but excluding those rights, warrants, dividends and distributions
referred to above and dividends and distributions not prohibited under the
terms of the Indenture) of the Company, subject to the limitation that all
adjustments by reason of any of the foregoing would not be made until they
result in a cumulative change in the conversion price of at least 1%. No
adjustments in the conversion price of the Debt Securities will be made for
regular quarterly or other periodic or recurring cash dividends or
distributions. In the event the Company shall effect any capital
reorganization or reclassification of its shares of Common Stock or shall
consolidate or merge with or into any trust or corporation (other than a
consolidation or merger in which the Company is the surviving entity) or shall
sell or transfer substantially all of its assets to any other trust or
corporation, the holders of the Debt Securities of any series shall, if
entitled to convert such Debt Securities at any time after such transaction,
receive upon conversion thereof, in lieu of each share of Common Stock into
which the Debt Securities of such series would have been convertible prior to
such transaction, the same kind and amount of stock and other securities, cash
or property as shall have been issuable or distributable in connection with
such transaction with respect to each share of Common Stock.

A conversion price adjustment made according to the provisions of the Debt
Securities of any series (or the absence of provisions for such an adjustment)
might result in a constructive distribution to the holders of Debt Securities
of such series or holders of shares of Common Stock that would be subject to
taxation as a dividend. The Company may, at its option, make such reductions
in the conversion price, in addition to those set forth above, as the Board of
Directors of the Company deems advisable to avoid or diminish any income tax
to holders of shares of Common Stock resulting from any dividend or
distribution of shares of Common Stock (or rights to acquire shares of Common
Stock) or from any event treated as such for income tax purposes or for any
other reason. The Board of Directors will also have the power to resolve any
ambiguity or correct any error in the adjustments made pursuant to these
provisions and its actions in so doing shall be final and conclusive.

9
<PAGE>

Fractional shares of Common Stock will not be issued upon conversion but, in
lieu thereof, the Company will pay a cash adjustment based upon market price.

The Holders of Debt Securities of any series at the close of business on an
interest payment record date shall be entitled to receive the interest payable
on such Debt Securities on the corresponding interest payment date
notwithstanding the conversion thereof. However, Debt Securities surrendered
for conversion during the period from the close of business on any record date
for the payment of interest to the opening of business on the corresponding
interest payment date must be accompanied by payment of an amount equal to the
interest payable on such interest payment date. Holders of Debt Securities of
any series who convert Debt Securities of such series on an interest payment
date will receive the interest payable by the Company on such date and need
not include payment in the amount of such interest upon surrender of such Debt
Securities for conversion. Except as aforesaid, no payment or adjustment is to
be made on conversion for interest accrued on the Debt Securities of any
series or for dividends on shares of Common Stock.

OPTIONAL REDEMPTION

The Debt Securities of any series may be subject to redemption as permitted
or required by the terms of such Debt Securities on at least 30 days' prior
notice by mail. The Indenture does not contain any provision requiring the
Company to repurchase the Debt Securities of any series 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 Debt Securities may decline
significantly as a result of such transaction. The Indenture does not protect
Holders of the Debt Securities of any series against any decline in credit
quality, whether resulting from any such transaction or from any other cause.
The Company may at any time buy Debt Securities of any series on the open
market.

SUBORDINATION

The indebtedness evidenced by the Debt Securities of any series may be
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 or thereafter
created on all Senior Indebtedness (as defined). The terms, if any, on which
the Debt Securities of any series may be subordinated and junior in right of
payment to the prior payment in full of amounts then due or thereafter created
on all Senior Indebtedness will be set forth in the Prospectus Supplement
relating thereto. No payment shall be made by the Company on account of
principal of (or premium, if any) or interest on the Debt Securities of any
series or on account of the purchase or other acquisition of Debt Securities
of any series, 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 any holder of Senior
Indebtedness, 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, payment of principal of (and premium, if any)
and interest on the Debt Securities of any series 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 Debt Securities 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 Debt Securities of any series or the Trustee are
entitled to receive or retain any assets so

10
<PAGE>

distributed in respect of the Debt Securities. By reason of this provision, in
the event of insolvency, holders of the Debt Securities of any series may
recover less, ratably, than holders of Senior Indebtedness.

"Senior Indebtedness" is defined to mean the principal, premium, if any,
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether
or not a claim for post-filing interest is allowed in such proceedings), fees,
charges, expenses, reimbursement and indemnification obligations, and all
other amounts payable under or in respect of Indebtedness (as defined) of the
Company for money borrowed, whether any such Indebtedness exists as of the
date of the Indenture or is created, incurred, assumed or guaranteed after
such date. There is no limit on the amount of Senior Indebtedness that the
Company may incur.

"Indebtedness" with respect to any Person is defined to mean:

(i) all indebtedness for money borrowed whether or not evidenced by a
promissory note, draft or similar instrument;

(ii) that portion of obligations with respect to leases that is properly
classified as a liability on a balance sheet in accordance with generally
accepted accounting principles;

(iii) notes payable and drafts accepted representing extensions of
credit;

(iv) any balance owed for all or any part of the deferred purchase price
or services which purchase price is due more than six months from the date
of incurrence of the obligation in respect thereof (except any such balance
that constitutes (a) a trade payable or an accrued liability arising in the
ordinary course of business or (b) a trade draft or note payable issued in
the ordinary course of business in connection with the purchase of goods or
services), if and to the extent such debt would appear as a liability upon
a balance sheet of such person prepared in accordance with generally
accepted accounting principles; and

(v) any deferral, amendment, renewal, extension, supplement or refunding
of any liability of the kind described in any of the preceding clauses (i)
through (iv); provided, however, that, in computing the "Indebtedness" of
any Person, there shall be excluded any particular indebtedness if, upon or
prior to the maturity thereof, there shall have been deposited with a
depositary in trust money (or evidence of indebtedness if permitted by the
instrument creating such indebtedness) in the necessary amount to pay,
redeem or satisfy such indebtedness as it becomes due, and the amount so
deposited shall not be included in any computation of the assets of such
Person.

DIVIDENDS, DISTRIBUTIONS AND ACQUISITIONS OF COMMON STOCK

The Company will not (i) declare or pay any dividend, or make any
distribution on its Common Stock to its stockholders (other than dividends or
distributions payable in Common Stock of the Company) 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 Debt Securities of any series or any other
convertible indebtedness of the Company that is neither secured nor
subordinated to the Debt Securities of any series), if at the time of such
action an Event of Default has occurred and is continuing or would exist
immediately after such action. The foregoing, however, will not prevent (i)
the payment of any dividend within 60 days after the date of declaration when
the payment would have complied with the foregoing provision on the date of
declaration; or (ii) the Company's retirement of any of its Common Stock by
exchange for, or out of the proceeds of the substantially concurrent sale of,
other Common Stock.

ADDITIONAL COVENANTS

Any additional covenants of the Company with respect to a series of the Debt
Securities will be set forth in the Prospectus Supplement relating thereto.

11
<PAGE>

MODIFICATION OF THE INDENTURE

Under the Indenture, with certain exceptions, the rights and obligations of
the Company with respect to any series of Debt Securities and the rights of
Holders of such series may only be modified by the Company and the Trustee
with the consent of the Holders of at least a majority in principal amount of
the outstanding Debt Securities of such series. However, without the consent
of each Holder of any Debt Securities affected, an amendment, waiver or
supplement may not (i) reduce the principal of, or rate of interest on, any
Debt Securities; (ii) change the stated maturity date of the principal of, or
any installment of interest on, any Debt Securities; (iii) waive a default in
the payment of the principal amount of, or the interest on, or any premium
payable on redemption of, any Debt Securities; (iv) change the currency for
payment of the principal of, or premium or interest on, any Debt Securities;
(v) impair the right to institute suit for the enforcement of any such payment
when due; (vi) adversely affect any right to convert any Debt Securities;
(vii) reduce the amount of outstanding Debt Securities necessary to consent to
an amendment, supplement or waiver provided for in the Indenture; or
(viii) modify any provisions of the Indenture relating to the modification and
amendment of the Indenture or waivers of past defaults, except as otherwise
specified.

EVENTS OF DEFAULT, NOTICE AND WAIVER

Except as otherwise set forth in the accompanying Prospectus Supplement, 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 any
series of Debt Securities: (i) default in the payment of interest on the Debt
Securities of such series when due and payable, which continues for 30 days;
(ii) default in the payment of principal of (and premium, if any) on the Debt
Securities when due and payable, at maturity, upon redemption or otherwise,
which continues for five Business Days; (iii) failure to perform any other
covenant of the Company contained in the Indenture or the Debt Securities of
such series which continues for 60 days after written notice as provided in
the Indenture; (iv) default under any bond, debenture or other Indebtedness
(as defined in the Indenture) of the Company or any subsidiary if (a) either
(x) such event of default results from the failure to pay any such
Indebtedness at maturity or (y) as a result of such event of default, the
maturity of such Indebtedness has been accelerated prior to its expressed
maturity and such acceleration shall not be rescinded or annulled or the
accelerated amount paid within 10 days after notice to the Company of such
acceleration, or such Indebtedness having been discharged, and (b) the
principal amount of such Indebtedness, together with the principal amount of
any other such Indebtedness in default for failure to pay principal or
interest thereon, or the maturity of which has been so accelerated, aggregates
$5,000,000 or more; 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 Debt
Securities of any series, either the Trustee or the Holders of a majority in
aggregate principal amount of the outstanding Debt Securities of such series
may declare the Debt Securities due and payable immediately.

The Company will not declare or pay any dividends or make any distribution
to holders of its capital stock (other than dividends or distributions payable
in capital stock of the Company) 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, except for (i) the payment of any dividend
within 60 days after the date of declaration when the payment would have
complied with the foregoing provisions on the date of declaration; or (ii) the
retirement of any share of the Company's capital stock by exchange for, or out
of the proceeds of the substantially concurrent sale (other than to a
subsidiary) of, other shares of its capital stock.

12
<PAGE>

The Indenture provides that the Trustee will, within 90 days after the
occurrence of any Default or Event of Default with respect to the Debt
Securities of any series, give to the Holders of Debt Securities notice of all
uncured Defaults and Events of Default known to it, but the Trustee will be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interest of such Holders, except in the
case of a default in the payment of the principal of (or premium, if any) or
interest on any of the Debt Securities of such series.

The Indenture provides that the Holders of a majority in aggregate principal
amount of the Debt Securities of any series then outstanding may direct the
time, method and place of conducting any proceedings for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee with
respect to the Debt Securities of such series. The right of a Holder to
institute a proceeding with respect to the Indenture is subject to certain
conditions precedent including notice and indemnity to the Trustee, but the
Holder has an absolute right to receipt of principal of (and premium, if any)
and interest on such Holder's Debt Securities on or after the respective due
dates expressed in the Debt Securities, and to institute suit for the
enforcement of any such payments.

The Holders of a majority in principal amount of the outstanding Debt
Securities of any series then outstanding may on behalf of the Holders of all
Debt Securities of such series waive certain past defaults, except a default
in payment of the principal of (or premium, if any) or interest on any Debt
Securities of such series or in respect of certain provisions of the Indenture
which cannot be modified or amended without the consent of the Holder of each
outstanding Debt Security of such series affected thereby.

The Company will be required to furnish to the Trustee annually a statement
of certain officers of the Company stating whether or not they know of any
Default or Events of Default (as defined in the Indenture) and, if they have
knowledge of a Default or Event of Default, a description of the efforts to
remedy the same.

CONSOLIDATION, MERGER, SALE OR CONVEYANCE

The Indenture provides that the Company may merge or consolidate with, or
sell or convey all, or substantially all, of its assets to any other trust or
corporation, provided that (i) either the Company shall be the continuing
entity, or the successor entity (if other than the Company) shall be any
entity organized and existing under the laws of the United States or a state
thereof or the District of Columbia (although it may, in truth, be owned by a
foreign entity) and such entity shall expressly assume by supplemental
indenture all of the obligations of the Company under the Debt Securities of
any series and the Indenture; (ii) immediately after giving effect to such
transactions, no Default or Event of Default shall have occurred and be
continuing; and (iii) the Company shall have delivered to the Trustee an
Officers' Certificate and opinion of counsel, stating that the transaction and
supplemental indenture comply with the Indenture.

GLOBAL SECURITIES

The Debt Securities may be issued in whole or in part in global form (the
"Global Securities"). The Global Securities will be deposited with a
depository (the "Depository"), or with a nominee for a Depository, identified
in the Prospectus Supplement. In such case, one or more Global Securities will
be issued in a denomination or aggregate denominations equal to the portion of
the aggregate principal amount of outstanding Debt Securities to be
represented by such Global Security or Securities. Unless and until it is
exchanged in whole or in part for Debt Securities in definitive form, a Global
Security may not be transferred except as a whole by the Depository for such
Global Security to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository or by such
Depository or any such nominee to a successor for such Depository or a nominee
of such successor.

13
<PAGE>

The specific material terms of the depository arrangement with respect to
any portion of a series of Debt Securities to be represented by a Global
Security will be described in the Prospectus Supplement. The Company
anticipates that the following provisions will apply to all depository
arrangements.

So long as the Depository for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depository or such nominee as
the case may be, will be considered the sole owner or Holder of the Debt
Securities represented by such Global Security for all purposes under the
Indenture; provided, however, that for purposes of obtaining any consents or
directions required to be given by the Holders of the Debt Securities, the
Company, the Trustee and its agents will treat a person as the holder of such
principal amount of Debt Securities as specified in a written statement of the
Depository.

Principal, premium, if any, and interest payments, if any, on Debt
Securities represented by a Global Security registered in the name of a
Depository or its nominee will be made directly to the owners of beneficial
interests of such Global Security, except as may be limited by the terms of
the resolution of the Board of Directors of the Company that authorizes such
series of Debt Securities.

The Company expects that the depository for any Debt Securities represented
by a Global Security, upon receipt of any payment of principal, premium, if
any, or interest will immediately credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of such Global Security as shown on the records of such
Depository. The Company also expects that payments by participants will be
governed by standing instructions and customary practices, as is now the case
with the securities held for the accounts of customers registered in "street
names," and will be the responsibility of such participants.

If the Depository for any Debt Securities represented by a Global Security
is at any time unwilling or unable to continue as Depository and a successor
Depository is not appointed by the Company within 90 days, the Company will
issue each Debt Security in definitive form to the beneficial owners thereof
in exchange for such Global Security. In addition, the Company may at any time
and in its sole discretion determine not to have any of the Debt Securities of
a series represented by one or more Global Securities and, in such event, will
issue Debt Securities of such series in definitive form in exchange for all of
the Global Security or Securities representing such Debt Securities.

GOVERNING LAW

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

DESCRIPTION OF PREFERRED STOCK

The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in such
Prospectus Supplement. The description of certain provisions of the Preferred
Stock set forth below and in any Prospectus Supplement does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Charter and the Board of Directors' resolution relating to each series of the
Preferred Stock which will be filed with the Commission and incorporated by
reference to the Registration Statement of which this Prospectus is a part at
or prior to the time of the issuance of such series of Preferred Stock.

14
<PAGE>

GENERAL

The authorized capital stock of the Company consists of 80,000,000 shares of
Common Stock, $.01 par value per share, and 1,000,000 shares of Preferred
Stock, $.01 par value per share. See "Description of the Company's Capital
Stock."

Under the Charter, the Board of Directors of the Company is authorized to
establish and issue, from time to time, up to 1,000,000 shares of Preferred
Stock, in one or more series, with such dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, and the liquidation
preference as shall be stated in the resolution providing for the issue of a
series of such stock, adopted, at any time or from time to time, by the Board
of Directors of the Company.

The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference
is made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the
designation and stated value per share of such Preferred Stock and the number
of shares offered; (ii) the amount of liquidation preference per share; (iii)
the initial public offering price at which such Preferred Stock will be
issued; (iv) the dividend rate (or method of calculation), the dates on which
dividends shall be payable and the dates from which dividends shall commence
to cumulate, if any; (v) any redemption or sinking fund provisions; (vi) any
conversion rights; and (vii) any additional voting, dividend, liquidation,
redemption, sinking fund and other rights, preferences, privileges,
limitations and restrictions.

The Preferred Stock will, when issued, be fully paid and nonassessable and
will have no preemptive rights. Unless otherwise stated in a Prospectus
Supplement relating to a particular series of the Preferred Stock, each series
of the Preferred Stock will rank on a parity as to dividends and distributions
of assets with each other series of the Preferred Stock. The rights of the
holders of each series of the Preferred Stock will be subordinate to those of
the Company's general creditors.

CERTAIN PROVISIONS OF THE CHARTER

See "Description of the Company's Capital Stock" for a description of
certain provisions of the Charter, including provisions which may have certain
anti-takeover effects.

DIVIDEND RIGHTS

Holders of shares of the Preferred Stock of each series will be entitled to
receive, when, as and if declared by the Board of Directors of the Company,
out of funds of the Company legally available therefor, cash dividends on such
dates and at such rates as will be set forth in, or as are determined by the
method described in the Prospectus Supplement relating to such series of the
Preferred Stock. Such rate may be fixed or variable or both. Each such
dividend will be payable to the holders of record as they appear on the stock
books of the Company on such record dates, fixed by the Board of Directors of
the Company, as specified in the Prospectus Supplement relating to such series
of Preferred Stock.

Such dividends may be cumulative or noncumulative, as provided in the
Prospectus Supplement relating to such series of Preferred Stock. If the Board
of Directors of the Company fails to declare a dividend payable on a dividend
payment date on any series of Preferred Stock for which dividends are
noncumulative, then the holders of such series of Preferred Stock will have no
right to receive a dividend in respect of the dividend period ending on such
dividend payment date, and the Company shall have no obligation to pay the
dividend accrued for such period, whether or not dividends on such series are
declared payable on any future dividend payment dates. Dividends on the shares
of each

15
<PAGE>

series of Preferred Stock for which dividends are cumulative will accrue from
the date on which the Company initially issues shares of such series.

So long as the shares of any series of the Preferred Stock shall be
outstanding, unless (i) full dividends (including if such Preferred Stock is
cumulative, dividends for prior dividend periods) shall have been paid or
declared and set apart for payment on all outstanding shares of the Preferred
Stock of such series and all other classes and series of Preferred Stock
(other than Junior Stock, as defined below) and (ii) the Company is not in
default or in arrears with respect to the mandatory or optional redemption or
mandatory repurchase or other mandatory retirement of, or with respect to any
sinking or other analogous fund for, any shares of Preferred Stock of such
series or any shares of any other Preferred Stock of any class or series
(other than Junior Stock), the Company may not declare any dividends on any
shares of Common Stock or any other stock of the Company ranking as to
dividends or distributions of assets junior to such series of Preferred Stock
(the Common Stock and any such other stock being herein referred to as "Junior
Stock"), or make any payment on account of, or set apart money for, the
purchase, redemption or other retirement of, or for a sinking or other
analogous fund for, any shares of Junior Stock or make any distribution in
respect thereof, whether in cash or property or in obligations or stock of the
Company, other than Junior Stock which is neither convertible into, nor
exchangeable or exercisable for, any securities of the Company other than
Junior Stock.

LIQUIDATION PREFERENCE

In the event of any liquidation, dissolution or winding up of the Company,
voluntary or involuntary, the holders of each series of the Preferred Stock
will be entitled to receive out of the assets of the Company available for
distribution to stockholders, before any distribution of assets or payment is
made to the holders of Common Stock or any other shares of stock of the
Company ranking junior as to such distribution or payment to such series of
Preferred Stock, the amount set forth in the Prospectus Supplement relating to
such series of the Preferred Stock. Upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the Preferred Stock of
such series and such other shares of Preferred Stock will share ratably in any
such distribution of assets of the Company in proportion to the full
respective preferential amounts to which they are entitled. After payment to
the holders of the Preferred Stock of each series of the full preferential
amounts of the liquidating distribution to which they are entitled, the
holders of each such series of the Preferred Stock will be entitled to no
further participation in any distribution of assets by the Company.

If such payment shall have been made in full to all holders of shares of
Preferred Stock, the remaining assets of the Company shall be distributed
among the holders of any other classes of stock ranking junior to the
Preferred Stock upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, or the sale, lease or
conveyance of all or substantially all of the property or business of the
Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.

REDEMPTION

A series of the Preferred Stock may be redeemable, in whole or from time to
time in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon terms,
at the times and at the redemption prices set forth in the Prospectus
Supplement relating to such series. Shares of the Preferred Stock redeemed by
the Company will be restored to the status of authorized but unissued shares
of preferred stock of the Company.

In the event that fewer than all of the outstanding shares of a series of
the Preferred Stock are to be redeemed, whether by mandatory or optional
redemption, the number of shares to be redeemed

16
<PAGE>

will be determined by lot or pro rata (subject to rounding to avoid fractional
shares) as may be determined by the Company or by any other method as may be
determined by the Company in its sole discretion to be equitable. From and
after the redemption date (unless the Company defaults in the payment of the
redemption price plus accumulated and unpaid dividends, if any), dividends
shall cease to accumulate on the shares of the Preferred Stock called for
redemption and all rights of the holders thereof (except the right to receive
the redemption price plus accumulated and unpaid dividends, if any) shall
cease.

So long as any dividends on shares of any series of the Preferred Stock or
any other series of preferred stock of the Company ranking on a parity as to
dividends and distributions of assets with such series of the Preferred Stock
are in arrears, no shares of any such series of the Preferred Stock or such
other series of preferred stock of the Company will be redeemed (whether by
mandatory or optional redemption) unless all such shares are simultaneously
redeemed, and the Company will not purchase or otherwise acquire any such
shares; provided, however, that the foregoing will not prevent the purchase or
acquisition of such shares of Preferred Stock of such series or of shares of
such other series of preferred stock pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding shares of Preferred Stock
of such series and, unless the full cumulative dividends on all outstanding
shares of any cumulative Preferred Stock of such series and any other stock of
the Company ranking on a parity with such series as to dividends and upon
liquidation shall have been paid or contemporaneously are declared and paid
for all past dividend periods, the Company shall not purchase or otherwise
acquire directly or indirectly any shares of Preferred Stock of such series
(except by conversion into or exchange for stock of the Company ranking junior
to the Preferred Stock of such series as to dividends and upon liquidation).

Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of shares of
Preferred Stock to be redeemed at the address shown on the stock transfer
books of the Company. After the redemption date, dividends will cease to
accrue on the shares of Preferred Stock called for redemption and all rights
of the holders of such shares will terminate, except the right to receive the
redemption price without interest.

CONVERSION RIGHTS

The terms, if any, on which shares of Preferred Stock of any series may be
exchanged for or converted (mandatorily or otherwise) into shares of Common
Stock or another series of Preferred Stock will be set forth in the Prospectus
Supplement relating thereto.

VOTING RIGHTS

Except as indicated below or in a Prospectus Supplement relating to a
particular series of the Preferred Stock, or except as required by applicable
law, the holders of the Preferred Stock will not be entitled to vote for any
purpose.

So long as any shares of Preferred Stock remain outstanding, the Company
shall not, without the consent or the affirmative vote of the holders of a
majority of the shares of each series of Preferred Stock outstanding at the
time given in person or by proxy, either in writing or at a meeting (such
series voting separately as a class) (i) authorize, create or issue, or
increase the authorized or issued amount of, any class or series of stock
ranking prior to such series of Preferred Stock with respect to payment of
dividends, or the distribution of assets on liquidation, dissolution or
winding up or reclassifying any authorized stock of the Company into any such
shares, or create, authorize or issue any obligation or security convertible
into or evidencing the right to purchase any such shares and (ii) to repeal,
amend or otherwise change any of the provisions applicable to the Preferred
Stock of such series in any manner which materially and adversely affects the
powers, preferences, voting power or other rights or privileges of such series
of the Preferred Stock or the holders thereof; provided, however, that any

17
<PAGE>

increase in the amount of the authorized Preferred Stock or the creation or
issuance of other series of Preferred Stock, or any increase in the amount of
authorized shares of such series or of any other series of Preferred Stock, in
each case ranking on a parity with or junior to the Preferred Stock of such
series, shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers.

The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of the Preferred Stock shall have been
redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.

TRANSFER AGENT AND REGISTRAR

The transfer agent, dividend and redemption price disbursement agent and
registrar for shares of each series of the Preferred Stock will be set forth
in the Prospectus Supplement relating thereto.

PLAN OF DISTRIBUTION

The Company may sell Securities in any of three ways: (i) through
underwriting syndicates represented by one or more managing underwriters, or
by one or more underwriters without a syndicate; (ii) through agents
designated from time to time; and (iii) directly to investors. The names of
any underwriters or agents of the Company involved in the sale of the
Securities in respect of which this Prospectus is being delivered and any
applicable commissions or discounts will be set forth in the Prospectus
Supplement. The net proceeds to the Company from each such sale will also be
set forth in the Prospectus Supplement.

Agents and underwriters may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which the agents or underwriters may be
required to make in respect thereof. Agents and underwriters may engage in
transactions with or perform services for the Company in the ordinary course
of business.

LEGAL MATTERS

The validity of the Securities offered hereby will be passed upon for the
Company by Latham & Watkins, Los Angeles, California.

EXPERTS

The financial statements of Assisted Living Concepts Group (the predecessor
of the Company) for the eleven months ended November 30, 1994 and of the
Company for the one month ended December 31, 1994, incorporated in this
Prospectus by reference to the Annual Report on Form 10-K for the year ended
December 31, 1996 of the Company have been so incorporated by reference in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.

The consolidated financial statements of Assisted Living Concepts, Inc. as
of December 31, 1996 and 1995 and for the years then ended have been
incorporated by reference herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.

18
<PAGE>

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

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY, ANY OF THE SECURITIES IN ANY JURISDICTION WHERE, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ S-3
Risk Factors.............................................................. S-7
Use of Proceeds........................................................... S-15
Price Range of Common Stock............................................... S-15
Capitalization............................................................ S-16
Selected Financial Data................................................... S-17
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations............................................................... S-19
Business.................................................................. S-31
Management................................................................ S-44
Underwriting.............................................................. S-47
Legal Matters............................................................. S-48
Index to Financial Statements............................................. F-1

PROSPECTUS

Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
The Company............................................................... 4
Ratio of Earnings to Fixed Charges........................................ 4
Use of Proceeds........................................................... 5
Description of the Company's Capital Stock................................ 5
Description of Debt Securities............................................ 8
Description of Preferred Stock............................................ 14
Plan of Distribution...................................................... 18
Legal Matters............................................................. 18
Experts................................................................... 18
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

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

3,600,000 SHARES
LOGO

COMMON STOCK

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

PROSPECTUS SUPPLEMENT

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

SCHRODER & CO. INC.

MORGAN STANLEY
DEAN WITTER

SMITH BARNEY INC.

J.C. BRADFORD & CO.

EQUITABLE SECURITIES CORPORATION

ADVEST, INC.

SUTRO & CO. INCORPORATED

OCTOBER 21, 1997

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