ASSISTED LIVING CONCEPTS INC, POS AM, 2000-04-25

ASSISTED LIVING CONCEPTS INC
POS AM, 2000-04-25
NURSING & PERSONAL CARE FACILITIES

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<PAGE>

As filed with the Securities and Exchange Commission on April 25, 2000
Registration No. 333-52297
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

POST EFFECTIVE AMENDMENT NO. 2
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

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

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

<TABLE>
<S> <C>
Nevada 93-1148702
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
</TABLE>

11835 N.E. Glenn Widing Drive
Building E
Portland, Oregon 97220
(503) 252-6233
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

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

DREW Q. MILLER

Chief Financial Officer
11835 N.E. Glenn Widing Drive
Building E
Portland, Oregon 97220
(503) 252-6233
(Name, address, including zip code, telephone number, including area code, of
agent for service)

Copies to:
<TABLE>
<S> <C>
GARY OLSON, ESQ. ROBERT KENNEDY, ESQ.
Latham & Watkins Latham & Watkins
633 West Fifth Street--Suite 4000 885 Third Avenue--Suite 1000
Los Angeles, California 90071 New York, New York 10022
(213) 485-1234 (212) 906-1200
</TABLE>

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

Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective, depending on
market conditions.

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]

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

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

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

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

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

The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said section 8(a), may determine.

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

The information contained in this Prospectus is not complete. We may change
or amend the information without notice. We are not offering to sell, or
asking you to buy, any securities. We will not make any offer to sell these
securities or accept offers to buy them until we have delivered this
Prospectus in its final form. We also will not sell these securities in any
jurisdiction where it would be illegal to offer or sell them, or solicit
purchasers, prior to registering or qualifying them under that jurisdiction's
securities laws.

Subject To Completion, Dated April 25, 2000.

PROSPECTUS
[LOGO]

$75,000,000
5.625% Convertible Subordinated Debentures Due 2003
(Interest Payable May 1 and November 1)

2,864,344 Shares
Common Stock, Par Value $.01 Per Share

ASSISTED LIVING CONCEPTS, INC.

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

This Prospectus relates to the resale of the following securities of
Assisted Living Concepts, Inc., a Nevada corporation, by the present holders
of the following securities:

. $75,000,000 aggregate principal amount of 5.625% Convertible Subordinated
Debentures Due 2003;

. 2,864,344 shares of our common stock into which our 5.625% Convertible
Subordinated Debentures may convert.

Our 5.625% Convertible Subordinated Debentures and the shares of our common
stock will be offered and sold by their present holders. We will not receive
any proceeds from any resale by the present holders.

We first registered the Debentures and the Conversion Shares on July 22,
1998. The Debentures that have been resold and registered under the Securities
Act of 1933, as amended, since that date are traded on the American Stock
Exchange under the symbol "ALS5E03." The remaining Debentures, and the shares
of common stock into which all of the Debentures are convertible, have been
approved for listing on AMEX, subject to registration under the Securities Act
and, in the case of the common stock, notice of issuance. Shares of our common
stock are listed for trading on the American Stock Exchange under the symbol
"ALF." On April 24, 2000, the last reported sales price for our common stock
on the American Stock Exchange was $1.188. Debentures that are not resold
pursuant to this Prospectus are eligible for trading on The PORTALSM
("PORTAL") Market of the Nasdaq Stock Market.

INVESTING IN OUR COMMON STOCK OR OUR 5.625% CONVERTIBLE SUBORDINATED
DEBENTURES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 11.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

The date of this prospectus is , 2000.
<PAGE>

AVAILABLE INFORMATION

We are subject to the informational reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, we file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). You may inspect and copy
these reports, proxy statements and other information 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. You may also obtain copies
of these materials at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also
inspect these reports and other information at the offices of the American
Stock Exchange ("AMEX"), 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.

We have filed with the Commission a registration statement (the
"Registration Statement") on Form S-1 under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the registration of the 5.625%
Convertible Subordinated Debentures (the "Debentures") and the shares of common
stock into which the Debentures are convertible (the "Conversion Shares")
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto, certain portions
of which have been omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus or in any document
incorporated by reference herein as to the contents of any contract or other
documents referred to are not necessarily complete. In each instance, we refer
you to the copy of such documents filed as an exhibit to the Registration
Statement or such other documents, which you may obtain from the Commission as
indicated above upon payment of the fees prescribed by the Commission. Each
such statement is qualified in its entirety by such reference.

FORWARD LOOKING STATEMENTS

This registration statement contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements may be affected by risks
and uncertainties, including without limitation (i) our ability to control
costs and improve operating margins (ii) the degree to which our future
operating results and financial condition will be affected by the
securityholder litigation described in this registration statement and the
resulting distraction of management's time and attention, (iii) the possibility
that we may incur start-up costs in excess of our present expectations, (iv)
the possibility that we will experience slower fill-up of our start-up
residences and/or declining occupancy in our stabilized residences, either of
which would adversely affect residence operating margins, (v) the effect that
the restatement of our financial statements for certain prior reporting periods
described in this registration statement may have on our compliance with lease
and loan covenants and (vi) our ability to develop an appropriate strategy to
maximize shareholder value. In light of such risks and uncertainties, our
actual results could differ materially from such forward-looking statements.
Except as required by applicable law, we do not undertake any obligation to
publicly release any revisions to any forward-looking statements contained
herein to reflect events and circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events.

2
<PAGE>

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding our company and the securities being registered hereby
and our consolidated financial statements and related notes appearing elsewhere
in this Prospectus. Because this is only a summary, you should read the rest of
this Prospectus before you invest in our common stock or our 5.625% Convertible
Subordinated Debentures. Read the entire Prospectus carefully, especially the
risks described under "Risk Factors."

The Company

We operate, own and lease free-standing assisted living residences. These
residences are primarily located in small middle-market rural and suburban
communities with a population typically ranging from 10,000 to 40,000. As of
December 31, 1999 we had operations in 16 states.

We also provide personal care and support services and make available
routine nursing services (as permitted by applicable regulations) designed to
meet the health care needs of our residents. We believe that this combination
of residential, personal care, support and health care services provides a
cost-efficient alternative and affords an independent lifestyle for individuals
who do not require the broader array of medical services that nursing
facilities are required by law to provide.

We have experienced significant and rapid growth, primarily through the
development of assisted living residences and, to a much lesser extent, through
acquisitions of residences. When we completed our initial public offering in
November 1994 we had a base of five residences (137 units). As of December 31,
1999, we had 185 assisted living residences in operation representing an
aggregate of 7,148 units. Of these residences, we owned 115 residences (4,515
units) and leased 70 residences (2,633 units). For the twelve months ended
December 31, 1999, our 115 Stabilized Residences (those residences that had
been operating for twelve months prior to the beginning of the period or had
achieved 95.0% occupancy within the first twelve months of operations) had an
average occupancy rate of approximately 85.4% and a weighted average monthly
rental rate of approximately $1,866 per unit.

For the twelve months ended December 31, 1999, we commenced operations with
respect to 20 residences (798 units) which were under construction at December
31, 1998. Except for the completion of these 20 residences, we discontinued all
development activity in 1999 in order to focus on stabilizing our current base
of operating residences. We wrote-off approximately $2.4 million and $4.9
million in fiscal years 1998 and 1999, respectively, primarily associated with
sites which we will no longer seek to develop. We own land for the development
of seven sites, and the expansion of three existing residences where
construction has not yet commenced. We currently have three of these sites
listed for sale and are retaining the remaining sites for possible future
development. We have no intention of developing these sites at this time.

During 1999 we discontinued all development activity in order to focus on
our core business of operating our existing residences. The principal elements
of our business strategy are to:

. increase occupancy and improve operating efficiencies at our existing
base of residences;

. expand market penetration in existing markets;

. serve higher-acuity residents; and

. pursue strategic business alliances.

3
<PAGE>

residents are not available and, in addition, provide our private pay residents
with alternative sources of income when their private funds are depleted and
they become Medicaid eligible.

Although we will seek to manage the mix of private paying tenants and
Medicaid paying tenants residing in our facilities, any shift to a high
Medicaid population could have an adverse effect on our financial position,
results of operations or cash flows, particularly if third-party payors such as
Medicaid continue to seek limits on reimbursement rates. See "Risk Factors--We
depend on reimbursements by third-party payors."

Assisted Living Concepts, Inc. is a Nevada corporation. Our principal
executive offices are located at 11835 N.E. Glenn Widing Drive, Building E,
Portland, Oregon 97220-9057, and our telephone number is (503) 252-6233.

4
<PAGE>

THE OFFERING

In April 1998, we sold $75,000,000 aggregate principal amount of our
Debentures. As part of that offering, we agreed to register the Debentures and
the Conversion Shares on behalf of the purchasers. To comply with that
agreement, we originally registered the Debentures and the Conversion Shares on
July 22, 1998. We have amended the Registration Statement, of which this
prospectus is a part, to convert the form of the Registration Statement to Form
S-1 following our delay in filing certain reports under the Exchange Act. See
"--The Company; Restatement of Historical Financial Statements."

Under the Registration Statement, holders of Debentures (the "Selling
Debentureholders") may sell Debentures and holders of Conversion Shares
registered under the Registration Statement may sell such Conversion Shares in
one or more offerings. We must use our best efforts to keep the Registration
Statement effective for a period of two years from July 22, 1998, or such
shorter period which will terminate when all of the Debentures and the
Conversion Shares have been sold pursuant to this registration statement or
when all Debentures and the Conversion Shares otherwise have been sold pursuant
to Rule 144 or are otherwise freely tradable. This Prospectus provides you with
a general description of the Debentures and the Conversion Shares that may be
sold. For more detailed information, you should read the exhibits filed with
the Registration Statement of which this Prospectus is a part.

OUR 5.625% CONVERTIBLE SUBORDINATED DEBENTURES

Amount Offered............. $75,000,000 principal amount of 5.625%
Convertible Subordinated Debentures Due 2003.

Maturity Date.............. May 1, 2003.

Interest Payment Dates..... May 1 and November 1 of each year, commencing
November 1, 1998.

Conversion Rights.......... You may convert our Debentures into Conversion
Shares at any time prior to maturity at a
conversion price of $26.184 per share, subject
to adjustment under certain conditions.
However, the right to convert Debentures called
for redemption terminates on the business day
immediately preceding the redemption date or
such earlier date as the holder presents any of
our Debentures for redemption.

Optional Redemption of
Debentures by Us........... We cannot redeem any Debentures prior to May
15, 2001. On and after May 15, 2001, we may
redeem the Debentures in whole or in part, at
any time, at the redemption prices listed in
the section "Description of Debentures" under
the heading "Optional Redemption."

Sinking Fund............... None.

Change in Control.......... If we sell certain assets or experience
specific kinds of changes in control, we must
offer to repurchase the Debentures (if any
remain outstanding) at the prices listed in
"Description of Debentures." If we experience
an event that triggers this obligation, we
cannot assure that we will have enough cash to
pay the purchase price for the Debentures, or
that we could do so without violating the terms
of other agreements.

5
<PAGE>

Subordination..............
The Debentures are general unsecured
obligations of ours and rank behind all of our
existing and future senior indebtedness. As of
December 31, 1999 we had $89.6 million of
senior indebtedness outstanding (including
accounts payable, trade payables, construction
payables and accrued real estate taxes and
other accrued expenses) as well as
approximately $16.6 million of annual operating
lease payment obligations that would have been
senior in right of payment to the Debentures.
The Debentures rank behind all existing and
future indebtedness and other liabilities
(including trade payables) of any subsidiaries
which we may acquire or establish. The
Indenture with Harris Trust and Savings Bank
governing the Debentures does not limit our
ability to take on senior or other
indebtedness.

Use of Proceeds............ We will not receive any proceeds from the sale
of the Debentures or the Conversion Shares
offered hereby.

Trading.................... The Debentures are listed for trading on the
American Stock Exchange. However, we cannot
assure that there will be any liquidity or
trading market for our Debentures.

Registration Rights........ We have agreed to file this Registration
Statement with respect to the resale of the
Debentures and the Conversion Shares and to use
our best efforts to keep this Registration
Statement effective until July 22, 2000, or
such shorter period which will terminate when
all of the Debentures and the Conversion Shares
have been sold pursuant to this registration
statement or when all Debentures and the
Conversion Shares otherwise have been sold
pursuant to Rule 144 or are otherwise freely
tradable.

Minimum Denomination....... The Debentures are issued in amounts of $1,000
principal amount and integral multiples
thereof.

Common Stock Offered....... We are offering for resale up to 2,864,344
shares of our common stock. This total includes
shares issuable upon conversion of the
Debentures, at a conversion price of $26.184
per share. Our common stock trades on the
American Stock Exchange under the symbol "ALF."

6
<PAGE>

Summary Consolidated Financial Data

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenue........................ $ 4,067 $21,022 $49,605 $ 89,384 $117,489
Operating expenses:
Residence operating
expenses.................... 2,779 14,055 31,591 57,443 81,767
Corporate general and
administrative.............. 1,252 1,864 4,050 11,099 21,178
Building rentals............. 798 3,949 7,969 12,764 15,367
Depreciation and
amortization................ 296 1,094 3,683 6,339 8,981
Terminated merger expense.... -- -- -- 1,068 228
Site abandonment costs....... -- -- -- 2,377 4,912
Write-off of impaired
assets...................... -- -- -- 8,521 --
------- ------- ------- -------- --------
Total operating expenses... 5,125 20,962 47,293 99,611 132,433
------- ------- ------- -------- --------
Operating income (loss)........ (1,058) 60 2,312 (10,227) (14,944)
------- ------- ------- -------- --------
Other income (expense):
Interest expense............... (96) (1,146) (4,946) (11,039) (15,200)
Interest income................ 579 455 1,526 3,869 1,598
Loss on sale of assets......... -- (854) (1,250) (651) (127)
Debenture conversion costs..... -- (426) -- -- --
Other income (expense), net.... -- (4) (121) (1,174) (260)
------- ------- ------- -------- --------
Total other income
(expense)................. 483 (1,975) (4,791) (8,995) (13,989)
------- ------- ------- -------- --------
Loss before taxes and
cumulative effect of change in
accounting principle.......... (575) (1,915) (2,479) (19,222) (28,933)
Cumulative effect of change in
accounting principle.......... -- -- -- (1,523) --
------- ------- ------- -------- --------
Net loss....................... $ (575) $(1,915) $(2,479) $(20,745) $(28,933)
======= ======= ======= ======== ========
Basic and diluted net loss per
common share:
Loss before cumulative effect
of change in accounting
principle..................... $ (0.10) $ (0.23) $ (0.21) $ (1.18) $ (1.69)
Cumulative effect of change in
accounting principle.......... -- -- -- $ (0.09) --
------- ------- ------- -------- --------
Basic and diluted net loss per
common share.................. $ (0.10) $ (0.23) $ (0.21) $ (1.27) $ (1.69)
======= ======= ======= ======== ========
Basic and diluted weighted
average common shares
outstanding................... 6,000 8,404 11,871 16,273 17,119
Ratio of earnings to fixed
charges(1).................... -- -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
At December 31,
---------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ...... $ 7,335 $ 2,105 $ 63,269 $ 55,036 $ 7,606
Working capital (deficit)....... (5,320) (27,141) 40,062 43,856 7,592
Total assets.................... 53,546 147,223 324,367 414,669 346,188
Long-term debt, excluding
current portion................ 24,553 49,663 157,700 266,286 233,199
Shareholders' equity............ 15,644 56,995 132,244 119,197 89,344
</TABLE>
- --------

(1) Earnings were insufficient to cover fixed charges by $1.2 million, $4.2
million, $9.1 million, $25.2 million and $31.0 million for the years ended
December 31, 1995 through 1999, respectively.

7
<PAGE>

USE OF PROCEEDS

The proceeds from the sale of the Debentures and Conversion Shares offered
by this Prospectus are solely for the account of the Selling Debentureholders.
Accordingly, we will not receive any of the proceeds from sales of the
Debentures or Conversion Shares.

8
<PAGE>

PRICE RANGE OF COMMON STOCK

Our common stock, par value $0.01, is listed on AMEX under the symbol "ALF."
The following table sets forth the high and low closing sales prices of the
common stock, as reported by the AMEX, for the periods indicated.

<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------- ------------
High Low High Low High Low
------ ----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Years ended December 31:
1st Quarter........................... $10.68 $7.13 $21.63 $17.50 $14.50 $3.31
2nd Quarter........................... 14.50 9.88 21.38 14.13 3.31 2.88
3rd Quarter........................... 19.75 13.25 18.00 12.44 -- --
4th Quarter........................... 22.38 15.75 14.50 9.88 2.25 .81
</TABLE>

On April 15, 1999, the AMEX halted trading in the common stock. Trading was
resumed on October 4, 1999 after our restatement was completed.

As of December 31, 1999, we had approximately 103 holders of record of
common stock. We are unable to estimate the number of additional stockholders
whose shares are held for them in street name or nominee accounts.

DIVIDEND POLICY

Our current policy is to retain any earnings to finance the operations and
expansion of our business. In addition, certain outstanding indebtedness and
certain lease agreements restrict the payment of cash dividends. It is
anticipated that the terms of future debt financing may do so as well.
Therefore, the payment of any cash dividends on the common stock is unlikely in
the foreseeable future.

9
<PAGE>

CAPITALIZATION

(in thousands, except share and per share data)

The following table sets forth the consolidated capitalization of the
Company at December 31, 1999. The capitalization table should be read in
connection with the Company's consolidated financial statements and related
notes included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
At December 31,
1999
---------------
<S> <C>
Trust deed notes, payable to the State of Oregon Housing and
Community Services Department................................ $ 10,025
Variable rate multifamily revenue bonds, payable to the
Washington State Housing Finance Commission Department....... 8,235
Variable rate demand revenue bonds, Series 1997, payable to
the Idaho Housing and Finance Association.................... 7,120
Variable rate demand revenue bonds, Series A-1 and A-2 payable
to the State of Ohio Housing Finance Agency.................. 12,845
Mortgages Payable............................................. 35,218
5.625% Convertible Subordinated Debentures due 2003........... 86,250
6.0% Convertible Subordinated Debentures due 2002............. 75,000
--------
Total long-term debt...................................... 234,693

Less current portion.......................................... 1,494
--------
Total long-term debt excluding current portion............ $233,199
========

Shareholders' 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;
17,120,745 shares issued and outstanding(1)................ 171
Additional paid-in-capital.................................. 144,443
Fair market value in excess of historical cost of acquired
net assets attributable to related party transactions...... (239)
Accumulated other comprehensive loss........................ (320)
Accumulated deficit......................................... (54,711)
--------
Total shareholders' equity................................ 89,344
--------
Total capitalization...................................... $322,543
========
</TABLE>
- --------

(1) Does not include: 3,208,000 shares of common stock reserved for issuance
pursuant to the Company's stock option plans, under which options to
purchase 1,744,420 shares have been granted, of which 982,973 are
exercisable at a weighted average exercise price of $10.04 per share. See
"Management."

10
<PAGE>

RISK FACTORS

Set forth below are the risks that we believe are material. This
Registration Statement including the risks discussed below, contains forward-
looking statements made pursuant to the safe harbor provisions of the Private
Securities Reform Act of 1995. These forward-looking statements may be affected
by risks and uncertainties, including without limitation (i) our ability to
control costs and improve operating margins, (ii) the degree to which our
future operating results and financial condition will be affected by the
securityholder litigation described herein and the resulting distraction of
management's time and attention, (iii) the possibility that we may incur start-
up costs in excess of our present expectations, (iv) the possibility that we
will experience slower fill-up of our start-up residences and/or declining
occupancy in our stabilized residences, either of which would adversely affect
residence operating margins, and (v) the possibility that we will not be able
to obtain financing needed to fund our operations after June 2001. In light of
such risks and uncertainties, our actual results could differ materially from
such forward-looking statements. Except as may be required by law, we do not
undertake any obligation to publicly release any revisions to any forward-
looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.

We face difficulties in stabilizing our operations following our rapid growth.

We have experienced rapid growth since 1994, which has placed significant
demands on our management resources. Our ability to stabilize operations and
manage our business following this growth requires us to continue to expand our
operational, financial and management information systems and to continue to
attract, train, motivate, manage and retain key employees. If we are unable to
manage this growth effectively, our business, financial condition and results
of operations could be adversely affected. Our ability to stabilize operations
and manage our business efficiently has been, and for the foreseeable future
will continue to be, adversely affected by the diversion of management's time
and attention to the pending securityholder litigation. See "--We may incur
significant costs and liability as a result of our securityholder litigation"
and "--Defaults may be declared under our loan and lease obligations."

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

We are highly leveraged. We had total indebtedness, including short term
portion, of $234.7 million as of December 31, 1999. We also had approximately
$16.6 million of annual operating lease payment obligations as of December 31,
1999. In addition, we had shareholders' equity of $89.3 million as of
December 31, 1999. The degree to which we are leveraged could have important
consequences, including:

. making it more difficult to satisfy our debt or lease obligations;

. increasing our vulnerability to general adverse economic and industry
conditions;

. limiting our ability to obtain additional financing;

. requiring dedication of a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our debt or
leases, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures or other general corporate
purposes;

. limiting our flexibility in planning for, or reacting to, changes in our
business or industry; and

. placing us at a competitive disadvantage to less leveraged competitors.

11
<PAGE>

December 31, 1999, we have determined that it is probable that we will not meet
these more restrictive covenants at June 30, 2000. If we fail to comply with
one or more of the U.S. Bank covenants or any other debt or lease covenants
(after giving effect to any applicable cure period), the lender or lessor may
declare us in default of the underlying obligation and exercise any available
remedies, which may include:

. in the case of debt, declaring the entire amount of the debt immediately
due and payable;

. foreclosing on any residences or other collateral securing the
obligation; and

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

In addition, many of our debt instruments and leases contain "cross-default"
provisions pursuant to which a default under one obligation can cause a default
under one or more other obligations. Accordingly, it could have a material
adverse effect on our financial condition if any lender or lessor notifies us
that we are in default under any debt instrument or lease.

We may require additional financing.

Our ability to satisfy our obligations, including payments with respect to
our outstanding indebtedness and lease obligations, will depend on future
performance, which is subject to our ability to stabilize our operations and to
a certain extent, to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. Although we believe
that our current cash on hand, cash available from operations, and potential
loans on uncollateralized properties are sufficient to meet our capital needs
for the next 12 to 18 months, there can be no assurance that cash available
from operations will be sufficient to fund our operations beyond such time. In
addition, our convertible subordinated debentures due 2002 (the "6.0%
Debentures") and our Debentures mature in November 2002 and May 2003,
respectively, which will require substantial additional financing. We are
reviewing our future capital requirements to identify financing options. As a
result of the securityholder litigation, the restatement and other factors,
there can be no assurance that financing from any source will be available in
the future, or, if available, that such financing will be available on terms
acceptable to us. See "Business--Securityholder Litigation" and "--Restatement
of Historical Financial Statements."

Approximately $28.5 million of our indebtedness was secured by letters of
credit as of December 31, 1999 which in some cases have termination dates prior
to the maturity of the underlying debt. As such letters of credit expire, we
will need to obtain replacement letters of credit, post cash collateral or
refinance the underlying debt. There can be no assurance that we will be able
to procure replacement letters of credit from the same or other lending
institutions on terms that are acceptable to us. In the event that we are
unable to obtain a replacement letter of credit or provide alternate collateral
prior to the expiration of any of these letters of credit, we would be in
default on the underlying debt.

We require substantial amounts for debt service.

We will likely require substantial amounts of cash to fund scheduled
payments of principal and interest on the Debentures, amounts due under our
operating leases, future capital expenditures and any increased working capital
requirements. Earnings were insufficient to cover fixed charges for the years
ended December 31, 1998 and 1999 by $25.2 million and $31.0 million,
respectively. We may be unable to meet our cash requirements beyond the next 18
months. We also may be unable to obtain alternative financing. Our 6.0%
Debentures and our Debentures mature in November 2002 and May 2003,
respectively, which will require us to make aggregate payments of $86.3 million
and $75.0 million, respectively, on those dates. We could attempt to refinance
the Debentures if our cash flow from operations is insufficient to repay them
at maturity. However, a refinancing might not be available on terms acceptable
to us, or at all. If we fail to make necessary payments on the Debentures, we
will be in default under the terms of the Debentures, and may also be in
default under agreements controlling our other indebtedness. Any default by us
under the Debentures or on other indebtedness or our operating leases could
adversely affect our financial condition and operating results.

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The Debentures rank below existing and future indebtedness.

The Debentures are unsecured and subordinated in right of payment to all of
our existing and future senior indebtedness. As of December 31, 1999, we had
approximately $89.6 million of senior indebtedness outstanding (including
accounts payable, trade payables, construction payables and accrued real estate
taxes and other accrued expenses), and $16.6 million of annual operating lease
payment obligations. Because the Debentures are subordinate to our senior
indebtedness, in the event of our bankruptcy, liquidation, reorganization or
certain other events, we will pay obligations on the Debentures only after we
satisfy all senior indebtedness. Therefore, we may have insufficient assets
remaining to pay amounts on the Debentures. The Debentures are subordinate to
all existing and future indebtedness and other liabilities (including trade
payables) of any subsidiaries which currently exist or which we may in the
future acquire or establish. Our right to receive assets of our subsidiaries
upon their liquidation or reorganization (and the consequent right of the
holders of the Debentures to share in those assets) would be subordinate to the
claims of that subsidiary's creditors (including trade creditors).

Our Indenture with Harris Trust and Savings Bank relating to the Debentures
does not limit our ability, or that of any of our subsidiaries, to incur senior
indebtedness, indebtedness and liabilities. We may have difficulty paying our
obligations under the Debentures if we, or any of our subsidiaries, incur
indebtedness or liabilities, or if we agree to guarantee the indebtedness of
any subsidiaries. We anticipate that we will incur additional indebtedness and
liabilities, including senior indebtedness. For more detailed information you
should review the section of this Prospectus entitled "Description of
Debentures--Subordination of Debentures."

The Debentures are our obligation exclusively. If we acquire or establish
any subsidiaries, our cash flow and our ability to pay our debt, including the
Debentures, may depend upon the subsidiaries' operating results and their
ability to provide cash (in the form of dividends, loans or otherwise) to pay
amounts due on our obligations. Any subsidiary will be a separate and distinct
legal entity and will have no obligation to pay any amounts due on the
Debentures. In addition, dividends, loans or other distributions from any
subsidiary to us may be subject to contractual or other restrictions, would
depend upon the subsidiary's operating results and may be subject to other
business considerations.

Our Indenture with Harris Trust and Savings Bank relating to the Debentures
does not contain any financial covenants that restrict our ability to do any of
the following:

. pay dividends in the absence of a default;

. incur indebtedness, including senior indebtedness; or

. issue or repurchase our securities or those of any subsidiary.

Change in control; we may be unable to repurchase our Debentures.

The terms of our Indenture with Harris Trust and Savings Bank relating to
the Debentures do not prohibit us from engaging in a change in our control,
except to the extent described under "Description of Debentures--Certain Rights
to Require Us to Repurchase the Debentures." The term "change in control" is
limited in our Indenture with Harris Trust and Savings Bank to a small number
of specified transactions.

Although we must offer to repurchase the Debentures upon a change in
control, this fact does not necessarily protect holders of the Debentures if we
conduct a highly leveraged transaction, reorganization, merger or similar
transaction. Similarly, transactions other than a change in control might
adversely affect our financial condition and leave holders of the Debentures
without protection.

If we experience a change in control, a holder of the Debentures may request
that we buy back all or a portion of the Debentures. If a change in control
occurs, we may be unable to pay the purchase price for all the Debentures
tendered to us. We would likely need additional financing to repurchase the
Debentures tendered to us upon a change in control. We may enter into future
agreements that prohibit us from purchasing the

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<PAGE>

Debentures, or that consider a change in control an event of default. If a
change in control occurs when we cannot purchase the Debentures, we could seek
our lenders' consent to purchase the Debentures or attempt to refinance the
borrowings that contain this prohibition. We will be unable to purchase the
Debentures if we do not obtain this consent or repay these borrowings. In that
case, our failure to repurchase any tendered Debentures would constitute an
event of default under our Indenture with Harris Trust and Savings Bank, which
may constitute a further default under the terms of our other indebtedness. In
those circumstances, the subordination provisions in our Indenture with Harris
Trust and Savings Bank, would likely prohibit us from purchasing the
Debentures.

We may incur significant costs and liability as a result of our securityholder
litigation.

Since February 1, 1999, 12 separate complaints were filed in the United
States District Court for the District of Oregon against us and certain of our
past and present officers and directors. Pursuant to Order signed on June 1,
1999, those complaints were consolidated for all purposes. On July 23, 1999, a
consolidated complaint was filed, and on October 20, 1999, an amended
consolidated complaint ("Complaint") was filed.

The Complaint purports to be brought on behalf of a class of purchasers of:
(a) our common stock from February 6, 1997 through March 31, 1999, inclusive;
(b) our 6.0% Debentures from October 21, 1997 through March 31, 1999,
inclusive; and (c) our Debentures from July 22, 1998 through March 31, 1999,
inclusive.

The Complaint also names as defendants Schroder & Co., Inc., Morgan Stanley
Dean Witter and Smith Barney, Inc. (solely as underwriters in connection with
the 6.0% Debentures) and KPMG LLP, our independent auditors (in connection with
our offerings of common stock, the 6.0% Debentures and the Debentures).

The Complaint alleges violations of the federal securities laws and seeks
unspecified damages. We filed an answer to the Complaint on December 7, 1999.

Pursuant to our by-laws, we are obligated to indemnify our officers and
directors to the maximum extent allowed by law for any liability incurred by
them as a result of the litigation. In addition, we previously entered into
indemnity agreements with certain of the individual defendants and the
underwriters.

We cannot predict the outcome of the foregoing litigation and currently are
unable to evaluate the likelihood of success or the range of possible loss.
However, if the foregoing litigation were determined adversely to us and/or to
those to whom our indemnity obligations exist, such a determination could have
a material adverse effect on our financial condition, results of operations,
cash flow and liquidity. See "Legal Proceedings."

In addition to the matter referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the
normal course of business. In the opinion of our management, although the
outcomes of these other suits and claims are uncertain and because of the early
stages of these matters, management cannot estimate the likelihood of success
or range of possible losses, should the outcomes be unfavorable. In the
aggregate such other suits and claims should not have a material adverse effect
on our financial condition, results of operations, cash flow or liquidity.

We face significant competition.

The long-term care industry is a highly competitive industry. We expect that
the assisted living business, in particular, will become even more competitive
in the future given the relatively low barriers to entry and continuing health
care cost containment pressures.

We compete with numerous other companies providing similar long-term care
alternatives. We operate in 16 states, and each community in which we operate
provides a unique market. Overall, a limited number of our markets include an
assisted living competitor offering assisted living facilities that are similar
in size, price and

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range of service. In markets where we have competition, our competitors include
other companies that provide adult day care in the home, higher priced assisted
living centers (typically larger facilities with more amenities), congregate
care facilities where tenants elect the services to be provided, and continuing
care retirement centers on campus like settings.

We expect to face increased competition from new market entrants as assisted
living receives increased attention and the number of states which include
assisted living in their Medicaid waiver programs increases. These new market
entrants will include publicly and privately held companies, including not for
profit corporations, focusing primarily on assisted living, as well as
hospitals and nursing homes that offer assisted living as a segment of their
overall businesses. We also compete with nursing facilities that provide long-
term care services. Some of our present and potential competitors are
significantly larger and have, or may obtain, greater financial resources than
we do. Consequently, we cannot guarantee that we will not encounter increased
competition in the future which could limit our ability to attract residents or
expand our business and could have a material adverse effect on our financial
condition and results of operations and prospects.

Overbuilding in the assisted living industry.

We believe that many assisted living markets have become or are on the verge
of becoming overbuilt. Regulation and other barriers to entry into the assisted
living industry are not substantial. In addition, because the segment of the
population that can afford to pay our daily resident fee is finite, the
development of new assisted living facilities could outpace demand. The short
term effects of overbuilding include (a) significantly longer fill-up periods
(2-3 years as compared to 12-18 months previously experienced), (b) pressure to
lower or refrain from increasing rates and (c) competition for workers in
already tight labor markets. Long term effects include lower margins for an
estimated 3-5 years until excess units are absorbed. Recently, we have
experienced slower fill-up than expected of new residences in some markets, as
well as declining occupancy in our stabilized residences due to the increase in
options available to potential new residents when units are vacated. We believe
that each local market is different, and we are and will continue to react in a
variety of ways to the specific competitive environment that exists in each
market. There can be no assurance that we will be able to compete effectively
in those markets where overbuilding exists, or that future overbuilding in
other markets where we have opened residences will not adversely affect our
operations.

Defaults may be declared under our debt and lease agreements.

Almost all of our loan agreements and leases contain customary covenants
requiring that we deliver periodic financial statements and certify that they
are materially accurate. As a result of the restatement initially announced in
February 1999, it is possible that a lender or lessor may assert a default
under the terms of these instruments with regard to the financial statements
for reporting periods in 1996, 1997 and 1998. We have received waivers from
certain of our creditors and lessors with respect to possible defaults under
certain of these covenants. There can be no assurance that one or more other
creditors or lessors will not attempt to declare a default and exercise any
remedies they may deem available, which could include attempting to terminate
the applicable lease or foreclose on one or more residences securing the
applicable indebtedness. To date, we had not received notice of a declaration
of default from any such other creditor or lessor. We continue to make all
required payments under each of these instruments.

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<PAGE>

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

We compete with other providers of long-term care with respect to attracting
and retaining qualified personnel. We also depend upon the available labor pool
of low-wage employees. A shortage of qualified personnel may require us to
enhance our wage and benefits packages in order to compete. Most of the states
in which we operate impose licensing requirements on individuals serving as
program directors at assisted living residences. In some states in which we
operate, particularly South Carolina, the growth in demand for licensed
assisted living program directors has exceeded the rate at which candidates can
be licensed. Until a program director at a particular residence can be
licensed, we are required to retain the services of outside licensed managers
at a significant additional cost. We cannot guarantee that our labor costs will
not increase, or that, if they do increase, they can be matched by
corresponding increases in revenues.

We will suffer operating losses for each of our new residences.

We opened 20 new residences during 1999. We expect that Start-Up Residences
will incur significant operating losses during the fill-up period. As a result,
our operating income will be adversely affected by operating losses at certain
residences, primarily residences opened during 1999, which we expect will range
from $1.5 million to $2.0 million. We cannot guarantee that we will not
experience unforeseen expenses, difficulties, complications and delays in
connection with the expansion of our operational base which could have a
material adverse effect on our financial condition and results of operations.

Our properties are geographically concentrated and we depend on the economies
and Medicaid waiver programs of the specific areas in which we operate our
properties.

We depend on the economies of Texas, Oregon, Ohio, Indiana and Washington
and, to some extent, on the continued funding of state Medicaid waiver program
in those states. As of December 31, 1999, 21.6% of our properties were in
Texas, 10.3% in Oregon, 9.7% in Ohio, 11.4% in Indiana and 8.6% in Washington.
Adverse changes in general economic factors affecting the respective health
care industries or laws and regulatory environment in each of these states,
including Medicaid reimbursement rates, could have a material adverse effect on
our financial condition and results of operations.

We depend on reimbursements by third-party payors.

Although revenues at a majority of our residences come primarily from
private pay sources, a portion of our revenues depends upon reimbursement from
third-party payors, including state Medicaid waiver programs and private
insurers. For the years ended December 31, 1997, 1998 and 1999, direct payments
received from Medicaid funded programs accounted for approximately 11.1%,
10.7%, and 10.4% respectively, of our revenue. Also, our tenant-paid portion of
Medicaid residents accounted for approximately 5.9%, 5.8%, and 5.9%
respectively, of our revenue during the years ended December 31, 1997, 1998 and
1999. We expect that state Medicaid waiver programs will constitute a
significant source of our revenue in the future. Furthermore, we cannot
guarantee that our proportionate percentage of revenue received from Medicaid
waiver programs will not increase. There are continuing efforts by governmental
and private third-party payors to contain or reduce the costs of health care by
lowering reimbursement rates, increasing case management review of services and
negotiating reduced contract pricing. Our revenues and profitability will be
affected if these efforts are successful. Also, there has been, and our
management expects that there will continue to be, a number of proposals
attempting to reduce the federal and some state budget deficits by limiting
Medicaid reimbursement in general. Adoption of any of these proposals at either
the federal or the state level could have a material adverse effect on our
business, financial condition, results of operations and prospects.

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implement a prospective payment system under which home health care services
will be reimbursed on a per diem basis for cost reporting periods beginning on
and after October 1, 2000. In 1998, following the adoption of the BBA, we
closed our home health operations. The shift to a prospective payment system
under the BBA does not apply to assisted living residences and therefore should
not affect our assisted living operations.

In November 1999, President Clinton signed into law the Medicare, Medicaid
and State Children's Health Insurance Programs Balanced Budget Refinement Act
("Budget Refinement Act") which reduces some of the reimbursement cutbacks
under the BBA. The Budget Refinement Act delays implementation of cost-cutting
measures and increases payments from the BBA to some sectors of the health care
industry. Long term care facilities will receive increased payments under the
Budget Refinement Act and other changes required by the BBA will be
ameliorated. Therefore, it is possible that the Budget Refinement Act could
result in increased competition from other types of long term care facilities,
such as skilled nursing facilities and home health agencies. The extent of the
relief provided by the Budget Refinement Act is estimated to be $16 billion
over five years.

We anticipate that revenues at a majority of our residences will continue to
come from private pay sources. However, we believe that locating residences in
states with favorable regulatory and reimbursement climates should provide a
stable source of residents eligible for Medicaid reimbursement to the extent
that private pay residents are not available and, in addition, provide our
private pay residents with alternative sources of income when their private
funds are depleted and they become Medicaid eligible. Although we will seek to
manage the mix of private paying tenants and Medicaid paying tenants residing
in our facilities, any shift to a high Medicaid population could have an
adverse affect on our financial position, results of operations or cash flows,
particularly if third-party payors such as Medicaid continue to seek to seek
limits on reimbursement rates.

We are subject to significant government regulation.

We are subject to federal and state laws prohibiting fraud by health care
providers, including criminal provisions which prohibit filing false claims or
making false statements to receive payment or certification under Medicaid, or
failing to refund overpayments or improper payments. Violation of these
provisions is a felony punishable by up to five years imprisonment and/or
$25,000 fines. Civil provisions prohibit the knowing filing of a false claim or
the knowing use of false statements to obtain payment. The penalties for such a
violation are fines of not less than $5,000 nor more than $10,000, plus treble
damages, for each claim filed.

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

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

. the number of licensed residences;

. the provision of services;

. equipment;

. staffing, including professional licensing and criminal background
checks;

. operating policies and procedures;

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<PAGE>

. fire prevention measures;

. environmental matters;

. resident characteristics; and

. physical design and compliance with building and safety codes.

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

. the imposition of fines;

. temporary stop placement of admission of new residents, or imposition of
other conditions to admission of new residents to the facility;

. termination of a facility's Medicaid contract; and

. suspension or revocation of a facility's license.

During 1998 and 1999, these adverse actions resulted in our paying fines of
$9,800 and $4,350 on eight and six residences, respectively, and temporary
suspension of admissions at certain residences. During 1998, a license
revocation action was commenced with respect to one of our residences in the
State of Washington. In July 1999 following discussions with the licensing
agency we settled this action without the revocation becoming effective.
Because regulations vary from one jurisdiction to another and because
determinations regarding whether to make a license provisional, suspend or
revoke a license, or to impose a fine or restrict admission, are subject to
administrative discretion, it is difficult for us to predict whether a
particular remedy will be sought or obtained in any given case. These types of
regulatory enforcement actions may adversely affect facility occupancy levels,
revenues and costs of operation. We cannot guarantee that federal, state, or
local governments will not impose additional restrictions on our activities
that could materially adversely affect us.

We are also subject to various laws and regulations, both federal and state,
due to the size and nature of our business, including laws and regulations
relating to:

. confidentiality of medical information;

. safe working conditions;

. family leave; and

. disposal of medical waste.

Our cost to comply with these regulations is significant. In addition, it
could adversely affect our financial condition or results of operations if a
court or regulatory tribunal were to determine that we had failed to comply
with any of these laws or regulations. Because these laws and regulations are
amended from time to time, we cannot predict when and to what extent liability
may arise. See "--Confidentiality of Medical Information," "--Restrictions
imposed by laws benefiting disabled persons" and "--Medical waste."

Federal and state fraud and abuse laws, such as "anti-kickback" laws and
"self-referral" laws, govern some financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
these providers. We have established policies and procedures that we believe
are sufficient to ensure that our facilities will operate in substantial
compliance with applicable regulatory requirements. However, we cannot
guarantee that these fraud and abuse laws will be interpreted in a manner
consistent with our practices.

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Confidentiality of Medical Information

Because we provide limited health care services to our residents, we are
subject to certain requirements regarding protection of confidential medical
information. HIPAA requires a significant overhaul of health care information
systems to protect such individual medical information. In November 1999, the
U.S. Department of Health and Human Services released proposed regulations to
protect the confidentiality of individual health information. Although the
final regulations have not yet been released, the cost to the health care
industry of complying with such regulations is likely to be significant.

Restrictions imposed by laws benefiting disabled persons.

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

Medical waste.

Some of our facilities generate potentially infectious waste due to the
illness or physical condition of the residents, including, for example, blood-
soaked bandages, swabs and other medical waste products and incontinence
products of those residents diagnosed with infectious diseases. The management
of potentially infectious medical waste, including handling, storage,
transportation, treatment and disposal, is subject to regulation under various
laws, both federal and state. These laws and regulations set forth the
management requirements, as well as permit, record keeping, notice and
reporting obligations. Any finding that we are not in compliance with these
laws and regulations could adversely affect our business operations and
financial condition. Because these laws and regulations are amended from time
to time, we cannot predict when and to what extent liability may arise.

We may be adversely affected by health care reform efforts.

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, which may be applied retroactively, 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.

Congress and state legislatures, from time to time, consider and enact
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. Also, public debate of these issues can be
expected to continue in the future. We cannot predict the ultimate timing or
effect of legislative efforts or their impact on us. We cannot guarantee that
either the various states or the federal government will not impose additional
regulations upon our activities which might adversely affect our business,
financial condition, results of operations or prospects.

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We face significant pressure to reduce our prices.

The health care services industry is currently experiencing market-driven
reforms from forces within and outside the industry pressuring 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. We cannot
predict the ultimate timing or effect of these market-driven reforms. We cannot
guarantee that any of these reforms will not have a material adverse effect on
our financial position, results of operations or cash flows.

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

The provision of health care services entails an inherent risk of liability.
In recent years, participants in the long-term care industry have been subject
to an increasing number of lawsuits alleging malpractice or related legal
theories. Many of these lawsuits involve large claims and significant defense
costs. In addition, we may be subject to claims alleging violations of federal
or state laws relating to safe working conditions, environmental matters and
the use and disposal of hazardous or potentially hazardous substances such as
medical waste. We currently maintain liability insurance intended to cover such
claims. We believe our insurance is in keeping with industry standards. We
cannot guarantee, however, that claims in excess of our insurance coverage or
claims not covered by our insurance coverage will not arise. A successful claim
against us not covered by, or in excess of, our insurance coverage could have a
material adverse effect upon our financial condition or results of operations.
Claims against us, regardless of their merit or eventual outcome, may also have
a material adverse effect upon our ability to attract residents or expand our
business and would require management to devote time to matters unrelated to
the operation of our business. In addition, we must renew our insurance
policies annually. We cannot guarantee that we 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.

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

We are subject to various federal, state and local environmental laws,
ordinances and regulations. Some of these laws, ordinances and regulations hold
a current or previous owner, lessee or operator of real property liable for the
cost of removal or remediation of some hazardous or toxic substances,
including, without limitation, asbestos-containing materials, that could be
located on, in or under such property. These laws and regulations often impose
liability whether or not we knew of, or were responsible for, the presence of
the hazardous or toxic substances. The costs of any required remediation or
removal of these substances could be substantial. Furthermore, there is no
limit to our liability under such laws and regulations. As a result, our
liability could exceed our property's value and aggregate assets. The presence
of these substances or failure to remediate these substances properly may also
adversely affect our ability to sell or lease the property, or to borrow using
our property as collateral.

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

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Market conditions may decrease the value of our common stock.

The market price of our common stock may fluctuate significantly in the
future in response to various factors and events, including:

. the liquidity of the market for our common stock;

. outstanding shareholder litigation;

. variations in our operating results; and

. 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 our common stock.

We depend on senior management and skilled personnel.

We depend, and will continue to depend, upon the services of Dr. Wilson,
President, Chief Executive Officer and Vice Chairman of the Board of Directors;
Ms. Campbell, Senior Vice President, General Counsel and Secretary; Ms. Gorshe,
Senior Vice President of Community Relations; Mr. Miller, Chief Financial
Officer and Treasurer; Mr. Mahon, Vice President and Chief Operating Officer;
Ms. Maloney, Vice President, Controller and Chief Accounting Officer; and Mr.
Parker, Vice President of Development.

We have entered into employment agreements with these officers as well as
other key personnel. We also depend upon our ability to attract and retain
management personnel who will be responsible for the day-to-day operations of
each residence. If we lose the services of any or all of our officers or we are
unable to attract additional management personnel in the future, our business,
financial condition or results of operations could be adversely affected.

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SELECTED FINANCIAL AND OTHER DATA

The following table presents selected historical consolidated financial
data. The consolidated statement of operations data for the years ended
December 31, 1997, 1998 and 1999, as well as the consolidated balance sheet
data as of December 31, 1998 and 1999, are derived from our consolidated
financial statements included elsewhere in this prospectus which have been
audited by KPMG LLP, independent auditors. You should read the selected
financial data below in conjunction with our consolidated financial statements,
including the related notes, and the information in "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
The Company
-----------------------------------------------
Years Ended December 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenue...................... $ 4,067 $ 21,022 $ 49,605 $ 89,384 $117,489
Operating expenses:
Residence operating
expenses.................. 2,779 14,055 31,591 57,443 81,767
Corporate general and
administrative............ 1,252 1,864 4,050 11,099 21,178
Building rentals........... 798 3,949 7,969 12,764 15,367
Depreciation and
amortization.............. 296 1,094 3,683 6,339 8,981
Terminated merger expense.. -- -- -- 1,068 228
Site abandonment costs..... -- -- -- 2,377 4,912
Write-off of impaired
assets.................... -- -- -- 8,521 --
------- -------- -------- -------- --------
Total operating
expenses................ 5,125 20,962 47,293 99,611 132,433
------- -------- -------- -------- --------
Operating income (loss)...... (1,058) 60 2,312 (10,227) (14,944)
------- -------- -------- -------- --------
Other income (expense):
Interest expense............. (96) (1,146) (4,946) (11,039) (15,200)
Interest income.............. 579 455 1,526 3,869 1,598
Loss on sale of assets....... -- (854) (1,250) (651) (127)
Debenture conversion costs... -- (426) -- -- --
Other income (expense), net.. -- (4) (121) (1,174) (260)
------- -------- -------- -------- --------
Total other income
(expense)............... 483 (1,975) (4,791) (8,995) (13,989)
------- -------- -------- -------- --------
Loss before taxes and
cumulative effect of change
in accounting principle..... (575) (1,915) (2,479) (19,222) (28,933)
Cumulative effect of change
in accounting principle..... -- -- -- (1,523) --
------- -------- -------- -------- --------
Net loss..................... $ (575) $(1,915) $(2,479) $(20,745) $(28,933)
======= ======== ======== ======== ========
Basic and diluted net loss
per common share:
Loss before cumulative effect
of change in accounting
principle................... $ (0.10) $ (0.23) $ (0.21) $ (1.18) $ (1.69)
Cumulative effect of change
in accounting principle..... -- -- -- $ (0.09) --
------- -------- -------- -------- --------
Basic and diluted net loss
per common share............ $ (0.10) $ (0.23) $ (0.21) $ (1.27) $ (1.69)
======= ======== ======== ======== ========
Basic and diluted weighted
average common shares
outstanding................. 6,000 8,404 11,871 16,273 17,119
Ratio of earnings to fixed
charges(1).................. -- -- -- -- --
<CAPTION>
At December 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents ... $ 7,335 $ 2,105 $ 63,269 $ 55,036 $ 7,606
Working capital (deficit).... (5,320) (27,141) 40,062 43,856 7,592
Total assets................. 53,546 147,223 324,367 414,669 346,188
Long-term debt, excluding
current portion............. 24,553 49,663 157,700 266,286 233,199
Shareholders' equity......... 15,644 56,995 132,244 119,197 89,344
</TABLE>
- --------

(1) Earnings were insufficient to cover fixed charges by $1.2 million, $4.2
million, $9.1 million, $25.2 million and $31.0 million for the years ended
December 31, 1995 through 1999 respectively.

22
<PAGE>

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

Restatement

On February 1, 1999, we announced that after consultation with our
independent auditors, we would restate our financial statements for the fiscal
quarter ended June 30, 1997, the fiscal quarter ended September 30, 1997, the
fiscal year ended December 31, 1997, the fiscal quarter ended March 31, 1998,
the fiscal quarter ended June 30, 1998 and the fiscal quarter ended September
30, 1998. On March 31, 1999, we announced that the restatement would be more
extensive than we had previously believed, and might include periods prior to
the second quarter of 1997, including the fiscal year ended December 31, 1996.
After further consultation with our independent auditors, we determined to
restate our financial statements for the fiscal year ended December 31, 1996,
the fiscal year ended December 31, 1997 and each of the first three fiscal
quarters of the fiscal year ended December 31, 1998. On September 30, 1999, we
filed restated financial statements with the Securities and Exchange Commission
for the fiscal years ended December 31, 1996 and 1997 and for each of the first
three fiscal quarters of the fiscal year ended December 31, 1998.

The restatement reduced the net income for the fiscal years ended December
31, 1996 and 1997 and for the nine months ended September 30, 1998 by $2.1
million, $6.7 million and $11.0 million, respectively. The cumulative effect of
the restatement reduced shareholders' equity by $19.7 million through September
30, 1998. As a result of the restatement, we reported net losses of $1.9
million, $2.5 million and $13.3 million for the fiscal years 1996 and 1997 and
the nine months ended September 30, 1998, respectively, compared to previously
reported net income of $149,000, $4.2 million and a net loss of $2.4 million,
respectively. As a result of the restatement, we reported net loss per diluted
share of $0.23, $0.21 and $0.84 for the fiscal years ended December 31, 1996
and 1997 and the nine months ended September 30, 1998, respectively, compared
to previously reported net income of $0.03 and $0.34, and net loss of $0.14,
per diluted share, respectively. After the restatement, our cash position as of
December 31, 1996 and 1997 and as of September 30, 1998 was $2.1 million, $63.3
million and $79.6 million, respectively, as compared to $2.1 million, $63.4
million and $79.8 million, respectively, as previously reported. In addition,
our working capital position as of December 31, 1996 and 1997 and as of
September 30, 1998 was negative $27.1 million, positive $40.1 million and
positive $63.0 million, respectively, as compared to previously reported
working capital of negative $26.4 million, positive $41.0 million and positive
$64.1 million, respectively.

The restatement resulted primarily from: (i) the earlier recognition of
certain expenses that we previously capitalized in association with our
development and financing activities; (ii) a modification in how we accounted
for certain of our lease arrangements; (iii) a modification in how we accounted
for certain of our acquisitions and our joint venture arrangements; (iv) the
capitalization of fees we received from Supportive Housing Service, Inc.
("SHS") and Home and Community Care, Inc. ("HCI"), that we previously recorded
as a reduction of expenses or other income; (v) the elimination of an
impairment write-down recorded in the second quarter of 1998 on three of our
residences which we later determined were not impaired based upon subsequent
cash flow analysis; (vi) the elimination of certain accrued expenses previously
recorded pursuant to a change in accounting principle and (vii) an increase in
the amount of goodwill that we wrote off in the second quarter of 1998 related
to exiting our home health operations.

Overview

We operate 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. We provide personal care and support services,
and make available routine nursing services (as permitted by applicable
regulations) designed to meet the personal and health care needs of our
residents. As of December 31, 1999, we had operations in 16 states.

We have experienced significant and rapid growth, primarily through the
development of assisted living residences and, to a lesser extent, through the
acquisition of assisted living residences. At the closing of our

23
<PAGE>

initial public offering in November 1994, we began operating five residences
(137 units) located in Oregon. As of December 31, 1999, we had received
certificates of occupancy on 185 residences (7,148 units), of which we owned
115 residences (4,515 units) and leased 70 residences (2,633 units).

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

. residence operating expenses, such as staff payroll, food, property
taxes, utilities, insurance and other direct residence operating
expenses;

. general and administrative expenses consisting of corporate and regional
support functions such as legal, accounting and other administrative
expenses;

. building rentals; and

. depreciation and amortization.

Our operating results for the year ended December 31, 1999 were adversely
affected by several factors, including the diversion of management's time and
attention related to the following:

. investment in infrastructure to accommodate growth of the Company;

. write-offs during 1999 relating to our decisions not to proceed with the
development of certain sites which we had acquired for development;

. the restatement of our financial statements for certain prior periods;
and

. securityholder litigation which commenced in February 1999.

These distractions continued throughout 1999 and, as such, our operating
results for the year ended December 31, 1999 are not necessarily indicative of
our future operating performance. With respect to our Stabilized Residences (as
defined below), our operating margins were substantially lower in 1999 because
our occupancy rates declined and our operating expenses increased in those
residences. This was partly due to increased competition in certain markets for
labor and residents and partly due to the diversion of management's time and
attention relating to the matters described above. These factors have also
resulted in slower fill-up and increased operating expenses in our Start-Up
Residences (as defined below). We expect these trends to continue to affect our
operating results in 2000.

24
<PAGE>

effects include lower margins for an estimated 3-5 years until excess units are
absorbed. We have experienced slower fill-up than expected of new residences in
some markets, as well as declining occupancy in our stabilized residences due
to the increase in options available to potential new residents when units are
vacated. We believe that each local market is different, and we are and will
continue to react in a variety of ways, to the specific competitive environment
that exists in each market. There can be no assurance that we will be able to
compete effectively in those markets where overbuilding exists, or that future
overbuilding in other markets where we have opened residences will not
adversely affect our operations.

For the year ended December 31, 1999, we commenced operations in 20
additional residences, all of which we developed. At this time, we have no
plans for further development. We expect that these 20 residences will incur
operating losses during the fill-up period. As a result, our operating results
will be adversely affected by operating losses at these residences and other
Start-Up Residences, which we expect will range from $1.5 million to $2.0
million during 2000.

We believe that our current cash on hand, cash available from operations and
potential loans on uncollateralized properties will be sufficient to meet our
operating needs through the next 12 to 18 months. However, to provide us with
additional capital, we intend to explore various financing alternatives and/or
commitments to engage in sale and leaseback transactions (including loans on
and sale and leasebacks of, our uncollateralized properties). We currently do
not have in place any of such loan or lease commitments. As a result of the
securityholder litigation, the restatement and other factors, there can be no
assurances that financing from any source will be available in the future, or,
if available, that such financing will be on terms acceptable to us. See
"Liquidity and Capital Resources" and "Risk Factors--We may require additional
financing."

Results of Operations

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

<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Total Residences
Residences operated (end of period)........................ 109 165 185
Units operated (end of period)............................. 4,024 6,329 7,148
Average occupancy rate (based on occupied units)........... 71.7% 72.3% 75.1%
Sources of revenue:
Medicaid state portion................................... 11.1% 10.7% 10.4%
Medicaid resident portion................................ 5.9% 5.8% 5.9%
Private.................................................. 83.0% 83.5% 83.7%
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

25
<PAGE>

The following table sets forth, for the periods presented for Stabilized
Residences, the total number of residences and units operated, average
occupancy rates and the sources of our revenue. Stabilized Residences are
defined as those residences which were operating for more than twelve months
prior to the beginning of the period or had achieved a 95% occupancy rate as of
the beginning of the reporting period.

<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Stabilized Residences
Residences operated (end of period)........................ 32 65 115
Units operated (end of period)............................. 1,063 2,434 4,386
Average occupancy rate (based on occupied units)........... 95.1% 93.9% 85.4%
Sources of revenue:
Medicaid state portion................................... 11.4% 14.5% 13.3%
Medicaid resident portion................................ 6.5% 8.2% 7.6%
Private.................................................. 82.1% 77.3% 79.1%
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

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

<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Start-up Residences
Residences operated (end of period)..................... 77 100 70
Units operated (end of period).......................... 2,961 3,895 2,762
Average occupancy rate (based on occupied units)........ 59.8% 55.7% 56.0%
Sources of revenue:
Medicaid state portion................................ 11.3% 7.1% 2.8%
Medicaid resident portion............................. 5.7% 3.4% 1.4%
Private............................................... 83.0% 89.5% 95.8%
----- ----- -----
Total............................................... 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 our revenue. Same Store Residences are
defined as those residences which were operating throughout comparable periods.

<TABLE>
<CAPTION>
Years Ended Years Ended Years Ended
December December December
31, 31, 31,
------------ ------------ ------------
1996 1997 1997 1998 1998 1999
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Same Store Residences
Residences operated (end of
period)......................... 19 19 59 59 108 108
Units operated (end of period)... 595 605 2,104 2,157 4,035 4,048
Average occupancy rate (based on
occupied units)................. 90.0% 95.6% 86.9% 93.5% 80.5% 84.7%
Sources of revenue:
Medicaid state portion......... 16.1% 13.8% 11.9% 15.1% 12.7% 13.4%
Medicaid resident portion...... 9.1% 7.6% 6.5% 8.7% 6.9% 7.7%
Private........................ 74.8% 78.6% 81.6% 76.2% 80.4% 78.9%
----- ----- ----- ----- ----- -----
Total.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>

26
<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>
Years Ended December
31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Stabilized Residences
Revenue............................................. $21,245 $46,260 $84,771
Residence operating expenses........................ 12,255 27,456 56,781
------- ------- -------
Residence operating income........................ 8,990 18,804 27,990
Building rentals.................................... 3,323 7,193 14,825
Depreciation and amortization....................... 945 1,777 3,610
------- ------- -------
Total other operating expenses.................... 4,268 8,970 18,435
------- ------- -------
Operating income................................ $ 4,722 $ 9,834 $ 9,555
======= ======= =======
</TABLE>

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

<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Start-up Residences
Revenue............................................. $27,164 $40,013 $32,718
Residence operating expenses........................ 18,519 27,591 24,986
------- ------- -------
Residence operating income........................ 8,645 12,422 7,732
Building rentals.................................... 4,612 5,535 520
Depreciation and amortization....................... 2,010 4,063 4,470
------- ------- -------
Total other operating expenses.................... 6,622 9,598 4,990
------- ------- -------
Operating income................................ $ 2,023 $ 2,824 $ 2,742
======= ======= =======
</TABLE>

27
<PAGE>

The following table sets forth, for the periods presented, the results of
operations for the 19 Same Store Residences included in operating results for
all of fiscal years 1996 and 1997, the 59 Same Store Residences included in
operating results for all of fiscal years 1997 and 1998 and the 108 Same Store
Residences included in operating results for all of fiscal years 1998 and 1999
(in thousands).

<TABLE>
<CAPTION>
Years Ended Years Ended Years Ended
December 31, December 31, December 31,
--------------- --------------- ---------------
1996 1997 1997 1998 1998 1999
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Same Store Residences
Revenue.................... $10,877 $12,397 $38,274 $42,002 $70,920 $77,881
Residence operating
expenses.................. 6,682 7,070 22,908 24,801 43,659 52,154
------- ------- ------- ------- ------- -------
Residence operating
income.................. 4,195 5,327 15,366 17,201 27,261 25,727
Building rentals........... 2,374 2,440 5,635 6,375 12,385 14,825
Depreciation and
amortization.............. 543 461 2,280 1,647 3,451 3,067
------- ------- ------- ------- ------- -------
Total other operating
expenses................ 2,917 2,901 7,915 8,022 15,836 17,892
------- ------- ------- ------- ------- -------
Operating income....... $ 1,278 $ 2,426 $ 7,451 $ 9,179 $11,425 $ 7,835
======= ======= ======= ======= ======= =======
</TABLE>

Year ended December 31, 1999 compared to year ended December 31, 1998:

We incurred a net loss of $28.9 million, or $1.69 per basic and diluted
share, on revenue of $117.5 million for the year ended December 31, 1999 (the
"1999 Period") as compared to a net loss (after the cumulative effect of change
in accounting principle and other charges as described below) of $20.7 million,
or $1.27 per basic and diluted share, on revenue of $89.4 million for the year
ended December 31, 1998 (the "1998 Period").

We had certificates of occupancy for 185 residences, all of which were
included in the operating results as of the end of the 1999 Period as compared
to certificates of occupancy for 173 residences, 165 of which were included in
the operating results as of the end of the 1998 Period. Of the residences
included in operating results as of the end of the 1999 Period, we owned 115
residences and leased 70 residences (all of which were operating leases) as
compared to 95 owned residences and 70 leased residences (54 of which were
operating leases and 16 of which were accounted for as financings) as of the
end of the 1998 Period.

Revenue. Revenue was $117.5 million for the 1999 Period as compared to $89.4
million for the 1998 Period, an increase of $28.1 million.

The increase includes:

. $20.8 million related to the full year impact of the 57 residences (2,302
units) which opened during the 1998 Period;

. $3.9 million related to the opening of an additional 20 residences (798
units) during the 1999 Period; and

. $7.0 million was attributable to the 108 Same Store Residences (4,048
units).

These increases were offset by:

. a reduction in revenues from home health operations of $3.1 million in
the 1999 Period (the Company exited all home health operations in 1998
and did not earn any revenues for such services during the 1999 Period);
and

. a reduction of $558,000 in revenues for a residence the Company leased
and operated nine months of the 1998 Period. The lease was terminated
September 30, 1998.

28
<PAGE>

Revenue from the Same Store Residences was $77.9 million for the 1999 Period
as compared to $70.9 million for the 1998 Period, an increase of $7.0 million
or 9.8%. The increase in revenue from Same Store Residences was attributable to
a combination of an increase in average occupancy to 84.7% and average monthly
rental rate to $1,873 for the 1999 Period as compared to average occupancy of
80.5% and average monthly rental rate of $1,823 for the 1998 Period.

Of the $117.5 million in revenues reported for the 1999 Period:

. $84.8 million or 72.2% was attributable to Stabilized Residences;

. $32.7 million or 27.8% was attributable to Start-Up Residences.

As of the end of the 1999 Period, we had 115 Stabilized Residences (4,386
units) with an average occupancy of 85.4% and an average monthly rental rate of
$1,866 and we had 70 Start-Up Residences (2,762 units) with an average
occupancy of 56.0% and an average monthly rental rate of $1,987.

Residence Operating Expenses. Residence operating expenses were $81.8
million for the 1999 Period as compared to $57.4 million for the 1998 Period,
an increase of $24.4 million.

The increase includes:

. $13.9 million related to the full year impact of the 57 residences (2,302
units) which opened during the 1998 Period;

. $4.3 million related to the opening of an additional 20 residences (798
units) during the 1999 Period; and

. $8.5 million was attributable to the 108 Same Store Residences (4,048
units).

These increases were offset by a reduction in expenses associated with our
home health operations of $2.3 million. We exited our home health operations
during the 1998 Period. Expenses incurred during the 1999 Period for home
health operations were related to the closure of the home health operations and
are included in Corporate, General and Administrative expenses.

Residence operating expenses for the Same Store Residences were $52.2
million for the 1999 period as compared to $43.7 million for the 1998 Period,
an increase of $8.5 million or 19.4%. This increase results from the additional
expenses incurred in connection with the increase in occupancy at the Same
Store Residences during the period.

Of the $81.8 million in residence operating expenses reported for the 1999
Period, $56.8 million or 69.4% was attributable to Stabilized Residences and
$25.0 million or 30.6% was attributable to Start-Up Residences.

Corporate General and Administrative. Corporate general and administrative
expenses as reported were $21.2 million for the 1999 Period as compared to
$11.1 million for the 1998 Period. Our corporate general and administrative
expenses before capitalized payroll costs were $21.8 million for the 1999
Period as compared to $12.9 million for the 1998 Period, an increase of $8.9
million.

Of the increase:

. $1.7 million, or 19.1%, related to increased payroll costs, including
severance costs of $1.0 million for certain terminated corporate
employees including costs associated with severance and consulting
agreements between us and our former chief executive officer;

. $4.3 million, or 48.3%, related to additional professional fees primarily
associated with increased legal, financial advisory and accounting costs
due to regulatory issues, securityholder litigation and the restatement
of our earnings for the years ended December 31, 1996, 1997 and the
interim 1998 periods;

29
<PAGE>

. $1.8 million, or 20.2%, related to the final operations of our home
health business, including provision for bad debt of $510,000;

. $1.1, or 12.4% related to an increase in travel and other related
expenses associated with the increase in number of regional offices from
three to five.

We capitalized $1.8 million and $617,000 of payroll costs associated with
the development of new residences for each of the 1998 Period and the 1999
Period.

Building Rentals. Building rentals were $15.4 million for the 1999 Period as
compared to $12.8 million for the 1998 Period, an increase of $2.6 million.
This increase was primarily attributable to $2.5 million of additional rental
expense associated with the March amendment of 16 of our leases, as discussed
above, which were previously accounted for as financings. As a result of the
amendment, the leases have been reclassified as operating leases for the last
nine months of the 1999 Period.

As of the end of the 1999 Period we had 70 operating leases as compared to
54 operating leases as of the end of the 1998 Period.

Depreciation and Amortization. Depreciation and amortization was $9.0
million for the 1999 Period as compared to $6.3 million for the 1998 Period, an
increase of $2.7 million. Depreciation expense was $8.7 million and
amortization expense was $294,000 for the 1999 Period as compared to $5.9
million and $398,000, respectively, for the 1998 Period. The increase in
depreciation is the result of:

. the full year effect of depreciation on the 53 owned residences which
commenced operations during the 1998 Period; and

. depreciation associated with the 20 owned residences that commenced
operations during the 1999 Period.

The increase in depreciation was offset by the impact of the March amendment
of 16 of our leases, as discussed above, which were previously accounted for as
financings. As a result of this amendment, the 1999 Period reflects 3 months of
depreciation expense associated with these facilities as compared to 12 months
in the 1998 Period.

Terminated Merger Expense. During the fourth quarter of the 1998 Period, we
recorded a $1.1 million charge relating to our terminated merger with American
Retirement Corporation ("ARC"). On February 1, 1999 we agreed with ARC to
terminate our previously announced merger agreement, which had been entered
into during November 1998. We incurred approximately $228,000 of additional
merger related expenses during the first quarter of 1999.

Site Abandonment Costs. As a result of our decision to reduce the number of
new residence openings during the 1998 Period and beyond, we wrote-off $2.4
million of capitalized costs during the 1998 Period relating to the abandonment
of certain development sites. In 1999, the Company wrote-off $4.9 million of
capitalized cost relating to the abandonment of all remaining development
sites, with the exception of 10 sites where the Company owns the land.

Write-Off of Impaired Assets and Related Expenses. In the 1998 Period, we
recorded an $8.5 million charge consisting of a $7.5 million write-off of
unamortized goodwill resulting from the exit from our home health operations
and a $1.0 million provision for exit costs associates with closing such home
health care operations. We recorded no such charges for the 1999 Period.

Interest Expense. Interest expense was $15.2 million for the 1999 Period as
compared to $11.0 million for the 1998 Period. Gross interest expense for the
1999 Period was $17.2 million as compared to $17.0 million for the 1998 Period,
a net increase of $200,000.

30
<PAGE>

Interest expense increased by:

. $1.4 million due to interest expense related to the April 1998 issuance
of 5.625% Debentures; and

. $2.3 million related to the new mortgage financing entered into during
the 1998 Period.

This increase was offset by decreases in interest expense of:

. $616,000 as a result of the redemption in August 1998 of the 7.0%
Convertible Subordinated Debentures due 2005 (the "7.0% Debentures");

. $2.5 million as a result of the amendment of the 16 leases resulting in a
change from financing obligations to operating leases; and

. $380,000 as a result of the termination of the joint venture agreements
in February 1999.

We capitalized $6.0 million of interest expense for the 1998 Period compared
to $2.0 million for the 1999 Period. We do not expect to capitalize any
interest in the 2000 Period as a result of the discontinuation of our
development activities.

Interest Income. Interest income was $1.6 million for the 1999 Period as
compared to $3.9 million for the 1998 Period, a decrease of $2.3 million. The
decrease is related to interest income earned on lower average cash balances
during the 1999 Period primarily resulting from the completion of construction
on 20 residences which opened during 1999.

Loss on Sale of Assets. Loss on sale of assets was $127,000 for the 1999
Period as compared to $651,000 for the 1998 Period. The loss during the 1999
Period was related to the disposal of leasehold improvements associated with
relocating our corporate offices in January 1999. Of the loss on sale of assets
recorded during the 1998 Period, $547,000 resulted from losses pertaining
primarily to additional capital costs incurred during the 1998 Period on sale
and leaseback transactions completed in the 1997 Period and $75,000 related to
losses incurred in connection with terminating one operating lease during the
1998 Period. The remainder of the loss on sale of assets was attributable to
losses incurred in connection with one sale and leaseback transaction completed
during the 1998 Period.

Other Income (Expense). Other expense was $260,000 for the 1999 Period as
compared to $1.2 million for the 1998 Period. Other expenses during the 1999
Period included $170,000 of administrative fees incurred in connection with our
February 1999 repurchase of the remaining joint venture partner's interest in
the operations of 17 residences. Other expense during the 1998 Period included
$907,000 of financing costs which were expensed during the period. Of such
amount, $614,000 related to financing costs which had been previously
capitalized in association with a financing commitment that was terminated
during the fourth quarter 1998 and the remaining $293,000 was associated with
the termination of a swap agreement at the end of the third quarter of the 1998
Period. In addition, other expenses during the 1998 Period included $210,000 of
administrative fees incurred in connection with our repurchase of the joint
venture partner's interest in the operations of 21 residences during the
period.

Cumulative Effect of Change in Accounting Principle. We adopted AICPA
Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("SOP
98-5") effective January 1, 1998. Under SOP 98-5, start-up costs associated
with the opening of new residences are expensed as incurred. We recognized a
charge of $1.5 million during the 1998 Period associated with adopting such
provision. We had no changes in accounting principle during the 1999 Period.

Net Loss. As a result of the above, net loss (after the cumulative effect of
change in accounting principle and other charges as described above) was $28.9
million or $1.69 per basic and diluted share for the 1999 Period, compared to
$20.7 million or $1.27 loss per basic and diluted share for the 1998 Period.

31
<PAGE>

Year ended December 31, 1998 compared to year ended December 31, 1997

We incurred a net loss (after the cumulative effect of change in accounting
principle and other charges as described below) of $20.7 million, or $1.27 per
basic and diluted share, on revenue of $89.4 million for the 1998 Period as
compared to a net loss of $2.5 million, or $0.21 per basic and diluted share,
on revenue of $49.6 million for the year ended December 31, 1997 (the "1997
Period").

We had certificates of occupancy for 173 residences, 165 of which were
included in the operating results as of the end of the 1998 Period as compared
to 130 residences with certificates of occupancy, 109 of which were included in
the operating results as of the end of the 1997 Period. Of the residences
included in operating results as of the end of the 1998 Period, we owned 95
residences and leased 70 residences (54 of which were operating leases and 16
of which were accounted for as financings) as compared to 42 owned residences
and 67 leased residences (51 of which were operating leases and 16 of which
were accounted for as financings) as of the end of the 1997 Period.

Revenue. Revenue was $89.4 million for the 1998 Period as compared to $49.6
million for the 1997 Period, an increase of $39.8 million. Of this increase:

. $18.5 million or 46.5% related to the full year impact of the 49
residences (1,875 units) which opened during the 1997 Period;

. $15.7 million or 39.4% related to the opening of an additional 57
residences (2,297 units) during the 1998 Period;

. $3.7 million or 9.3% was attributable to the 59 Same Store Residences
(2,157 units); and

. the remaining $1.9 million or 4.8% related to a full year of results from
our ancillary operations (home health operations revenues began
diminishing subsequent to June 1998 when we began our exit plan to
discontinue these services) as compared to two full months of such
activity in the 1997 Period.

Revenue from the Same Store Residences was $42.0 million for the 1998 Period
as compared to $38.3 million for the 1997 Period, an increase of $3.7 million
or 9.7%. The increase in revenue for Same Store Residences was attributable to
a combination of an increase in average occupancy to 93.5% and average monthly
rental rate to $1,753 for the 1998 Period as compared to 86.9% and $1,720,
respectively, for the 1997 Period.

Of the $89.4 million in revenues reported for the 1998 Period:

. $46.3 million or 51.8% was attributable to Stabilized Residences;

. $40.0 million or 44.7% was attributable to Start-Up Residences; and

. $3.1 million or 3.5% was attributable to our ancillary service operation.

As of the end of the 1998 Period, we had 65 Stabilized Residences (2,434
units) with an average occupancy of 93.9% and an average monthly rental rate of
$1,762 and we had 100 Start-Up Residences (3,895 units) with an average
occupancy of 55.7% and an average monthly rental rate of $1,934.

Residence Operating Expenses. Residence operating expenses were $57.4
million for the 1998 Period as compared to $31.6 million for the 1997 Period,
an increase of $25.8 million. Of this increase:

. $10.5 million or 40.7% related to the full year impact of the 49
residences (1,885 units) which opened during the 1997 Period;

. $11.8 million or 45.7% related to the opening of an additional 57
residences (2,297 units) during the 1998 Period;

. $1.9 million or 7.4% was attributable to the 59 Same Store Residences
(2,157 units); and

. the remaining $1.6 million or 6.2% related to a full year of expenses
associated with our ancillary service operation as compared to two full
months of such activity in the 1997 period.

32
<PAGE>

Residence operating expenses for the Same Store Residences were $24.8
million for the 1998 Period as compared to $22.9 million for the 1997 Period,
an increase of $1.9 million or 8.3%. This increase results from the additional
expenses incurred in connection with the increase in occupancy at the Same
Store Residences during the period.

Of the $57.4 million in residence operating expenses reported for the 1998
Period, $27.5 million or 47.9% was attributable to Stabilized Residences, $27.6
million or 48.1% was attributable to Start-Up Residences and $2.3 million or
4.0% was attributable to our ancillary service operation.

Corporate General and Administrative. Corporate general and administrative
expenses as reported were $11.1 million for the 1998 Period as compared to $4.1
million for the 1997 Period. Our corporate general and administrative expenses
before capitalized payroll costs were $12.9 million for the 1998 Period as
compared to $5.9 million for the 1997 Period, an increase of $7.0 million. This
increase results from additional investments in our corporate and regional
infrastructure to support the opening of new residences and the on-going
operation of our existing base of residences. Of the increase:

. $3.9 million or 56.0% related to increased payroll costs;

. $525,000 or 7.5% related to increased marketing expenses;

. $450,000 or 6.5% related to the increased corporate office rental
expense; and

. the remaining $2.1 million or 30.0% related to increased general
corporate expenses such as legal and travel related expenses.

We capitalized $1.8 million of payroll costs associated with the development
of new residences for each of the 1998 Period and the 1997 Period.

Building Rentals. Building rentals were $12.8 million for the 1998 Period as
compared to $8.0 million for the 1997 Period, an increase of $4.8 million. Of
the increase:

. $4.2 million was the result of the full year impact of the 26 operating
leases entered into during the 1997 Period;

. $400,000 related to the four leases entered into during the 1998 Period;
and

. the remainder of the increase was primarily driven by an increase in
expense on leases entered into prior to the 1997 Period offset by one
operating lease which was terminated during the 1998 Period.

As of the end of the 1998 Period we had 54 operating leases as compared to
51 operating leases as of the end of the 1997 Period.

Depreciation and Amortization. Depreciation and amortization was $6.3
million for the 1998 Period as compared to $3.7 million for the 1997 Period, an
increase of $2.6 million. Depreciation expense was $5.9 million and
amortization expense was $398,000 for the 1998 Period as compared to $2.9
million and $800,000, respectively, for the 1997 Period. The increase in
depreciation is the result of:

. the full year effect of depreciation on the 16 owned residences which
commenced operations during the 1997 Period;

. depreciation associated with the 53 owned residences that commenced
operations during the 1998 Period; and

. depreciation associated with the full year impact of seven residences
which were sold and leased back during the 1997 Period which were
accounted for as financings.

33
<PAGE>

Amortization expense decreased as a result of the change in accounting for
certain costs incurred prior to opening new residences. Effective January 1,
1998, we adopted Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities ("SOP 98-5"). See the discussion of cumulative effect of change in
accounting principle below.

Terminated Merger Expense. During the fourth quarter of the 1998 Period, we
recorded a $1.1 million charge relating to our terminated merger with American
Retirement Corporation ("ARC"). On February 1, 1999 we agreed with ARC to
terminate our previously announced merger agreement, which had been entered
into during November 1998. We incurred approximately $200,000 of additional
merger related expenses during the first quarter of 1999.

Site Abandonment Costs. As a result of our decision to reduce the number of
new residence openings during the 1999 Period and beyond, we wrote-off $2.4
million of capitalized costs during the 1998 Period relating to the abandonment
of 36 development sites. Of such costs, $1.0 million were written-off during
the second quarter and the remaining $1.4 million were written-off during the
fourth quarter 1998.

Write-Off of Impaired Assets and Related Expenses. In the 1998 Period, we
recorded an $8.5 million charge consisting of:

. $7.5 million write-off of unamortized goodwill resulting from the exit
from our home health operations; and

. a $1.0 million provision for exit costs associated with closing such home
health care operation. During the fourth quarter of 1998, we reduced the
provision by $400,000 from $1.4 million as a result of a change in the
estimate for such exit costs.

Interest Expense. Interest expense was $11.0 million for the 1998 Period as
compared to $4.9 million for the 1997 Period. Gross interest expense for the
1998 Period was $17.0 million compared to $11.5 million for the 1997 Period, a
net increase of $5.5 million.

Interest expense increased by:

. $4.8 million due to the full year impact of interest expense related to
the October 1997 issuance of 6.0% Debentures;

. $3.6 million due to interest expense related to the April 1998 issuance
of the Debentures;

. $1.8 million related to the new mortgage financing entered into during
the 1998 Period;

. $750,000 related to the full year impact of seven residences which were
sold and leased back during the 1997 Period which were accounted for as
financings; and

. $475,000 related to interest expense associated with losses which were
reimbursed by the partner to our joint venture agreement (accounted for
as loans) incurred in connection with the operation of joint venture
residences (interest was calculated based on the average loan balance
using an imputed 20% interest rate, and other expense was calculated
based on a $10,000 administrative fee per residence).

This increase was offset by:

. a $5.5 million reduction associated with construction financing used to
fund development activity during the 1997 Period which was either repaid
or converted to leases prior to the 1998 Period; and

. a $400,000 reduction as a result of the redemption in August 1998 of our
7.0% Convertible Subordinated Debentures due 2005 (the "7.0%
Debentures").

We capitalized $6.0 million of interest expense for the 1998 Period compared
to $6.6 million for the 1997 Period.

34
<PAGE>

Interest Income. Interest income was $3.9 million for the 1998 Period as
compared to $1.5 million for the 1997 Period, an increase of $2.4 million. The
increase is related to interest income earned on higher average cash balances
during the 1998 Period primarily resulting from the April 1998 offering of the
Debentures from which we received net proceeds of approximately $72.2 million.

Loss on Sale of Assets. Loss on sale of assets was $651,000 for the 1998
Period as compared to $1.3 million for the 1997 Period. Of the loss on sale of
assets recorded during the 1998 Period, $547,000 resulted from losses
pertaining primarily to additional capital costs incurred during the 1998
Period on sale and leaseback transactions completed in the 1997 Period and
$75,000 related to losses incurred in connection with terminating one operating
lease during the 1998 Period. The remainder of the loss on sale of assets was
attributable to losses incurred in connection with one sale and leaseback
transaction completed during the 1998 Period. We entered into four sale and
leaseback transactions during the 1998 Period as compared to 24 sale and
leaseback transactions during the 1997 Period.

Other Income (Expense). Other expense was $1.2 million for the 1998 Period
as compared to $121,000 for the 1997 Period. Other expenses during the 1998
Period included $907,000 of financing costs which were expensed during the
period. Of such amount, $614,000 related to financing costs which had been
previously capitalized and deferred in association with a future financing
commitment terminated during the fourth quarter 1998 and the remaining $293,000
was associated with the termination of a swap agreement at the end of the third
quarter of the 1998 Period. In addition, other expenses during the 1998 Period
included $210,000 of administrative fees incurred in connection with our
repurchase of the joint venture partner's interest in the operations of
21 residences during the period.

Cumulative Effect of Change in Accounting Principle. We adopted SOP 98-5
effective January 1, 1998. Under SOP 98-5, start-up costs associated with the
opening of new residences are expensed as incurred. We recognized a charge
of $1.5 million during the 1998 Period associated with adopting such provision.
Prior to the adoption of SOP 98- 5, we capitalized pre-opening costs on our
balance sheet and amortized such costs over a 12-month period.

Net Loss. As a result of the above, net loss (after the cumulative effect of
change in accounting principle and other charges as described above) was $20.7
million or $1.27 per basic and diluted share, for the 1998 Period, compared to
$2.5 million, or $0.21 per basic and diluted share, for the 1997 Period.

Liquidity and Capital Resources

We have historically financed our activities with the net proceeds from the
offerings of debt and equity securities, sale and leaseback financing, long-
term mortgage financing and cash flows from operations. At December 31, 1999,
we had $234.7 million of indebtedness outstanding, including $161.3 million of
convertible subordinated debentures. As of December 31, 1999, approximately 88%
of our indebtedness bore interest at fixed rates, with a weighted average
interest rate of 6.3%. Our variable rate indebtedness carried an average rate
of 3.4% as of December 31, 1999. As of December 31, 1999, we had working
capital of $7.6 million as compared to $43.9 million as of December 31, 1998.
As of December 31, 1999, our unrestricted cash balance was $7.6 million as
compared to $55.0 million as of December 31, 1998.

Net cash used in operating activities was $11.9 million for the year ended
December 31, 1999, as compared with $3.0 million provided by operating
activities for the year ended December 31, 1998 and $4.5 million provided by
operating activities for the year ended December 31, 1997.

Net cash used in investing activities was $33.4 million for the year ended
December 31, 1999, as compared with $123.3 million and $94.0 million,
respectively, for the years ended December 31, 1998 and 1997. During the year
ended December 31, 1999, the primary uses of cash were:

. $27.8 million related to the development of new assisted living
residences in Arizona, Florida, Georgia, Iowa, Indiana, Louisiana,
Michigan, New Jersey and South Carolina; and

. $7.6 million related to restrictions in accordance with certain loan and
lease agreements.

35
<PAGE>

During the third quarter of 1999, we amended certain loan agreements with
U.S. Bank National Association ("U.S. Bank"). Pursuant to the amendment, we
agreed to provide $8.3 million of additional cash collateral in exchange for
the waiver of certain possible defaults related to the delivery of financial
statements and compliance with financial covenants, including an amendment to
certain financial covenants. In August 1999, we restricted $8.3 million of cash
balances as a result of such amendment. The amendment also provides for the
release of the additional collateral upon the achievement of specified
performance targets, provided that we are in compliance with the other terms of
the loan agreements. We achieved certain of these specified targets during the
fourth quarter of fiscal 1999 and $1.2 million of the restricted cash was
released. Additionally, during the third quarter of 1999, we agreed to provide
$418,000 of additional cash collateral pursuant to certain lease agreements
with one of our lessors. We restricted $418,000 of cash balances as a result of
such action.

Several of our debt instruments and leases contain financial covenants,
including debt to cash flow and net worth tests. There can be no assurance that
we will be in compliance with these financial covenants in the future,
particularly if we are unable to stabilize our operations and efficiently
manage our business. Our credit agreements with U.S. Bank require us to comply
with two financial ratios that become more restrictive commencing in the second
quarter of 2000. Although we were in compliance with these less restrictive
covenants at December 31, 1999, we have determined that it is probable that we
will not meet these more restrictive covenants at June 30, 2000. If we fail to
comply with one or more of the U.S. Bank covenants or any other debt or lease
covenants (after giving effect to any applicable cure period), the lender or
lessor may declare us in default of the underlying obligation and exercise any
available remedies, which may include:

. in the case of debt, declaring the entire amount of the debt immediately
due and payable;

. foreclosing on any residences or other collateral securing the
obligation;

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

In addition, our debt instruments and leases contain "cross-default"
provisions pursuant to which a default under one obligation can cause a default
under one or more other obligations. Accordingly, it could have a material
adverse effect on our financial condition if any lender or lessor notifies us
that we are in default under any debt instrument or lease.

We believe that our current cash on hand, cash available from operations and
potential loans on uncollateralized properties are sufficient to meet our
operating needs for the next 12 to 18 months. However, to provide us with
additional capital, we may explore various financing alternatives and/or
commitments to engage in sale and leaseback transactions. We currently do not
have in place any of such loan or lease commitments for future financing beyond
our existing financing and sale and leaseback arrangements. As a result of the
securityholder litigation, the restatement and other factors, there can be no
assurances that financing from any source will be available in the future, or,
if available, that such financing will be available on terms acceptable to us.

As of December 31, 1999, we had invested excess cash balances in short-term
certificates of deposit and highly liquid marketable debt securities.

Inflation

We do not believe that inflation has materially adversely affected our
operations. We expect salary and wage increases for our skilled staff will
continue to be higher than average salary and wage increases, as is common in
the health care industry. We expect that we will be able to offset the effects
of inflation on salaries and other operating expenses by increases in rental
and service rates, subject to applicable restrictions with respect to services
that are provided to residents eligible for Medicaid reimbursement.

36
<PAGE>

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 137, issued in June 1999, deferred the effective
date of SFAS No. 133 to all fiscal quarters of fiscal years beginning after
June 15, 2000. We do not expect the adoption of this statement to have a
material impact on our results of operations.

Year 2000

We did not anticipate nor did we experience any interruptions as a result of
Year 2000 issues. We expended less than $25,000 for Year 2000 compliance.

37
<PAGE>

Quantitative and Qualitative Disclosure Regarding

Market Risk and Risk Sensitive Instruments

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

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

For variable rate debt, changes in interest rates generally do not impact
the fair market value of the debt instrument, but do affect our future earnings
and cash flows. We had variable rate debt of $28.2 million outstanding at
December 31, 1999 with a weighted average interest rate of 3.4%. Assuming that
our balance of variable rate debt remained constant at $28.2 million, each one-
percent increase in interest rates would result in an annual increase in
interest expense, and a corresponding decrease in cash flows, of $280,000.
Conversely, each one-percent decrease in interest rates would result in an
annual decrease in interest expense, and a corresponding increase in cash
flows, of $280,000.

The table below presents principal cash flows and related weighted average
interest rates by expected maturity dates for debt outstanding as of December
31, 1999.

<TABLE>
<CAPTION>
Expected Maturity Date
-----------------------------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------ ------ ------- ------- ------ ---------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt
Fixed rate............ $1,157 $1,234 $ 1,299 $ 1,374 $1,456 $38,170 $ 44,690 $ 44,690
Average interest
rate................. 7.97% 7.97% 7.97% 7.97% 7.97% 7.97% 7.97%
Variable rate......... $ 337 $ 366 $ 396 $ 430 $ 465 $26,759 $ 28,753 $ 28,753
Average interest
rate................. 3.35% 3.35% 3.35% 3.35% 3.35% 3.35% 3.35%
------ ------ ------- ------- ------ ------- -------- --------
Total long-term
debt................ $1,494 $1,600 $ 1,695 $ 1,804 $1,921 $64,929 $ 73,443 $ 73,443
Convertible debentures
6.0% Debentures....... $ -- $ -- $86,250 $ -- $ -- $ -- $ 86,250 $ 50,888
Average interest
rate................. 6% 6% 6% 6% 6% 6% 6%
5.625% Debentures..... $ -- $ -- $ -- $75,000 $ -- $ -- $ 75,000 $ 43,500
Average interest
rate................. 5.625% 5.625% 5.625% 5.625% 5.625% 5.625% 5.625%
------ ------ ------- ------- ------ ------- -------- --------
Total convertible
debentures.......... $ -- $ -- $86,250 $75,000 $ -- $ -- $161,250 $ 94,388
------ ------ ------- ------- ------ ------- -------- --------
Total long-term debt
and convertible
debentures.......... $1,494 $1,600 $87,945 $76,804 $1,921 $64,929 $234,693 $167,831
====== ====== ======= ======= ====== ======= ======== ========
</TABLE>

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

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

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

38
<PAGE>

BUSINESS

Overview

We have experienced significant and rapid growth, primarily through the
development of assisted living residences and, to a much lesser extent, through
acquisitions of residences. When we completed our initial public offering in
November 1994 we had a base of five residences (137 units). As of December 31,
1999, we had 185 assisted living residences in operation representing an
aggregate of 7,148 units. Of these residences, we owned 115 residences (4,515
units) and leased 70 residences (2,633 units). For the twelve months ended
December 31, 1999, our 115 Stabilized Residences (those residences that had
been operating for twelve months prior to the beginning of the period or had
achieved 95.0% occupancy within the first twelve months of operations) had an
average occupancy rate of approximately 85.4% and an average monthly rental
rate of approximately $1,866 per unit.

For the twelve months ended December 31, 1999, we commenced operations with
respect to 20 residences (798 units) which were under construction at December
31, 1998. Except for the completion of these 20 residences, we discontinued all
development activity in 1999 in order to focus on stabilizing our current base
of operating residences. We wrote-off approximately $2.4 million and $4.9
million in fiscal years 1998, 1999, respectively, primarily associated with
sites which we will no longer seek to develop. We own land for the development
of seven sites, and the expansion of three existing residences where
construction has not yet commenced. We currently have three of these sites
listed for sale and are retaining the remaining sites for possible future
development. We have no intention of developing these sites at this time.

During 1999 we discontinued all development activity in order to focus on
our core business of operating our existing residences. The principal elements
of our business strategy are to:

. increase occupancy and improve operating efficiencies at our existing
base of residences;

. expand market penetration in existing markets;

. serve higher-acuity residents; and

. pursue strategic business alliances.

should provide a stable source of residents eligible for Medicaid reimbursement
to the extent that private pay residents are not available and, in addition,
provide our private pay residents with alternative sources of income if their
private funds are depleted and they become Medicaid eligible.

Although we will seek to manage the mix of private paying tenants and
Medicaid paying tenants residing in our facilities, any shift to a high
Medicaid population could have an adverse affect on our financial position,
results of operations or cash flows, particularly if third-party payors such as
Medicaid continue to seek limits on reimbursement rates. See "Risk Factors--We
depend on reimbursement by third-party payors."

39
<PAGE>

Restatement of Historical Financial Statements

On February 1, 1999, we announced that after consultation with our
independent auditors we would restate our financial statements for the fiscal
quarter ended June 30, 1997, the fiscal quarter ended September 30, 1997, the
fiscal year ended December 31, 1997, the fiscal quarter ended March 31, 1998,
the fiscal quarter ended June 30, 1998 and the fiscal quarter ended September
30, 1998. On March 31, 1999, we announced that the restatement would be more
extensive than we had previously believed, and might include periods prior to
the second quarter of 1997, including the fiscal year ended December 31, 1996.
After further consultation with our independent auditors, we determined to
restate our financial statements for the fiscal year ended December 31, 1996,
the fiscal year ended December 31, 1997 and each of the first three fiscal
quarters of the fiscal year ended December 31, 1998. On September 30, 1999, we
filed restated financial statements with the Commission for the fiscal years
ended December 31, 1996 and 1997 and for each of the first three fiscal
quarters of the fiscal year ended December 31, 1998.

The restatement resulted primarily from:

. the earlier recognition of certain expenses that we previously
capitalized in connection with our development and financing activities;

. a modification in how we accounted for certain of our lease arrangements;

. a modification in how we accounted for certain of our acquisitions and
joint venture agreements;

. the capitalization of fees we received from SHS and HCI that we
previously recorded as a reduction of expenses or other income;

. the elimination of an impairment write-down recorded in the second
quarter of 1998 on three of our residences which we later determined were
not impaired based upon subsequent cash flow analysis;

. the elimination of certain accrued expenses previously recorded pursuant
to a change in accounting principle; and

. an increase in the amount of goodwill that we wrote-off in the second
quarter of 1998 relating to exiting our home health operations.

The overall effect of the restatement on net income and net income per share
in each of the periods subject to the restatement is illustrated in the
following table:

<TABLE>
<CAPTION>
As previously reported As restated
-------------------------- -----------------------
Net Income
(Loss) Per
Share Net Loss Per
Net Income --------------- Basic and
Period (Loss) Basic Diluted Net Loss Diluted Share
- ------ ---------- ------ ------- -------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Year ended 12/31/96........ $ 149 $ 0.02 $ 0.01 $ (1,915) $(0.23)
Year ended 12/31/97........ $ 4,209 $ 0.35 $ 0.34 $ (2,479) $(0.21)
Quarter ended 3/31/98(1)... $ 1,906 $ 0.12 $ 0.12 $ (784) $(0.05)
Quarter ended 6/30/98...... $(4,378) $(0.28) $(0.28) $(11,831) $(0.75)
Quarter ended 9/30/98...... $ 2,722 $ 0.16 $ 0.16 $ (720) $(0.04)
</TABLE>
- --------
(1) Net income and net income per share, as previously reported for the quarter
ended March 31, 1998, do not reflect the cumulative effect of the change in
accounting principle which was adopted during the quarter ended June 30,
1998, effective January 1, 1998.

40
<PAGE>

Termination of Merger Agreement

On February 1, 1999, we agreed with American Retirement Corporation to
terminate our previously announced merger agreement, which had been entered
into during November 1998. We recorded a charge of approximately $1.1 million
in the fourth quarter of 1998, and $228,000 the first quarter of 1999 for
expenses incurred related to the terminated merger.

Securityholder Litigation

The Complaint alleges violations of the federal securities laws and seeks
unspecified damages. We filed an answer to the Complaint on December 7, 1999.

We cannot predict the outcome of the foregoing litigation and currently are
unable to evaluate the likelihood of success or the range of possible loss.
However, if the foregoing consolidated action were determined adversely to us
and/or to those to whom our indemnity obligations exist, such a determination
could have a material adverse effect on our financial condition, results of
operations, cash flow and liquidity. See "Legal Proceedings" for information
regarding this litigation.

Termination of Joint Venture Agreements

During fiscal years 1997 and 1998, we entered into joint venture agreements
with respect to the operation of certain start-up residences pursuant to which
90% of the operating risks and rewards related to such residences were
allocated to the joint venture partner, in which we had an interest. We
consolidated the operations of the joint venture agreements in our financial
statements. The joint venture partner reimbursed us for 90% of the start-up
losses of the joint venture residences incurred in the second quarter of 1997
and through the third quarter of 1998, and we recognized such reimbursements as
other income in our financial statements during such quarters. As part of the
restatement such loss reimbursements have been accounted for as loans, rather
than other income. We also have reflected amounts paid to repurchase the joint
venture partner's interest in the operations of the joint venture residences in
excess of reimbursed losses as interest and other expense.

During the first quarter of 1999, we negotiated with the joint venture
partner to acquire, for $3.8 million, all of such partner's remaining interests
in the operations of the remaining 17 residences subject to joint venture
agreements through the third quarter of 1998. The joint venture partner did not
reimburse us for any start-up losses, nor have we entered into any new joint
venture agreements with respect to the operation of start-up residences,
subsequent to the third quarter of 1998.

41
<PAGE>

Management Changes

On March 16, 1999, our board of directors announced the appointment of Dr.
Keren Brown Wilson, our co-founder, as our President and Chief Executive
Officer. The board also announced the appointment of Leslie J. Mahon as Vice
President and Chief Operating Officer and James W. Cruckshank as Vice President
and Chief Financial Officer and Treasurer. As of March 16, 1999, we also
entered into a consulting agreement with William McBride, pursuant to which Mr.
McBride agreed to provide us with consulting services and to resign from his
position as our Chief Executive Officer, and amended Dr. Wilson's existing
employment agreement. See, "Management--Employment and Consulting Agreements."

On March 31, 1999, we announced the resignation of Mr. McBride as Chairman
of the Board of Directors and the election by the board of Richard C. Ladd as
Interim Chairman. We also announced that Mr. McBride had decided not to seek
reelection to the board of directors at the next annual meeting.

In April 1999, we announced the increase in the number of board members from
five to six and the election by the board of Jill Krueger to serve as a
director and as chairman of our Audit Committee.

On March 3, 2000, we announced the appointment of W. James Nicol and John M.
Gibbons to our Board of Directors, including the appointment of Mr. Nicol as
Chairman of the Board. We also announced the formation of an Executive
Committee of our Board of Directors comprised of Dr. Keren Brown Wilson,
Mr. Nicol and Mr. Gibbons. On March 3, 2000, we also announced the resignation
of James W. Cruckshank as our Chief Financial Officer and the appointment of
Mr. Gibbons as Interim Chief Financial Officer. At that time, we entered into a
Separation and Consulting Agreement with Mr. Cruckshank, pursuant to which
Mr. Cruckshank's employment agreement with us was terminated, and Mr.
Cruckshank agreed to provide us with consulting services through the end of
2000. See "Management--Employment and Consulting Agreements."

On March 16, 2000, we announced the addition of Drew Q. Miller as our Chief
Financial Officer and Treasurer and the resignation of Mr. Gibbons as Interim
Chief Financial Officer.

Amendments to Certain Leases

In March 1999, we amended 16 leases with a single lessor. Prior to the
amendment the leases were accounted for as financings due to our continuing
involvement in the residences in the form of a fair market value purchase
option. The amendments resulted in the reclassification of such leases from
financings to operating leases.

In June 1999, we amended all of our 37 leases with another lessor. These
amendments restructured provisions related to future minimum annual rent
increases, or "rent escalators," which prior to the amendments required us to
account for rent expense related to such leases on a straight-line basis. From
the date of the amendment forward, we will account for the amended leases on a
contractual cash payment basis and amortize the deferred rent balance as of the
date of the amendment over the remaining initial terms of the leases. Those
amendments also redefined the lease renewal option with respect to certain
leases and provided the lessor with the option to declare an event of default
in the event of a change of control under certain circumstances. In addition,
the amendments also provide us with the ability, subject to certain conditions,
to sublease or assign our leases with respect to two Washington residences.

Amendment of Loan Agreements

During the third quarter of 1999, we amended certain loan agreements with
one of our creditors. Pursuant to the amendments, we agreed to provide $8.3
million of additional cash collateral in exchange for the forbearance or waiver
of certain possible defaults, including an amendment to certain financial
covenants. The amendments provide for the release of the additional collateral
upon the achievement of specified performance targets, provided that we are in
compliance with the other terms of the loan agreements. We achieved certain of
these specified targets during the fourth quarter of fiscal 1999 and $1.2
million of the cash was released from restriction.

42
<PAGE>

Site Abandonment Costs

Except for the completion of 20 residences opened during 1999, we
discontinued all development activity in 1999 in order to focus on stabilizing
our current base of operating residences. We wrote-off in 1999 approximately
$4.9 million primarily associated with sites which we will no longer seek to
develop. We own land for the development of seven sites and the expansion of
three existing residences, where construction has not yet commenced. We
currently have three of the sites listed for sale and are retaining the
remaining sites for possible future development. We have no intention of
developing these sites at this time.

Services

Our residences offer residents a supportive, "home-like" setting and
assistance with activities of daily living. Residents are individuals who, for
a variety of reasons, cannot live alone but do not typically need the 24-hour
skilled medical care provided in nursing facilities. We design services
provided to these residents to respond to their individual needs and to improve
their quality of life. This individualized assistance is available 24 hours a
day, to meet both anticipated and unanticipated needs, including routine
health-related services, which are made available and are provided according to
the resident's individual needs and state regulatory requirements.

Available services include:

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

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

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

We also provide or arrange access to additional services beyond basic
housing and related services, including physical therapy and pharmacy services.

Although a typical package of basic services provided to a resident includes
meals, housekeeping, laundry and personal care, we do not have a standard
service package for all residents. Instead, we are able to accommodate the
changing needs of our residents through the use of individual service plans and
flexible staffing patterns. Our multi-tiered rate structure for services is
based upon the acuity of, or level of services needed by, each resident.
Supplemental and specialized health-related services for those residents
requiring 24-hour supervision or more extensive assistance with activities of
daily living are provided by third-party providers who are reimbursed directly
by the resident or a third-party payor (such as Medicaid or long-term care
insurance). We assess the level of need of each resident regularly.

Operations

Each residence has an on-site program director who is responsible for the
overall day-to-day 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. We consult with outside providers, such as
registered nurses, pharmacists, and dietitians, for purposes of medication
review, menu planning and responding to any special dietary needs of residents.
Personal service assistants who primarily are full-time employees are
responsible for personal care, dietary services, housekeeping and laundry
services. Maintenance services are performed by full and part-time employees.

We have established an infrastructure that includes five regional vice
presidents of operations who oversee the overall performance and finances of
each region, regional operations managers and two regional associate operations
managers who oversee the day-to-day operations of up to 10 to 12 residences,
and team leaders who

43
<PAGE>

provide peer support for up to three to four residences. Presently, residence
personnel also are supported by corporate staff based at our headquarters. We
also have regional property managers who oversee the maintenance of the
residences and five regional marketing coordinators who assist with marketing
the residences. Corporate and regional personnel work with the program
directors to establish residence goals and strategies, quality assurance
oversight, development of our policies and procedures, government relations,
marketing and sales, community relations, development and implementation of new
programs, cash management and treasury functions, and human resource
management.

Competition

The long-term care industry generally is highly competitive. We expect that
the assisted living business, in particular, will become even more competitive
in the future given the relatively low barriers to entry and continuing health
care cost containment pressures.

We compete with numerous other companies providing similar long-term care
alternatives. We operate in 16 states and each community in which we operate
provides a unique market. Overall, a limited number of our markets include an
assisted living competitor offering assisted living facilities that are similar
in size, price and range of service. In markets where we have competition, our
competitors include other companies that provide adult day care in the home,
higher priced assisted living centers (typically larger facilities with more
amenities), congregate care facilities where tenants elect the services to be
provided, and continuing care retirement centers on campus like settings.

We expect to face increased competition from new market entrants as assisted
living receives increased attention and the number of states which include
assisted living in their Medicaid programs increases. Competition will also
grow from new market entrants, including publicly and privately held companies
focusing primarily on assisted living. Nursing facilities that provide long-
term care services are also a potential source of competition for us. Providers
of assisted living residences compete for residents primarily on the basis of
quality of care, price, reputation, physical appearance of the facilities,
services offered, family preferences, physician referrals and location. Some of
our competitors operate on a not-for-profit basis or as charitable
organizations. Some of our competitors are significantly larger than us and
have, or may obtain, greater resources than ours. While we generally believe
that there is moderate competition for less expensive segments of the private
market and for Medicaid residents in small communities, we have seen an
increase in competition in certain of our markets.

We believe that many assisted living markets have become or are on the verge
of becoming overbuilt. Regulation and other barriers to entry into the assisted
living industry are not substantial. In addition, because the segment of the
population that can afford to pay our daily resident fee is finite, the
development of new assisted living facilities could outpace demand. The short
term effects of overbuilding include (a) significantly longer fill-up periods
(2-3 years as compared to 12-18 months previously experienced), (b) pressure to
lower or refrain from increasing rates and (c) competition for workers in
already tight labor markets. Long term effects include lower margins for an
estimated 3-5 years until excess units are absorbed. Recently, we have
experienced slower fill-up than expected of new residences in some markets as
well as declining occupancy in our stabilized residences due to the increase in
options available to potential new residents when units are vacated. We believe
that each local market is different, and we are and will continue to react in a
variety of ways to the specific competitive environment that exists in each
market. There can be no assurance that we will be able to compete effectively
in those markets where overbuilding exists, or that future overbuilding in
other markets where we have opened residences will not adversely affect our
operations.

Funding

Assisted living residents or their families generally pay the cost of care
from their own financial resources. Depending on the nature of an individual's
health insurance program or long-term care insurance policy, the

44
<PAGE>

individual may receive reimbursement for costs of care under an "assisted
living," "custodial" or "alternative care benefit." Government payments for
assisted living have been limited. Some state and local governments offer
subsidies for rent or services for low-income elders. Others may provide
subsidies in the form of additional payments for those who receive Supplemental
Security Income (SSI). Medicaid provides coverage for certain financially or
medically needy persons, regardless of age, and is funded jointly by federal,
state and local governments. Medicaid contracts for assisted living vary from
state to state. Although a majority of our revenues come from private payors,
the cost structure of the residences has historically been, and is expected to
continue to be, sufficiently low so that the residences are able to operate
profitably if all of their revenues are derived through Medicaid contracts.

In 1981, the federal government approved a Medicaid waiver program called
Home and Community Based Care which was designed to permit states to develop
programs specific to the healthcare and housing needs of the low-income elderly
eligible for nursing home placement (a "Medicaid Waiver Program"). In 1986,
Oregon became the first state to use federal funding for licensed assisted
living services through a Medicaid Waiver Program authorized by the Health Care
Financing Administration ("HCFA"). Under a Medicaid Waiver Program, states
apply to HCFA for a waiver to use Medicaid funds to support community-based
options for the low-income elderly who need long-term care. These waivers
permit states to reallocate a portion of Medicaid funding for nursing facility
care to other forms of care such as assisted living. In 1994, the federal
government implemented new regulations which empowered states to further expand
their Medicaid Waiver Programs and eliminated restrictions on the amount of
Medicaid funding states could allocate to community-based care, such as
assisted living. A limited number of states including Oregon, New Jersey,
Texas, Arizona, Nebraska, Florida, Idaho and Washington currently have
operating Medicaid Waiver Programs that allow them to pay for assisted living
care. Without a Medicaid Waiver Program, states can use federal Medicaid funds
only for long-term care in nursing facilities.

During the years ended December 31, 1997, 1998 and 1999, direct payments
received from state Medicaid agencies accounted for approximately 11.1%, 10.7%,
and 10.4% respectively, of our revenue while the tenant-paid portion received
from Medicaid residents accounted for approximately 5.9%, 5.8%, and 5.9%
respectively, of our revenue during these periods. We expect in the future that
state Medicaid reimbursement programs will continue to constitute one of our
sources of revenue.

The Balanced Budget Act ("BBA") of 1997, Public Law 105-33, included
sweeping changes to Medicare and Medicaid, significantly reducing rates of
increase for payments to home health agencies. Under the BBA, home health
agencies (as well as certain other health related industries) will no longer be
reimbursed under a cost based system. Rather, the BBA requires the Secretary of
Health and Human Services to establish and implement a prospective payment
system under which home health care services will be reimbursed on a per diem
basis for cost reporting periods beginning on and after October 1, 2000. In
1998, following the adoption of the BBA, we closed our home health operations.
The shift to a prospective payment system under the BBA does not apply to
assisted living residences and therefore should not affect our assisted living
operations.

We anticipate that revenues at a majority of our residences will continue to
come from private pay sources. However, we believe that locating residences in
states with favorable regulatory and reimbursement climates should provide a
stable source of residents eligible for Medicaid reimbursement to the extent
that private pay residents are not available and, in addition, provide our
private pay residents with alternative sources of income when their private
funds are depleted and they become Medicaid eligible. Although we will seek to
manage the mix of private paying tenants and Medicaid paying tenants residing
in our facilitites, this shift could have an adverse effect on our financial
position, results of operations or cash flows, particularly if third-party
payors such as Medicaid continue to seek limits on reimbursement rates.

45
<PAGE>

Government Regulation

Our assisted living residences are subject to certain state statutes, rules
and regulations, including those which provide for licensing requirements. In
order to qualify as a state licensed facility, our residences must comply with
regulations which address, among other things, staffing, physical design,
required services and resident characteristics. As of December 31, 1999, we had
obtained licenses in Oregon, Washington, Idaho, Nebraska, Texas, Arizona, Iowa,
Louisiana, Ohio, New Jersey, Pennsylvania, Florida, Michigan, Georgia and South
Carolina. We are not currently subject to state licensure requirements in
Indiana. Our residences are also subject to various local building codes and
other ordinances, including fire safety codes. These requirements vary from
state to state and are monitored to varying degrees by state agencies.

As a provider of services under the Medicaid program in the United States,
we are subject to Medicaid fraud and abuse laws, which prohibit any bribe,
kickback, rebate or remuneration of any kind in return for the referral of
Medicaid patients, or to induce the purchasing, leasing, ordering or arranging
of any goods or services to be paid for by Medicaid. Violations of these laws
may result in civil and criminal penalties and exclusions from participation in
the Medicaid program. The Inspector General of the Department of Health and
Human Services issued "safe harbor" regulations specifying certain business
practices, which are exempt from sanctions under the fraud and abuse law.
Several states in which we operate have laws that prohibit certain direct or
indirect payments or fee-splitting arrangements between health care providers
if such arrangements are designed to induce or encourage the referral of
patients to a particular provider. We at all times attempt to comply with all
applicable fraud and abuse laws. There can be no assurance that administrative
or judicial interpretation of existing laws or regulations or enactments of new
laws or regulations will not have a material adverse effect on our results of
operations or financial condition.

Currently, the federal government does not regulate assisted living
residences as such. State standards required of assisted living providers are
less in comparison with those required of other licensed health care operators.
For instance, the states we initially targeted for development/expansion
typically 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 we believe that
our facilities are substantially in compliance with, or are exempt from,
present requirements, we will incur additional costs if required changes
involve a greater expenditure than anticipated or must be made on a more
accelerated basis than anticipated. Further legislation may impose additional
burdens or restrictions with respect to access by disabled persons, the costs
of compliance with which could be substantial.

Employees

As of December 31, 1999 we had 3,718 employees, of whom 1,546 were full-time
employees, and 2,172 were part-time employees. None of our employees are
represented by any labor union. We believe that our labor relations are
generally good.

46
<PAGE>

Properties

The following chart sets forth, as of December 31, 1999 the location, number
of units, date of licensure, ownership status, and occupancy percentage of our
residences.

<TABLE>
<CAPTION>
Occupancy %
Opening at
Residence Units Date(1) Ownership(2) 12/31/99(3)
- --------- ----- ------- ------------ -----------
<S> <C> <C> <C> <C>
Western Region
Idaho
Burley................................... 35 08/97 Leased 88.6
Caldwell................................. 35 08/97 Leased 60.0
Garden City.............................. 48 04/97 Owned 83.3
Hayden................................... 39 11/96 Leased 100.0
Idaho Falls.............................. 39 01/97 Owned 89.7
Moscow................................... 35 04/97 Owned 71.4
Nampa.................................... 39 02/97 Leased 74.4
Rexburg.................................. 35 08/97 Owned 65.7
Twin Falls............................... 39 09/97 Owned 48.7
--- -----
Sub Total.............................. 344 76.2

Oregon
Astoria.................................. 28 08/96 Owned 96.4
Bend..................................... 46 11/95 Owned 87.0
Brookings................................ 36 07/96 Owned 100.0
Canby.................................... 25 12/90 Leased 100.0
Estacada................................. 30 01/97 Owned 100.0
Eugene................................... 47 08/97 Leased 100.0
Hood River............................... 30 10/95 Owned 96.7
Klamath Falls............................ 36 10/96 Leased 100.0
Lincoln City............................. 33 10/94 Owned 75.7
Madras................................... 27 03/91 Owned 100.0
Myrtle Creek............................. 34 03/96 Leased 100.0
Newberg.................................. 26 10/92 Leased 100.0
Newport.................................. 36 06/96 Leased 83.3
Pendleton................................ 39 04/91 Leased 87.2
Prineville............................... 30 10/95 Owned 96.7
Redmond.................................. 37 03/95 Leased 100.0
Silverton................................ 30 07/95 Owned 96.7
Sutherlin................................ 30 01/97 Leased 100.0
Talent................................... 36 10/96 Owned 100.0
--- -----
Sub Total.............................. 636 95.6
</TABLE>

47
<PAGE>

<TABLE>
<CAPTION>
Occupancy %
Opening at
Residence Units Date(1) Ownership(2) 12/31/99(3)
- --------- ----- ------- ------------ -----------
<S> <C> <C> <C> <C>
Washington
Battle Ground............................ 40 11/96 Leased 100.0
Bremerton................................ 39 05/97 Owned 82.1
Camas.................................... 36 03/96 Leased 100.0
Enumclaw................................. 40 04/97 Owned 95.0
Ferndale................................. 39 10/98 Owned 79.5
Grandview................................ 36 02/96 Leased 91.7
Hoquiam.................................. 40 07/97 Leased 100.0
Kelso.................................... 40 08/96 Leased 90.0
Kennewick................................ 36 12/95 Leased 47.2
North Spokane............................ 39 09/97 Owned 87.2
Port Orchard............................. 39 06/97 Owned 97.4
Port Townsend............................ 39 01/98 Owned 97.4
Sumner................................... 48 03/98 Owned 97.9
Vancouver................................ 44 06/96 Leased 77.3
Walla Walla.............................. 36 02/96 Leased 100.0
Yakima................................... 48 07/98 Owned 89.6
--- -----
Sub Total.............................. 639 84.5

Midwest Region
Indiana
Bedford.................................. 39 03/98 Owned 61.5
Bloomington.............................. 39 01/98 Owned 38.5
Camby.................................... 39 12/98 Owned 43.6
Crawfordsville........................... 39 06/99 Owned 76.9
Elkheart................................. 39 09/97 Leased 89.7
Fort Wayne............................... 39 06/98 Owned 38.5
Franklin................................. 39 05/98 Owned 53.9
Huntington............................... 39 02/98 Owned 59.0
Jeffersonville........................... 39 03/99 Owned 28.2
Kendalville.............................. 39 05/98 Owned 48.7
Lafayette................................ 39 11/99 Owned 38.5
LaPorte.................................. 39 10/98 Owned 43.6
Logansport............................... 39 02/98 Owned 100.0
Madison.................................. 39 10/97 Leased 97.4
Marion................................... 39 03/98 Owned 38.5
Muncie................................... 39 02/98 Owned 89.7
New Albany............................... 39 05/98 Owned 64.1
New Castle............................... 39 02/98 Owned 82.1
Seymour.................................. 39 05/98 Owned 69.2
Shelbyville.............................. 39 05/98 Owned 92.3
Warsaw................................... 39 10/97 Owned 48.7
--- -----
Sub Total.............................. 819 62.3

Iowa
Atlantic................................. 30 09/98 Owned 83.3
Carroll.................................. 35 01/99 Owned 60.0
Clarinda................................. 35 09/98 Owned 97.1
Council Bluff............................ 50 03/99 Owned 62.0
Denison.................................. 35 05/98 Leased 62.9
Sergeant Bluff........................... 39 11/99 Owned 10.3
--- -----
Sub Total.............................. 224 61.2
</TABLE>

48
<PAGE>

<TABLE>
<CAPTION>
Occupancy %
Opening at
Residence Units Date(1) Ownership(2) 12/31/99(3)
- --------- ----- ------- ------------ -----------
<S> <C> <C> <C> <C>
Michigan
Coldwater................................ 39 10/99 Owned 38.5
Kalamazoo................................ 39 11/99 Owned 46.2
Three Rivers............................. 39 04/99 Owned 28.2
--- -----
Sub Total.............................. 117 37.6

Nebraska
Beatrice................................. 39 07/97 Leased 97.4
Blair.................................... 30 07/98 Owned 86.7
Columbus................................. 39 06/98 Owned 97.4
Fremont.................................. 39 05/98 Owned 100.0
Nebraska City............................ 30 06/98 Owned 86.7
Norfolk.................................. 39 04/97 Leased 79.5
Seward................................... 30 10/98 Owned 80.0
Wahoo.................................... 39 06/97 Leased 71.8
York..................................... 39 05/97 Leased 100.0
--- -----
Sub Total.............................. 324 89.2

Southeast Region
Georgia
Rome..................................... 39 08/99 Owned 25.6
--- -----
Sub Total.............................. 39 25.6

Florida
Defuniak................................. 39 07/99 Owned 20.5
Pensacola................................ 39 06/99 Owned 43.6
Quincy................................... 39 04/99 Owned 43.6
Milton................................... 39 06/99 Owned 51.3
--- -----
Sub Total.............................. 156 39.7

Louisiana
Alexandria............................... 48 07/98 Owned 66.7
Bunkie................................... 39 01/99 Owned 43.6
Houma.................................... 48 08/98 Owned 81.3
Ruston................................... 39 01/99 Owned 46.2
--- -----
Sub Total.............................. 174 60.9

South Carolina
Aiken.................................... 39 02/98 Owned 87.2
Clinton.................................. 39 11/97 Leased 33.3
Goose Creek.............................. 39 08/98 Owned 41.0
Greenwood................................ 39 05/98 Leased 41.0
Greer.................................... 39 06/99 Owned 66.7
James Island............................. 39 08/98 Owned 82.1
North Augusta............................ 39 10/98 Owned 35.9
Port Royal............................... 39 09/98 Owned 71.8
Summerville.............................. 39 02/98 Owned 79.5
--- -----
Sub Total.............................. 351 59.8

Texas
Athens................................... 38 11/95 Leased 94.7
Carthage................................. 30 10/95 Leased 93.3
Greenville............................... 40 11/95 Leased 95.0
Gun Barrel City.......................... 40 10/95 Leased 100.0
Henderson................................ 30 09/96 Leased 100.0
Jacksonville............................. 39 12/95 Leased 97.4
Longview................................. 30 09/95 Leased 93.3
</TABLE>

49
<PAGE>

<TABLE>
<CAPTION>
Occupancy %
Opening at
Residence Units Date(1) Ownership(2) 12/31/99(3)
- --------- ----- ------- ------------ -----------
<S> <C> <C> <C> <C>
Marshall................................. 40 07/95 Leased 87.5
Sulpher Springs.......................... 30 01/96 Owned 100.0
Paris Oaks............................... 50 12/98 Owned 100.0
----- -----
Sub Total.............................. 367 96.7

Southwest Region
Texas
Abilene.................................. 38 10/96 Leased 100.0
Amarillo................................. 50 03/96 Leased 98.0
Beaumont................................. 50 04/96 Leased 92.0
Big Springs.............................. 38 05/96 Leased 97.4
Bryan.................................... 30 06/96 Leased 100.0
Canyon................................... 30 06/96 Leased 100.0
Cleburne................................. 45 01/96 Owned 100.0
College Station.......................... 39 10/96 Leased 79.5
Conroe................................... 38 07/96 Leased 94.7
Denison.................................. 30 01/96 Owned 86.7
Gainesville.............................. 40 01/96 Leased 97.5
Levelland................................ 30 01/96 Leased 100.0
Lubbock.................................. 50 07/96 Leased 96.0
Lufkin................................... 39 05/96 Leased 100.0
McKinney................................. 39 01/97 Owned 100.0
McKinney................................. 50 05/98 Owned 94.0
Mesquite................................. 50 07/96 Leased 92.0
Midland.................................. 50 12/96 Owned 98.0
Mineral Wells............................ 30 07/96 Leased 100.0
Nagodoches............................... 30 06/96 Leased 100.0
Orange................................... 36 03/96 Leased 97.2
Pampa.................................... 36 08/96 Leased 100.0
Plainview................................ 36 07/96 Leased 94.4
Plano.................................... 64 05/98 Owned 89.1
Port Arthur.............................. 50 05/96 Owned 98.0
Rowlett.................................. 36 10/96 Owned 100.0
Sherman.................................. 39 10/95 Leased 94.9
Sweetwater............................... 30 03/96 Leased 96.7
Temple................................... 40 01/97 Leased 60.0
Wichita Falls............................ 50 10/96 Leased 86.0
----- -----
Sub Total.............................. 1,213 95.5

Arizona
Apache Junction.......................... 48 03/98 Owned 93.8
Bullhead City............................ 40 08/97 Leased 82.5
Lake Havasu.............................. 36 04/97 Leased 69.4
Mesa..................................... 50 01/98 Owned 66.0
Payson................................... 39 10/98 Owned 100.0
Peoria................................... 50 07/99 Owned 16.0
Prescott Valley.......................... 39 10/98 Owned 59.0
Surprise................................. 50 10/98 Owned 28.0
Yuma..................................... 48 03/98 Owned 83.3
----- -----
Sub Total.............................. 400 65.3
</TABLE>

50
<PAGE>

<TABLE>
<CAPTION>
Occupancy %
Opening at
Residence Units Date(1) Ownership(2) 12/31/99(3)
- --------- ----- ------- ------------ -----------
<S> <C> <C> <C> <C>
Northeast Region
New Jersey
Bridgeton................................ 39 03/98 Owned 79.5
Burlington............................... 39 11/97 Owned 100.0
Egg Harbor............................... 39 04/99 Owned 100.0
Glassboro................................ 39 03/97 Leased 100.0
Millville................................ 39 05/97 Leased 82.1
Pennsville............................... 39 11/97 Owned 94.9
Rio Grande............................... 39 11/97 Owned 100.0
Vineland................................. 39 01/97 Leased 97.4
----- -----
Sub Total.............................. 312 95.2
Ohio
Bellefountaine........................... 35 03/97 Owned 51.4
Bucyrus.................................. 35 01/97 Owned 97.1
Cambridge................................ 39 10/97 Owned 59.0
Celina................................... 39 04/97 Owned 79.5
Defiance................................. 35 02/96 Owned 82.9
Findlay.................................. 39 03/97 Owned 53.9
Fremont.................................. 39 07/97 Leased 89.7
Greenville............................... 39 02/97 Owned 97.4
Hillsboro................................ 39 03/98 Owned 74.3
Kenton................................... 35 03/97 Owned 100.0
Lima..................................... 39 06/97 Owned 35.9
Marion................................... 39 04/97 Owned 51.3
Newark................................... 39 10/97 Leased 92.3
Sandusky................................. 39 09/98 Owned 33.3
Tiffin................................... 35 06/97 Leased 85.7
Troy..................................... 39 03/97 Leased 100.0
Wheelersburg............................. 39 09/97 Leased 25.6
Zanesville............................... 39 12/97 Owned 89.7
----- -----
Sub Total.............................. 682 71.8
Pennsylvania
Butler................................... 39 12/97 Owned 84.6
Hermitage................................ 39 03/98 Owned 82.1
Indiana.................................. 39 03/98 Owned 53.8
Johnstown................................ 39 06/98 Owned 46.2
Latrobe.................................. 39 12/97 Owned 97.4
Lower Burrell............................ 39 01/98 Owned 89.7
New Castle............................... 39 04/98 Owned 100.0
Penn Hills............................... 39 05/98 Owned 59.0
Uniontown................................ 39 06/98 Owned 87.2
----- -----
Sub Total.............................. 351 77.8
----- -----
Grand Total............................ 7,148 79.0%
===== =====
</TABLE>
- --------

(1) Reflects the date operations commenced, typically the licensure date for
developed residences and the date of purchase for acquired residences. With
the exception of four facilities purchased in 1998 (Plano, Texas; McKinney,
Texas; Alexandria, Louisiana; Paris Oaks, Texas), we developed all of the
residences identified as opening in 1998 and 1999.

(2) As of December 31, 1999, we owned 115 residences, 37 of which were subject
to permanent mortgage financing and 78 of which were unencumbered, and we
leased 70 residences pursuant to long-term operating leases. See Notes 5
and 8 to the audited consolidated financial statements included elsewhere
herein.

(3) Occupancy is calculated based upon occupied units at December 31, 1999.

51
<PAGE>

In 1999, we also lease in total approximately 28,000 square feet of office
space for the Corporate and Regional offices in Portland, Oregon; Glendale,
Arizona; Dallas, Texas; Omaha, Nebraska; and Dublin, Ohio.

Legal Proceedings

Securityholder Litigation

The Complaint alleges violations of the federal securities laws and seeks
unspecified damages. We filed an answer to the Complaint on December 7, 1999.

Other Litigation

In addition to the matter referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the
normal course of business. In the opinion of our management, although the
outcomes of these other suits and claims are uncertain and because of the early
stages of these matters, management cannot estimate the losses or range of
losses, should the outcomes be unfavorable. In the aggregate, such other suits
and claims should not have a material adverse effect on our financial
condition, results of operations, cash flow or liquidity.

52
<PAGE>

MANAGEMENT

General

We have provided below certain information regarding our directors and
executive officers:

<TABLE>
<CAPTION>
Name Age(1) Position
---- ------ --------
<C> <C> <S>
Director and Chairman of the Board of
W. James Nicol(2)(4)(6)....... 56 Directors

Dr. Keren Brown Wilson(2)(5).. 52 President, Chief Executive Officer and
Vice Chairman of the Board of
Directors

Richard C. Ladd(5)(3)......... 61 Director

Jill M. Krueger(3)(6)......... 40 Director

Bradley G. Razook(4).......... 44 Director

Gloria J. Cavanaugh(4)(5)..... 57 Director

John M. Gibbons(2)(3)......... 51 Director

Senior Vice President, General Counsel
Sandra Campbell............... 53 and Secretary

Senior Vice President of Community
Nancy Gorshe.................. 49 Relations

Drew Q. Miller................ 47 Chief Financial Officer and Treasurer

Vice President and Chief Operating
Leslie W. Mahon............... 52 Officer

Paul B. Parker................ 33 Vice President of Development

Vice President, Controller and Chief
M. Catherine Maloney.......... 37 Accounting Officer
</TABLE>
- --------

(1) As of December 31, 1999.

(2) Member of the Executive Committee.

(3) Member of the Audit Committee.

(4) Member of the Compensation Committee.

(5) Member of the Education, Training and Quality Assurance Committee.

(6) Member of the Special Committee for Securityholder Litigation.

W. James Nicol was appointed Chairman of the Board on March 3, 2000. Mr.
Nicol has over 20 years experience of senior executive management, including
finance and corporate development in health care service organizations. Mr.
Nicol has most recently served as the Chief Financial Officer of HemoTherapies,
Inc., a San Diego based medical device start-up company. Prior to joining
HemoTherapies, he served in various senior executive roles for numerous
companies, including Chief Operating Officer of Laguna Medical Systems,
President and Chief Executive Officer of Health Management, Inc. and Chief
Financial Officer of Careline, Inc. and Quantum Health Resources, Inc. Mr.
Nicol has served as a senior officer and/or member of the Board of Directors of
six publicly-traded companies.

Dr. Keren Brown Wilson is one of our co-founders and served as our
President/Chief Executive Officer from our formation in July 1994 until
September 1997, and as President/Chief Operating Officer from September 1997
until March 1999. She has served as Vice Chairman of our Board of Directors
since September 1997, and as President and Chief Executive Officer since March
1999. From September 1997 until March 1999 Dr. Wilson served as our Chief
Operating Officer. Dr. Wilson has over twenty years of experience in aging
service delivery systems and has, for the past 17 years, focused primarily on
assisted living. Since 1983, Dr. Wilson has also been an Associate Professor at
the Institute for Aging at Portland State University. In these capacities,
Dr. Wilson was responsible for designing, developing and managing the state of
Oregon's first assisted living residence along with the state's first Medicaid-
eligible assisted living residence. She currently serves as Vice Chair of the
Assisted Living Federation of America and is on the Board of Directors of the
American Society on Aging and the IOM Quality of LTC Committee.

53
<PAGE>

Richard C. Ladd has served as Chairman of our Board of Directors since March
1999 and 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 social services consulting firm. He is also co-director of the
National Long-Term Care Balancing Project and was an adjunct assistant
professor at the School of Internal Medicine, University of Texas Medical
Branch at Galveston, Texas. From June 1992 to September 1994, Mr. Ladd served
as the Texas Commissioner of Health and Human Services where he oversaw the
development and implementation of a 22,000-bed Medicaid Waiver Program to be
used for assisted living and other community-based service programs. From
November 1981 to June 1992, Mr. Ladd served as Administrator of the Oregon
Senior and Disabled Services Division. He is also a member of numerous
professional and honorary organizations.

Jill M. Krueger was elected to the Board of Directors in April 1999, and
presently serves as Chairman of our Audit Committee. Since 1996, Ms. Krueger
has served as President and Chief Executive Officer of Health Resources
Alliance, an organization designed to optimize market position and achieve
synergies which enable its 20 member organizations to prosper in a managed care
environment. From 1988 to 1996 Ms. Krueger was a partner at KPMG LLP where she
served as its Partner in charge of the firm's National Long Term Care and
Retirement Housing Practice.

Bradley G. Razook has been a director since August 1994. Mr. Razook is
currently President and Managing Director at Cohen & Steers Capital Advisors,
LLC. From July 1997 until February 1999, Mr. Razook served as Managing Director
and Head of 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. 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.

Gloria J. Cavanaugh was appointed as a director 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.

John M. Gibbons was appointed a director in March 2000. He brings over 16
years of public company senior management experience in finance and executive
management positions. During his six years at The Sports Club Company, a
developer and operator of luxury sports and fitness clubs, Mr. Gibbons held a
number of positions, including Chief Financial Officer, Chief Operating Officer
and most recently President and Chief Executive Officer. He was a director of
The Sports Club from 1995 through February 2000. Prior to joining The Sports
Club, Mr. Gibbons was employed by Com-Systems, a publicly-traded long-distance
telecommunications company, where he served in multiple capacities, including
as Senior Vice-President, General Manager and Chief Financial Officer.

Sandra Campbell joined us as Senior Vice President, General Counsel and
Secretary in January of 1998. Ms. Campbell has almost 20 years of experience in
practicing law in real property, secured transactions and general business law.
Prior to joining us she was a partner in the law firm of Bullivant Houser
Bailey where she was employed from April 1995 to December 1998. From January
1992 to April 1995, Ms. Campbell served as Chief Legal Counsel for First
Fidelity Thrift & Loan Association.

Nancy Gorshe joined us as Vice President of Community Relations in January
of 1998 and has over twenty years of experience in the field of geriatric
health, community and long-term care and housing. Prior to joining us, she was
President of Franciscan ElderCare Corporation which is comprised of nursing
homes, assisted living facilities, and subacute units in nursing homes and
hospitals from 1993 to 1997. In addition, Ms. Gorshe has served as Executive
Director of Providence Elderplace, a long-term care HMO.

54
<PAGE>

Drew Q. Miller joined us in March 2000 as Chief Financial Officer and
Treasurer. Mr. Miller has over 16 years of senior finance and accounting
experience in health care services. Most recently Mr. Miller served as Chief
Executive Officer and President of Advantage Behavior Health, Inc., a southern
California-based comprehensive behavioral management company. Prior to
Advantage, he served as Chief Financial Officer of Comprehensive Care
Corporation, a publicly traded company engaged in the development, delivery and
management of behavioral services.

Leslie W. Mahon joined us as Vice President and Chief Operating Officer in
March of 1999 and his background includes 10 years experience in the health
care industry as the Chief Executive Officer of Lantis Enterprises, Inc., a
private company that operates 37 assisted living facilities in five states.

Paul B. Parker joined us in July 1998, and currently serves as Vice
President of Development. Mr. Parker has eight years experience in the
development and acquisition of assisted living facilities, health policy and
regulation as well as reimbursement. Prior to joining us, he served as Chief
Executive Officer of Supportive Housing Services, Inc. and President of LTC
Development Company. Both firms specialize in the development of assisted
living facilities.

M. Catherine Maloney joined us as Controller in June 1998, and currently
serves as Vice President, Controller, and Chief Accounting Officer. Prior to
joining us, Ms. Maloney was an Audit Manager with KPMG LLP.

55
<PAGE>

EXECUTIVE COMPENSATION

We have set forth in the following table information concerning the
compensation paid during the fiscal year ended December 31, 1999 to Mr. McBride
and Dr. Wilson, each of whom served as our Chief Executive Officer for a
portion of 1999 and each of our four other most highly compensated executive
officers (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Compensation(1) Long-Term Compensation Awards
----------------------------------- ----------------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying All Other
Position Year Salary Bonus(2) Compensation(3) Awards(3) Options Compensation
------------------ ---- -------- --------- --------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
William McBride III(4).. 1999 $ 68,500 $(100,000) $1,375,000 -- -- --
Former Chief 1998 247,000 100,000 -- -- -- --
Executive Officer 1997 -- -- -- $3,400,000 -- --
Dr. Keren Brown Wilson.. 1999 $200,000 $(100,000) $ 187,500 -- 7,500 --
President and Chief 1998 203,000 100,000 -- -- -- --
Executive Officer 1997 200,000 -- -- $ 850,000 -- --
Leslie J. Mahon(5)...... 1999 $141,300 $ 17,500 -- -- 30,000 --
Chief Operating
Officer
Sandra Campbell(6)...... 1999 $150,000 $ 51,250 -- -- -- --
Senior Vice President, 1998 141,600 25,000 -- -- 15,000 --
General Counsel
and Secretary
Nancy Gorshe(7)......... 1999 $125,000 $ 15,000 -- -- -- --
Senior Vice President 1998 101,300 -- -- -- 55,000 --
Of Community Relations
James Cruckshank(5)..... 1999 $115,400 -- -- -- 30,000 --
</TABLE>
- --------

(1) Excludes certain perquisites and other personal benefit amounts, such as
car allowance, which, for any executive officer did not exceed, in the
aggregate, the lesser of $50,000 or 10% of the total annual salary and
bonus for such executive.

(2) Each of Mr. McBride and Dr. Wilson was paid a bonus of $100,000 in 1998
related to the execution of the ARC merger agreement. Payments made to each
of them subsequent to December 31, 1998 were reduced by $100,000 to reflect
repayment of these bonus payments.

(3) Restricted stock awards are valued in the table above at their fair market
value based on $17.00, the per share closing price of our Common Stock on
the American Stock Exchange on the date of the award. At December 31, 1998,
Mr. McBride and Dr. Wilson held 200,000 and 50,000 shares, respectively, of
restricted stock valued at $2.6 million and $656,000, respectively
(calculated by multiplying the amount of restricted stock by the closing
market price of $13.125 on the last trading day of 1998). As of March 15,
1999 Mr. McBride and Dr. Wilson agreed to forfeit the shares of restricted
stock held by each of them for $750,000 and $187,500, respectively. In
addition, during 1999 Mr. McBride received a severance payment of $490,000
and consulting payments of $135,000. See "Employment Agreements" and
"Consulting Agreement."

(4) Mr. McBride became Chief Executive Officer on October 3, 1997, but did not
begin receiving compensation until January 1, 1998. In March 1999, Mr.
McBride resigned as Chief Executive Officer.

(5) Each of Mr. Mahon and Mr. Cruckshank began his employment with us in March
1999. Subsequent to December 31, 1999, Mr. Cruckshank resigned as Chief
Financial Officer.

(6) Ms. Campbell began her employment with us on December 31, 1997 and began
receiving compensation in January 1998.

(7) Ms. Gorshe began her employment with us in February 1998.

56
<PAGE>

We have provided in the following table information on stock options granted
during 1999 to the Named Executive Officers.

STOCK OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
Potential
Realizable Value
at Assumed
% of Total Annual Rate of
Number of Options Stock Price
Securities Granted to Appreciation for
Underlying Employees Exercise Option Term(1)
Options in Fiscal Price Expiration ----------------
Name Granted Year ($/Sh) Date 5% 10%
---- ---------- ---------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
William McBride III..... -- -- -- -- -- --
Dr. Keren Brown Wilson.. 7,500 1.6% $1.69 11/16/09 $ 8,000 $ 20,000
Leslie J. Mahon......... 30,000 6.5% $5.00 03/01/09 $94,300 $239,000
Sandra Campbell......... -- -- -- -- -- --
Nancy Gorshe............ -- -- -- -- -- --
James Cruckshank........ 30,000 6.5% $3.81 03/18/09 $71,900 $182,200
</TABLE>
- --------

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

We have provided in the following table information with respect to the
Named Executive Officers concerning unexercised stock options held as of
December 31, 1999.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-The-Money Options
Unexercised Options at Fiscal Year-
at Fiscal Year-End End(1)
Shares -------------------- --------------------
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
---- ----------- -------- -------------------- --------------------
<S> <C> <C> <C> <C>
William McBride III..... -- -- 145,000/ 0 $0/$0
Keren Brown Wilson...... -- -- 215,000/ 7,500 $0/$3,263
Leslie J. Mahon......... -- -- 0/30,000 $0/$0
Sandra Campbell......... -- -- 38,334/26,666 $0/$0
Nancy Gorshe............ -- -- 25,001/29,999 $0/$0
James Cruckshank........ -- -- 0/30,000 $0/$0
</TABLE>
- --------

(1) The closing trading price on the American Stock Exchange for the Common
Stock on December 31, 1999 was $2.125.

Compensation of Directors

During 1999 each non-employee director received a fee of $12,000 per year
for services as a director, plus $1,000 for attendance in person, or $500 for
attendance by telephone, at each meeting of the Board of Directors or any
committee meeting held on a day on which the Board of Directors does not meet.
During 2000, those outside directors serving on the Executive Committee receive
$5,000 per month for such service and on February 29, 2000 received non-
qualified options to purchase 30,000 shares of common stock at $1.81 per share
for acting in such capacity. In addition, we reimburse the directors for travel
expenses incurred in connection with their duties as our directors. On November
16, 1999, we granted each of our directors non-

57
<PAGE>

qualified options to purchase 7,500 shares of common stock at $1.69 per share.
These options vest ratably on each of November 16, 2000, 2001 and 2002. Under
the terms of our Amended and Restated 1994 Stock Option Plan, each new non-
employee director receives non-qualified options to purchase 20,000 shares of
common stock at the time he or she joins the Board of Directors. Such director
options vest with respect to one third of the amount of each grant on each of
the first, second and third anniversaries of the grant date, and expire on the
earlier of the seventh anniversary of the date of vesting or one year following
the director's ceasing to be a director for any reason. Jill Krueger, Jim Nicol
and John Gibbons received such new non-employee director options to purchase
20,000 shares of common stock at $2.88, $1.81 and $1.81 per share on April 15,
1999, February 29, 2000 and February 29, 2000, respectively.

On February 29, 2000, Jill Krueger, Richard Ladd and Gloria Cavanaugh
received nonqualified options to purchase at $1.81 per share, 30,000, 10,000
and 10,000 shares of common stock, respectively.

Employment and Consulting Agreements

Set forth below are summaries of employment and consulting agreements
between certain individuals and us who were Named Executive Officers during
1999.

Keren Brown Wilson

We entered into an employment agreement with Dr. Wilson in October 1997,
providing for Dr. Wilson's services as President and Chief Operating Officer.
The agreement provides for a four-year term with automatic extensions until the
fourth anniversary of the our notice, or six months after Dr. Wilson's notice,
of a desire to terminate the agreement. Notwithstanding such "evergreen"
provision, the agreement provides that we can terminate it for "Cause" or Dr.
Wilson can terminate it for "Good Reason" (each as defined in the agreement).
The latter is defined in the agreement as

(1) material diminution of title, duties, or salary;

(2) reduction in benefit not generally applicable to senior executive
personnel; or

(3) a direction by the Board of Directors to report to any person or
group other than the Board of Directors.

It also constitutes "Good Reason" for Dr. Wilson to terminate her employment if
our shareholders fail to elect Dr. Wilson to the Board of Directors, or if the
Directors fail to elect Dr. Wilson as Vice-Chairman of the Board of Directors
unless in either case Dr. Wilson has declined to be so elected.

Under the agreement, in the event of a termination of employment for any
reason other than cause, Dr. Wilson will be entitled to the payment of an
amount equal to four times her annual salary. In the event of a termination
within one year of a change in control (as defined in the agreement) for any
reason other than her death or disability or a termination by us for cause, Dr.
Wilson would be entitled to a $3.0 million termination payment. The agreement
also contains a "gross-up" provision to compensate Dr. Wilson in the event that
any payment under such contract is subject to an excise tax imposed under
Section 4999 of the Internal Revenue Code. The employment agreement provides
that Dr. Wilson is entitled to compensation at an annual rate of $200,000.
Pursuant to the employment agreement, Dr. Wilson was awarded, without cost to
her, 50,000 shares of "restricted stock" under the Amended and Restated 1994
Stock Option Plan. The restricted stock agreement relating to the restricted
stock provided that the restrictions applicable to such shares would lapse, and
such shares will no longer be subject to forfeiture in the event of termination
of employment, at the rate of 25% per year commencing on October 3, 2001, the
fourth anniversary of the date of award, subject to acceleration in the event
of a change in control.

In connection with her employment agreement, we agreed to indemnify Dr.
Wilson to the extent permitted under Nevada law against liability and expenses
incurred by her in any proceeding in which she is involved due to her role as
an officer or director. The indemnity agreement excludes certain claims from
indemnification by us.

58
<PAGE>

Effective as of March 15, 1999, we and Dr. Wilson entered into an amendment
to her employment agreement to provide that we will employ Dr. Wilson as
President and Chief Executive Officer. In addition, we paid Dr. Wilson a lump-
sum cash payment of $187,500 (which was reduced to $87,500 to reflect repayment
of a $100,000 bonus paid in 1998 related to the execution of the our merger
agreement with American Retirement Corporation) in consideration for Dr.
Wilson's agreement to forfeit her interest in 50,000 shares of restricted stock
held by her and to terminate the restricted stock agreement related to those
shares.

Sandra Campbell

On December 31, 1997, we entered into an employment agreement with Sandra
Campbell providing for Ms. Campbell's services as Senior Vice President,
General Counsel and Secretary. The agreement provides for an initial two and
one-half-year term. If the agreement has not been terminated prior to the
expiration of the initial term, then the agreement is automatically extended on
a continuous basis. We may terminate the agreement by providing Ms. Campbell
with two and one-half years' prior notice of our intention to terminate her
employment, and Ms. Campbell may terminate the agreement by providing us with
four months prior notice of her intention to resign. In addition, we may
terminate the agreement at any time for "Cause" and Ms. Campbell may terminate
the agreement for "Good Reason" (each as defined in the agreement), and the
agreement automatically terminates upon Ms. Campbell's death or permanent
disability. If we terminate Ms. Campbell's employment other than for Cause and
without providing the notice referred to above, or if Ms. Campbell terminates
the agreement for Good Reason, then we must make a lump-sum payment to
Ms. Campbell equal to twice her then-annual salary plus $100,000. In addition,
if there is a Change in Control (as defined in the agreement), regardless of
whether she remains in our employ, Ms. Campbell is entitled to receive an
additional amount equal to two times her then-annual salary plus $100,000, and
all options exercisable for common stock automatically vest and become
exercisable. The agreement provides that our President or Chief Executive
Officer will determine Ms. Campbell's annual compensation subject to adjustment
from time to time at the discretion of the Board of Directors. Ms. Campbell's
current annual salary is $195,000. In addition, Ms. Campbell received options
to purchase 50,000 shares of common stock, to become exercisable in annual
installments of 16,666 shares commencing December 31, 1998, at an exercise
price of $16.50, equal to the fair market value of the common stock on the date
of grant. The agreement includes an agreement to indemnify Ms. Campbell to the
extent permitted under Nevada law against liability and expenses incurred by
her in any proceeding in which she is involved due to her role as an officer.
The indemnity agreement excludes certain claims from indemnification by us.

Leslie Mahon

On March 15, 1999, we entered into an employment agreement with Leslie Mahon
providing for Mr. Mahon's services as Vice President and Chief Operating
Officer. The agreement provides for an initial two- year term, subject to
automatic one-year extensions unless we notify Mr. Mahon during the 90-day
period ending on March 15 of each year that we wish to terminate the agreement
on March 15 of the following year. Notwithstanding this "evergreen" provision,
we may terminate the agreement at any time for "Cause" (as defined in the
agreement) and Mr. Mahon may resign at any time upon 90 days' prior written
notice to us. If we terminate Mr. Mahon's employment without "Cause" and
without offering Mr. Mahon comparable employment (employment with us or an
affiliated company that is not materially different in level of responsibility,
at the same or higher salary level, with same or similar title or rank and
within a 20-mile radius of his immediately prior position with us), then we
must make a lump-sum payment to Mr. Mahon in an amount equal to twice his then
annual salary. The agreement provides that our Chief Executive Officer will
determine Mr. Mahon's annual compensation subject to adjustment from time to
time at the discretion of the Board of Directors. Mr. Mahon's current annual
salary is $175,000. The agreement further provides that Mr. Mahon is subject to
confidential information restrictions for as long as Mr. Mahon possesses any
confidential information, and non-competition provisions until one year after
the termination of Mr. Mahon's employment. In addition, Mr. Mahon received
options to purchase 30,000 shares of common stock, to become exercisable in
annual installments of 10,000 shares commencing March 15, 2000, at an exercise
price of $5.00, equal to the fair market value of the common stock on the date
of the grant.

59
<PAGE>

Nancy Gorshe

On February 3, 1998, we entered into an employment agreement with Nancy
Gorshe providing for Ms. Gorshe's services as Vice President/Community
Relations. On January 19, 2000, we entered into an amendment to Ms. Gorshe's
employment agreement. The agreement, as amended, provides for an initial two-
year term, subject to automatic one-year extensions unless we notify Ms. Gorshe
during the 90-day period ending on February 3 of each year that we wish to
terminate the agreement on February 3 of the following year. Notwithstanding
this "evergreen" provision, we may terminate the agreement at any time for
"Cause" (as defined in the agreement). If we terminate Ms. Gorshe's employment
without "Cause" and without offering Ms. Gorshe comparable employment
(employment with us or any affiliated company that is not materially different
in level of responsibility, at the same or higher salary level, with same or
similar title or rank and within a 20-mile radius of her immediately prior
position with us) or if within one year following a Change of Control (as
defined in the agreement) we either terminate Ms. Gorshe without cause or she
voluntarily resigns (and we have not offered her comparable employment in
either case), then we must make a lump-sum payment to Ms. Gorshe in an amount
equal to twice her then annual salary. In addition, if we terminate Ms. Gorshe
within one year following a Change in Control, all common stock options held by
Ms. Gorshe will automatically become immediately exercisable. The agreement
provides that our President or Chief Executive Officer will determine Ms.
Gorshe's annual compensation subject to adjustment from time to time at the
discretion of the Board of Directors. Ms. Gorshe's current annual salary is
$125,000. The agreement further provides that Ms. Gorshe is subject to
confidential information, and non-competition provisions until one year after
the termination of Ms. Gorshe's employment. In addition, Ms. Gorshe received
options to purchase 20,000 shares of common stock, to become exercisable in
annual installments of 6,667 shares commencing on July 27, 1999, at an exercise
price of $16.50, equal to the fair market value of the common stock on the date
of grant.

Drew Q. Miller

In addition to the foregoing employment agreements, we intend to enter into
an employment agreement with Drew Q. Miller in connection with his services as
our Chief Financial Officer and Treasurer pursuant to which we intend to pay
Mr. Miller a salary of $190,000 per year and grant Mr. Miller options
exercisable for 150,000 shares of common stock at an exercise price equal to
the fair market value of the common stock on the date of grant.

Agreements With Mr. McBride

Effective as of March 15, 1999, we entered into a consulting agreement with
Mr. McBride which provided, among other things, for the termination of Mr.
McBride's employment agreement, entered into in October 1997.

The employment agreement with Mr. McBride provided for Mr. McBride's
services as Chief Executive Officer. The agreement provided for a four-year
term with automatic extensions until the fourth anniversary of our notice, or
six months after Mr. McBride's notice, of a desire to terminate the agreement.
Notwithstanding such "evergreen" provision, the employment agreement provided
that we may terminate it for "Cause" or Mr. McBride may terminate it for "Good
Reason." Under the employment agreement, in the event of a termination of
employment for any reason other than cause, Mr. McBride would have been
entitled to the payment of an amount equal to four times his annual salary. In
the event of a termination within one year of a change in control (as defined
in the employment agreement) for any reason other than his death or disability
or a termination by us for cause, Mr. McBride would have been be entitled to a
$4.0 million termination payment. The employment agreement also contained a
"gross-up" provision to compensate Mr. McBride in the event that any payment
under such contract was subject to an excise tax imposed under Section 4999 of
the Internal Revenue Code. The employment agreement provided that Mr. McBride
was entitled to compensation at an annual rate of $265,000. Pursuant to the
employment agreement, Mr. McBride was awarded, without cost to him, 200,000
shares of "restricted stock" under the Amended and Restated 1994 Employee Stock
Option Plan.

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The restricted stock agreement relating to the restricted stock provided that
the restrictions applicable to such shares would 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 October 3, 2001, the fourth
anniversary of the date of award, subject to acceleration in the event of a
change in control.

Effective as of March 15, 1999, we entered into a consulting agreement with
Mr. McBride which provided for the termination of his employment agreement, the
forfeiture of his $4.0 million termination payment, the forfeiture of his
restricted stock and the extinguishment of Mr. McBride's and our rights and
obligations under that agreement. Pursuant to the consulting agreement, Mr.
McBride agreed to provide consulting services to us and to resign from his
position as the our Chief Executive Officer. The termination of Mr. McBride's
employment pursuant to the consulting agreement was by mutual agreement.
Pursuant to the consulting agreement Mr. McBride received a lump-sum cash
termination payment of $490,000 (which was reduced to $390,000 to reflect
repayment of a $100,000 bonus paid in 1998 related to the execution of the our
merger agreement with ARC). In addition, we paid Mr. McBride a lump-sum cash
payment of $750,000 in consideration for Mr. McBride's agreement to forfeit his
interest in 200,000 shares of restricted stock held by him and to terminate the
related restricted stock agreement.

Pursuant to the consulting agreement, Mr. McBride will provide consulting
services to us for a period of two years, on a basis of not more than forty
hours per month at a rate of $15,000 per month. During the consulting term, Mr.
McBride will also be entitled to participate in our medical insurance plans at
a cost equal to our cost of providing coverage. If we terminate the consulting
relationship without "Cause" (as defined in the consulting agreement), Mr.
McBride will be entitled to the balance of the cash amounts which he would have
received had the consulting relationship continued for the remainder of the two
year term. In addition, upon the occurrence of a "Change in Control" (as
defined in the consulting agreement), the consulting relationship will
automatically terminate and Mr. McBride will be entitled to a lump-sum cash
payment in an amount equal to the balance of the cash amounts which he would
have received had the consulting relationship continued for the remainder of
the two year term.

In addition, Mr. McBride has agreed that he will not disclose any of our
confidential information and, for a period of two years following the
effectiveness of the consulting agreement, he will not compete with us or
solicit the our employees. However, if the consulting relationship is
terminated as a result of our Change in Control, Mr. McBride's covenant not to
compete will automatically terminate. Pursuant to the consulting agreement, we
also reimbursed Mr. McBride for his attorneys fees incurred in the negotiation
and preparation of the consulting agreement in the amount of approximately
$8,000.

In connection with his employment agreement, we agreed to indemnify Mr.
McBride to the extent permitted under Nevada law against liability and expenses
incurred by him in any proceeding in which he is involved due to his role as
officer or director. The indemnity agreement excludes certain claims from
indemnification by us. We and Mr. McBride have also entered into certain stock
option agreements pursuant to which Mr. McBride has been granted options
exercisable for 150,000 shares of common stock. Mr. McBride's indemnity
agreement and option agreements with us survive the termination of his
employment agreement. Effective November 11, 1999, our Board of Directors
approved an amendment to our option agreements with non-employee directors to
clarify that the provisions of the 1994 Plan relating to the expiration of
options following a termination of directorship apply to all options granted to
such directors and not only to the original 20,000 options granted at the time
each director joined the Board of Directors. This amendment also applied to
120,000 options granted to Mr. McBride prior to his employment as our Chief
Executive Officer. As a result of the amendment, these options, which have an
exercise price of $4.50 per share, will expire one year after Mr. McBride's
departure from the Board, rather than three months after such departure as
provided in his original option agreement.

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Agreements With Mr. Cruckshank

Effective as of March 3, 2000, we entered into a Separation and Consulting
agreement with Mr. Cruckshank which provided, among other things, for the
termination of Mr. Cruckshank's employment agreement, entered into on March 15,
1999.

The employment agreement with Mr. Cruckshank provided for Mr. Cruckshank's
services as Vice President and Chief Financial Officer. The agreement provided
for an initial two-year term, subject to automatic one-year extensions unless
we notified Mr. Cruckshank during the 90-day period ending on March 15 of each
year that we wished to terminate the agreement on March 15 of the following
year. Notwithstanding this "evergreen" provision, we were able to terminate the
agreement at any time for "Cause" (as defined in the agreement) and Mr.
Cruckshank could resign at any time upon 90 days' prior written notice to us.
If we had terminated Mr. Cruckshank's employment without "Cause" and without
offering Mr. Cruckshank comparable employment (employment with us or an
affiliated company that is not materially different in level of responsibility,
at the same or higher salary level, with same or similar title or rank and
within a 20-mile radius of the location of his immediately prior position with
us), then we would have been obligated to make a lump-sum payment to Mr.
Cruckshank in an amount equal to twice his then annual salary. The agreement
provided that our Chief Executive Officer would determine Mr. Cruckshank's
annual compensation subject to adjustment from time to time at the discretion
of the Board of Directors. The agreement further provided that Mr. Cruckshank
was subject to confidential information restrictions for as long as Mr.
Cruckshank possessed any confidential information, and non-competition
provisions until one year after the termination of Mr. Cruckshank's employment.
In addition, Mr. Cruckshank received options to purchase 30,000 shares of
common stock, to become exercisable in annual installments of 10,000 shares
commencing March 15, 2000, at an exercise price of $3.81, equal to the fair
market value of the common stock on the date of grant.

Effective as of March 3, 2000, we entered into a separation and consulting
agreement with Mr. Cruckshank which provided for the termination of his
employment agreement, the forfeiture of any severance or future bonus payment
(other than a $50,000 bonus that we paid Mr. Cruckshank in connection with the
execution of the Separation and Consulting Agreement) and the extinguishment of
Mr. Cruckshank's and our rights and obligations under that employment
agreement. Pursuant to the separation and consulting agreement, Mr. Cruckshank
agreed to resign from his position as our Chief Financial Officer.

Pursuant to the separation and consulting agreement, Mr. Cruckshank will
provide consulting services to us through December 31, 2000, for which we will
pay him a bi-weekly amount equal to $3,000. If we terminate the consulting
relationship without "Cause" (as defined in the separation and consulting
agreement), Mr. Cruckshank will be entitled to the balance of the cash amounts
which he would have received had the consulting relationship continued for the
remainder of its term. During the consulting term, Mr. Cruckshank will also be
entitled to participate in our medical insurance plans at his sole expense.

In addition, Mr. Cruckshank has agreed that he will not disclose any of our
confidential information and, during the term of his service as a consultant
and for a period of one year thereafter, he will not compete with us or solicit
our employees. Mr. Cruckshank also agreed that for a period of three years
following the expiration or earlier termination of the Separation and
Consulting Agreement he will not engage in tender offers, proxy solicitations
or other similar actions involving our common stock, or act to seek to control
or influence our management, Board of Directors or policies.

We and Mr. Cruckshank have entered into certain stock option agreements
pursuant to which Mr. Cruckshank was granted options exercisable for 30,000
shares of common stock. In connection with the termination of employment, Mr.
Cruckshank agreed to the termination, as of March 2, 2000, of his options to
purchase 20,000 shares of common stock, which were to vest on March 15, 2001
and March 15, 2002. We also agreed with Mr. Cruckshank that his options to
purchase 10,000 shares of Company common stock, which vested on March 15, 2000
and had an exercise price of $3.81 per share, will expire on the earlier of 90
days after (a) December 31, 2000 or (b) the termination of his consulting
agreement without "Cause" (as defined in

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the Separation and Consulting Agreement); provided that Mr. Cruckshank will
forfeit such options if he breaches the consulting agreement, is terminated
with "Cause" or voluntarily resigns.

Stock Option Plan and Restricted Stock

We have two Stock Option Plans (the "Plans") which provide for the issuance
of incentive and non-qualified stock options and restricted stock. The Plans
are administered by the Compensation Committee of the Board of Directors which
set the terms and provisions of options granted under the plans. Incentive
options may be granted only to our officers or other full-time employees, while
non-qualified options may be granted to directors, officers or other employees,
or consultants who provide us with services.

The Amended and Restated 1994 Employee Stock Option Plan (the "1994 Plan")
combines an incentive and nonqualified stock option plan, a stock appreciation
rights ("SAR") plan and a stock award plan (including restricted stock). The
1994 Plan is a long-term incentive compensation plan and is designed to provide
a competitive and balanced incentive and reward program for participants.

Under the 1994 Plan, we may grant options or award restricted stock to
employees, consultants and other key persons for up to 2,208,000 shares of
Common Stock. The exercise price of each option equals the market price of the
Common 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. Options typically vest three years
from the date of issuance and typically are exercisable within seven to nine
years from the date of vesting. Each option is exercisable in equal
installments as designated by the Compensation Committee or the Board 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 the grant. All options are nontransferable and subject to adjustment by
the Compensation Committee upon changes in our capitalization. The Board of
Directors, at its option, may discontinue or amend the 1994 Plan at any time.

During the year ended December 31, 1998, our Board of Directors adopted the
Non-Executive Employee Equity Participation Plan of Assisted Living Concepts,
Inc. (the "Non-Officer Plan") pursuant to which up to 500,000 shares of common
stock were issuable pursuant to non-qualified options granted under the Non-
Officer Plan. On November 5, 1999, we authorized an additional 500,000 shares
of common stock for issuance under the Non-Officer Plan. Officers, directors
and significant employees are not eligible to participate in the Non-Officer
Plan; however, consultants and non-executives are eligible.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

We have set forth in the following table information as of March 27, 2000
with respect to the beneficial ownership of our common stock (based upon
information provided by such persons) by:

(1) each of our directors;

(2) each of the Named Executive Officers for the fiscal year ended December
31, 1999;

(3) each other person who is known by us to own beneficially more than 5% of
our Shares; and

(4) our directors and executive officers as a group.

<TABLE>
<CAPTION>
Shares Percent
Beneficially of
Name and Address of Beneficial Owner(1) Owned(2) Class
--------------------------------------- ------------ -------
<S> <C> <C>
W. James Nicol..................................... -- *
Dr. Keren Brown Wilson............................. 880,412 5.1%
Richard C. Ladd.................................... 57,500 *
Bradley G. Razook(3)............................... 46,500 *
170 Water Street, 20th Floor
New York, NY 10038
Gloria Cavanaugh................................... 22,500 *
John M. Gibbons.................................... -- *
William McBride III(4)............................. 226,000 1.3%
Jill Krueger....................................... 6,667 *
Leslie J. Mahon.................................... 10,000 *
Sandra Campbell.................................... 39,128 *
Nancy Gorshe....................................... 25,001 *
Drew Q. Miller..................................... -- *
James W. Cruckshank................................ 12,000 *
Bruce E. Toll(5)................................... 2,645,098.65 14.9%
3103 Philmont Avenue
Huntington Valley, Pennsylvania 19006
Wellington Management Company, LLP(6).............. 1,690,000 9.9%
75 State Street
Boston, MA 02109
Greenlight Capital, L.L.C.(7) ..................... 1,566,012 8.8%
420 Lexington Avenue, Suite 875
New York, New York 10170
Capital Group International, Inc. and Capital
Guardian Trust(8)................................. 1,445,000 8.4%
11800 Santa Monica Blvd.
Los Angeles, CA 90025
John W. Adams(9)................................... 1,200,000 7.0%
885 Third Avenue, 34th Floor
New York, New York 10022
All directors and executive officers as a group
(13 persons)(10).................................. 1,129,914 6.6%
</TABLE>
- --------
* Less than 1%.

(1) Except as otherwise noted above, the address of our directors and officers
is c/o Assisted Living Concepts, Inc., 11835 NE Glenn Widing Drive,
Portland, Oregon, 97220.

(2) Includes options to purchase 215,000 shares by Dr. Wilson, 57,500 shares
by Mr. Ladd, 42,500 shares by Mr. Razook, 22,500 shares by Ms. Cavanaugh,
6,667 shares by Ms. Krueger, 145,000 shares by Mr. McBride, 38,334 shares
by Ms. Campbell, 10,000 shares by Mr. Cruckshank, 10,000 shares by
Mr. Mahon, 25,001 shares by Ms. Gorshe, 23,334 shares by Mr. Parker and
18,334 shares by Ms. Maloney which are exercisable within 60 days of March
27, 2000.

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(3) Includes 4,000 shares owned by Mr. Razook's children.

(4) Mr. McBride no longer serves as a director or executive officer.

(5) Based on the Form 13D/A as filed on November 12, 1999. 575,098.65 of such
shares are held by BET Associates, L.P., a partnership controlled by Mr.
Toll.

(6) Based on the Form 13G/A as filed on February 11, 2000.

(7) Based on the Form 13D as filed on December 30, 1999. 667,412 of such
shares are issuable upon the conversion of our 6.0% Debentures.

(8) Based on the Form 13G as filed on February 11, 2000.

(9) Based on the Form 13D as filed on February 11, 2000. These shares are held
by JWA Investment Corp. and Tempe Wicke Investments L.P., which in turn
are controlled by Mr. Adams.

(10) Excludes 504,000 shares beneficially owned by Mr. McBride, and 12,000
shares beneficially owned by Mr. Cruckshank.

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DESCRIPTION OF DEBENTURES

We issued the Debentures under an indenture, dated as of April 13, 1998 (the
"Indenture"), between us and Harris Trust and Savings Bank, as the trustee (the
"Trustee"). The terms of the Debentures include those stated in the Indenture
and those made a part of the Indenture by reference to the Trust Indenture Act
of 1939, as amended. We filed a copy of the Indenture with the Registration
Statement.

The following is a summary of certain provisions of the Indenture. The
summary is not a complete description of the entire Indenture and is qualified
in its entirety by reference to the detailed provisions of the Indenture,
including the related definitions. Wherever we reference particular provisions
or sections of, or defined terms used in, the Indenture, we are incorporating
those provisions or definitions in this summary by reference. In this section,
the term "the Company" refers to us.

General

We have issued $75.0 million aggregate principal amount of Debentures
subject to the following general terms and provisions:

.Interest

We must pay interest on the Debentures on May 1 and November 1 of each
year, beginning November 1, 1998, at an annual rate of 5.625%. We will pay
interest on the Debentures to the persons who are registered holders of
Debentures at the close of business on the April 15 or October 15 preceding
the interest payment date.

.Maturity

If not previously redeemed or repurchased pursuant to the terms of the
Indenture described below, we must repay the entire principal amount of the
Debentures on May 1, 2003.

.Subordination

The Debentures are unsecured general obligations of ours. If holders of
Senior Indebtedness accelerate the maturity of that Indebtedness, or if we
are ever involved in a bankruptcy, insolvency or similar event or
proceeding, holders of Senior Indebtedness would have the right to be
repaid in full before holders of the Debentures would be entitled to any
payment with respect to the Debentures.

.Conversion Rights

The holders of the Debentures are entitled to convert the Debentures into
shares of common stock at the conversion price of $26.184 per share
(subject to the provisions described below).

We will maintain an office or agency (which initially is at the offices of
the Trustee) for purposes of paying principal (and premium, if any) and
interest and to register the conversion, exchange, and transfer of Debentures.
We may pay principal and interest by check and may mail an interest check to a
holder's registered address. Holders must surrender Debentures to a paying
agent to collect principal payments.

Initially, the Trustee will act as paying agent, registrar and conversion
agent. We may change any paying agent, registrar, conversion agent or co-
registrar upon prior written notice to the Trustee and may act in any such
capacity ourselves.

Delivery and Form of Debentures

On April 13, 1998 we deposited the Debentures in the form of a single global
security (a "Global Security") with The Depository Trust Company, New York, New
York ("DTC"), registered in the name of Cede & Co., DTC's nominee. Except under
certain limited circumstances described below, the Debentures will be
represented by one or more Global Securities and will not be issued in
definitive form.

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DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC holds securities that its participants
("participants") deposit with DTC. DTC also facilitates the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations. DTC is owned by a number of its participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a direct
participant, either directly or indirectly. The rules applicable to DTC and its
participants are on file with the Securities and Exchange Commission.

As long as DTC or its nominee is the registered owner of a Global Security,
DTC or its nominee, as the case may be, will be considered the sole owner or
holder of the Debentures represented by that Global Security for all purposes
under the indenture. Except under certain limited circumstances described
below, owners of beneficial interests in a Global Security will not be entitled
to have Debentures represented by that Global Security registered in their
names, will not receive or be entitled to receive physical delivery of the
Debentures in definitive form and will not be considered the owners or holders
of the Debentures under the indenture.

Upon the issuance of a Global Security, DTC will credit the accounts of
persons designated by the underwriters on its book-entry registration and
transfer system with the respective principal amounts of the Debentures
represented by the Global Security. Ownership of beneficial interests in a
Global Security will be limited to participants or persons that clear through
or maintain a custodial relationship with a participant. Ownership of
beneficial interests in a Global Security will be shown on, and the transfer of
that ownership will be effected only through, DTC's or its nominee's records
(with respect to interests of participants) and on participant's records (with
respect to interests of persons other than participants). The laws of some
states require that certain purchasers of securities take physical delivery of
such securities in definitive form. These laws and their limitations may impair
the ability to transfer beneficial interests in a Global Security.

Principal and interest payments on Debentures registered in the name of DTC
or its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the relevant Global Security. Neither us nor the Trustee or
any paying agent for the Debentures will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial interests in a Global Security or for maintaining, supervising or
reviewing any records relating to such beneficial interests.

We expect that DTC or its nominee, upon receipt of any payment of principal
or interest, will immediately credit each participant's accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of the relevant Global Security as shown on its records. We
also expect that payments by participants to owners of beneficial interests in
a Global Security held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name,"
and will be the responsibility of such participants.

If DTC is at any time unwilling or unable to continue as depository with
respect to any Global Security and we do not appoint a successor depository
within 90 days, we will issue Debentures in definitive form in exchange for the
entire Global Security. In addition, we may at any time and in our sole
discretion determine not to have the Debentures represented by a Global
Security and, in such event, will issue Debentures in definitive form in
exchange for the entire Global Security. In any such instance, an owner of a
beneficial interest in a Global Security will be entitled to physical delivery
of Debentures in definitive form represented by such Global Security equal in
principal amount to such beneficial interest and to have such Debentures

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registered in its name. Debentures issued in definitive form will be issued as
registered Debentures in denominations of $1,000 and integral multiples
thereof, unless otherwise specified by us.

DTC management is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, or after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its participants and other members of the financial
community that it has developed and is implementing a program so that its
Systems, as the same relate to the timely payment of distributions (including
principal and income payments) to securityholders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which
is complete. Additionally, DTC's plan includes a testing phase, which is
expected to be completed within appropriate time frames.

However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed its participants and other members of the
financial community that it is contacting (and will continue to contact) third-
party vendors from whom DTC acquires services to impress upon them the
importance of such services being Year 2000 compliant and to determine the
extent of their efforts for Year 2000 remediation (and, as appropriate,
testing) of their services. In addition, DTC is in the process of developing
contingency plans it deems appropriate.

According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty, or contract modification of any kind.

The information contained in this section concerning DTC and DTC's book-
entry system has been obtained from sources that we believe to be reliable, but
we take no responsibility for the accuracy thereof.

Conversion Rights

The holders of the Debentures are entitled at any time after July 22, 1998,
(the "Registration Date") and prior to maturity, subject to prior redemption,
to convert all or a portion of the Debentures (in denominations of $1,000 or
multiples thereof) into shares of common stock at the conversion price of
$26.184 per share (subject to adjustments as described below). We will not make
any payment or adjustment for accrued interest on a converted Debenture. If any
registered holder converts a Debenture not called for redemption between a
record date for the payment of interest and the next succeeding interest
payment date, such Debenture must be accompanied by funds equal to the interest
payable to the registered holder on such interest payment date on the principal
amount so converted. We will not issue fractional interests in shares of common
stock upon conversion of the Debentures and instead will deliver a check for
the fractional share based upon the market value of the common stock on the
last trading date prior to the conversion date. If we call the Debentures for
redemption, conversion rights will expire at the close of business on the
redemption date, unless we default in payment due upon such redemption.

The conversion price is subject to adjustments, as set forth in the
Indenture, if:

. we pay dividends or distributions on our common stock in shares of
capital stock;

. we subdivide or combine the common stock into a greater or smaller number
of shares of common stock;

. we reclassify the shares of common stock resulting in an issuance of any
shares of our capital stock;

. we distribute rights or warrants to all holders of common stock entitling
them to purchase common stock at less than the then current price at that
time; or

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. we distribute assets to all holders of common stock, excluding certain
cash dividends and distributions, or debt securities or any rights or
warrants to purchase our securities.

The conversion price is not subject to any adjustment:

. if holders of the Debentures receive notice of and are allowed to
participate in a transaction described in the preceding sentence;

. for rights to purchase common stock pursuant to a plan for reinvestment
of dividends or interest, or for a change in the par value of the common
stock;

. as to cash received on conversion, to the extent that Debentures become
convertible into cash; or

. unless such adjustment would require a change of at least 1.0% in the
conversion price; however, any adjustment that would otherwise be
required to be made will be carried forward and taken into account in any
subsequent adjustment.

We may voluntarily reduce the conversion price for a period of time.

. If we pay dividends on the common stock in shares of capital stock or
subdivide or combine the common stock or

. issue by reclassification of its common stock any shares of our capital
stock or

. merge with, or transfer or lease substantially all of our assets to,
another corporation or trust

then the holders of the Debentures then outstanding will be entitled thereafter
to convert such Debentures into the kind and amount of shares of capital stock,
other securities, cash or other assets which they would have owned immediately
after such event had such Debentures been converted before the effective date
of the transaction.

Subordination of Debentures

The indebtedness evidenced by the Debentures is subordinated and junior in
right of payment to the extent set forth in the Indenture to the prior payment
in full of amounts then due on all Senior Indebtedness. "Senior Indebtedness"
means the principal, premium, if any, interest on and all other amounts payable
under or in respect of Indebtedness other than

. Indebtedness owed to a subsidiary of ours,

. Indebtedness of ours which is expressly pari passu with the Debentures or

. Indebtedness of ours which is expressly subordinated to the Debentures.

As of December 31, 1999, we had $89.6 million of Senior Indebtedness
outstanding. There is no limit on the amount of Senior Indebtedness that we may
incur.

We will not make any payment on account of principal of (or premium if any)
or interest on the Debentures or on account of the purchase or other
acquisition of Debentures, if:

. there is a continuing default with respect to any Senior Indebtedness
that

. would permit the holders to accelerate the maturity of the Senior
Indebtedness or

. is the subject of a judicial proceeding; or

. we have received notice of such default from certain authorized persons,
unless and until such default or event of default has been cured or
waived or ceases to exist.

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By reason of these provisions, in the event of default on any Senior
Indebtedness, whether now outstanding or hereafter issued, we may be prohibited
from making payments of principal of (and premium, if any) and interest on the
Debentures until we have repaid such Senior Indebtedness in full, or until we
have cured (or the holders of such Senior Indebtedness have waived) the event
of default on such Senior Indebtedness.

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

Optional Redemption

We may, at our option at any time on or after May 15, 2001, redeem all of
the Debentures or some of them, at a redemption price equal to 100% of the
principal amount thereof, plus accrued interest to the redemption date. If we
elect to redeem all or some of the Debentures we must provide at least 30 days'
but not more than 60 days' notice to each holder of Debentures to be redeemed
at his or her registered address. We may not so redeem the Debentures before
May 15, 2001.

If we call any Debentures for redemption, we may agree with one or more
investment banks or other purchasers that such purchasers will purchase such
Debentures from the holder at the redemption price and convert them into common
stock, unless the holder surrenders such Debentures for conversion on or before
the close of business on the redemption date.

Certain Rights to Require Us to Repurchase the Debentures

In the event of any Change in Control occurring after the date of issuance
of the Debentures and on or prior to maturity, each holder of Debentures will
have the right to require us to repurchase all or any part of such holder's
Debentures on the date (the "Repurchase Date") that is 75 days after the date
we give notice of the Change in Control (as described below) at a price (the
"Repurchase Price") equal to 101% of their principal amount, together with
accrued and unpaid interest to the Repurchase Date. On or prior to the
Repurchase Date, we must deposit with the Trustee or a paying agent an amount
of money sufficient to pay the Repurchase Price of the Debentures that are to
be repaid on the Repurchase Date. Neither our Board of Directors nor the
Trustee, acting alone or together, can modify or waive this required repurchase
of the Debentures.

It will be an event of default under the Indenture if we fail to repurchase
the Debentures when required under the preceding paragraph, whether or not such
repurchase is permitted by the subordination provisions of the Indenture.

On or before the fifteenth day after the occurrence of a Change in Control,
we must mail to all holders a notice that includes

. a description of the event constituting, and the date of, such Change in
Control,

. the Repurchase Date,

. the date by which the repurchase right must be exercised,

. the Repurchase Price, and

. the procedures that a holder must follow to exercise a repurchase right.

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To exercise the repurchase right, a holder of a Debenture must deliver, on
or before the tenth day prior to the Repurchase Date, written notice to us (or
an agent designated by us for such purpose) and to the Trustee of the holder's
exercise of such right, together with the certificates evidencing the
Debentures with respect to which the right is being exercised, duly endorsed
for transfer.

Subject to the exceptions described in the immediately following paragraphs,
a "Change in Control" will occur when:

(1) we sell all or substantially all of our assets as an entirety to any
person or related group of persons;

(2) we consummate any consolidation or merger

(A) in which we are not the continuing or surviving corporation (other
than a consolidation or merger with a wholly-owned subsidiary of
ours in which all shares of common stock outstanding immediately
prior to the effectiveness the consolidation or merger are changed
into or exchanged for the same consideration) or

(B) pursuant to which our common stock is converted into cash,
securities, or other property, in each case other than a
consolidation or merger in which the holders of the common stock
immediately prior to the consolidation or merger have, directly or
indirectly, at least a majority of the common stock of the
continuing or surviving corporation immediately after such
consolidation or merger; or

(3) any person, or any persons acting together that would constitute a
"group" for purposes of Section 13(d) of the Exchange Act, together with
any affiliates of such person or persons, acquires beneficial ownership
(as defined in Rule 13d-3 under the Exchange Act) of at least 50% of the
total voting power of all classes of our capital shares entitled to vote
generally in the election of directors.

Notwithstanding clause (3) of the foregoing definition, a Change in Control
will not be deemed to have occurred solely by virtue of

. us;

. any of our subsidiaries;

. any employee share purchase plan, share option plan, or other share
incentive plan or program;

. any retirement plan or automatic dividend reinvestment plan; or

. any substantially similar plan of ours or any Subsidiary or any person
holding securities of ours for or pursuant to the terms of any such
employee benefit plan,

filing or becoming obligated to file a report under or in response to Schedule
13D or Schedule 14D-1 (or any successor schedule, form, or report) under the
Exchange Act disclosing beneficial ownership by it of shares or securities of
ours, whether at least 50% of the total voting power referred to in clause (3)
of the foregoing definition or otherwise. A recapitalization or a leveraged
buyout or similar transaction involving members of management or their
affiliates will constitute a Change in Control if it meets the foregoing
definition.

Notwithstanding the foregoing, a Change in Control as described above will
not be deemed to have occurred if

(1) the Current Market Price of our common stock on the date of a Change in
Control is at least equal to 105% of the conversion price of the
Debentures in effect immediately preceding the time of such Change in
Control; or

(2) all of the consideration (excluding cash payments for fractional
shares) in the transaction giving rise to such Change in Control to the
holders of our common stock consists of shares of common stock that
are, or immediately upon issuance will be, listed on a national
securities exchange or quoted on the Nasdaq National Market, and as a
result of such transaction the Debentures will become convertible
solely into such shares of common stock; or

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(3) the consideration in the transaction giving rise to such Change in
Control to the holders of our common stock consists of cash or
securities that are, or immediately upon issuance will be, listed on a
national securities exchange or quoted on the Nasdaq National Market,
or a combination of cash and such securities, and the aggregate fair
market value of such consideration (which, in the case of such
securities, will be equal to the average of the daily closing prices of
such securities during the 10 consecutive trading days commencing with
the sixth trading day following consummation of such transaction) is at
least 105% of the conversion price of the Debentures in effect on the
date immediately preceding the closing date of such transaction.

There is no definition of the phrase "all or substantially all" as applied
to our assets and used in the definition of Change in Control in the Indenture,
and there is no clear definition of the phrase under applicable law. As a
result of the uncertainty of the meaning of this phrase, in the event we were
to sell a significant amount of its assets, the holders may disagree with us
over whether the sale gives rise to the right of holders to require us to
repurchase the Debentures. In such event, the holders would likely not be able
to require us to repurchase any Debentures unless and until the disagreement
were resolved in favor of the holders.

The right to require us to repurchase Debentures as a result of a Change in
Control could create an event of default under Senior Indebtedness, as a result
of which any repurchase could, absent a waiver, be blocked by the subordination
provisions of the Debentures. See "Subordination of Debentures." Our ability to
pay cash to the holders upon a repurchase may also be limited by certain
financial covenants contained in our Senior Indebtedness.

In the event a Change in Control occurs and the holders exercise their
rights to require us to repurchase Debentures, we intend to comply with
applicable tender offer rules under the Exchange Act, including Rules 13e-4 and
14e-1, as then in effect, with respect to any such purchase. The Change in
Control purchase feature of the Debentures may in certain circumstances make
more difficult or discourage a takeover of us and, thus, the removal of
incumbent management. The Change in Control purchase feature, however, is not
the result of management's knowledge of any specific effort to accumulate
common stock or to obtain control of us by means of a merger, tender offer,
solicitation, or otherwise, or part of a plan by management to adopt a series
of anti-takeover provisions. Instead, the Change in Control purchase feature is
a standard term contained in other similar debt offerings and the specific
terms of this feature resulted from negotiations between us and the initial
purchasers of the Debentures.

The foregoing provisions would not necessarily afford holders protection in
the event that we enter into highly leveraged or other transactions that may
adversely affect holders.

Modification of the Indenture

Under the Indenture, with certain exceptions, our rights and obligations
with respect to the Debentures and the rights of holders of the Debentures may
only be modified by us and the Trustee with the written consent of the holders
of not less than 66-2/3% in principal amount of the outstanding Debentures.
However, without the consent of each holder of any Debenture affected, an
amendment, waiver or supplement may not:

. reduce the amount of Debentures whose holders may consent to an
amendment;

. reduce the rate or change the time of payment of interest on any
Debenture;

. reduce the principal of or change the fixed maturity of any Debenture;

. make any Debenture payable in money other than that stated in the
Debenture;

. change the provisions of the Indenture regarding the right of the holders
of a majority of the Debenture to waive defaults under the Indenture or
impair the right of any holder of Debentures to institute suit for the
enforcement of any payment of principal and interest on the Debentures on
and after their respective due dates; or

. make any change that adversely affects the right to convert any
Debenture.

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

Events of Default, Notice and Waiver

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

It will be an Event of Default under the Indenture with respect to the
Debentures if:

(1) we default in the payment of interest on the Debentures when due and
payable which continues for 30 days;

(2) we default in the payment of principal of (and premium, if any) on the
Debentures when due and payable, at maturity, upon redemption or
otherwise, which continues for five business days;

(3) we fail to perform any of our other covenants contained in the
Indenture or the Debentures which continues for 60 days after notice as
provided in the Indenture;

(4) there is an acceleration of any Indebtedness for money borrowed
(including obligations under leases required to be capitalized on the
balance sheet of the lessee under generally accepted accounting
principles but not including any Indebtedness or obligation for which
recourse is limited to property purchased) in an aggregate principal
amount in excess of $5.0 million, whether existing on the date of the
execution of the Indenture or thereafter created, if such Indebtedness
is not paid or such acceleration is not annulled within ten days after
notice to us of such acceleration; or

(5) certain events of bankruptcy, insolvency or reorganization occur.

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

We will not (1) declare or pay any dividends or make any distribution to
holders of our capital stock or (2) purchase, redeem or otherwise acquire or
retire for value any of our common stock, or any warrants, rights or options,
to purchase or acquire any shares of our common stock (other than the
Debentures or any other convertible indebtedness of ours that is neither
secured nor subordinated to the Debentures), if at the time any of the
aforementioned Events of Default has occurred and is continuing or would exist
immediately after giving effect to such action.

Matters Related to Trustee

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

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Consolidation, Merger, Sale or Conveyance

The Indenture provides that we may not merge or consolidate with, or sell or
convey all, or substantially all, of our assets to another person unless:

. such person is a company or a trust;

. such person assumes by supplemental indenture all of our obligations
under the Debentures and the Indenture; and

. immediately after the transaction no default or Event of Default exists.

Marketability

At present there is a limited public market for the Debentures. We
originally sold the Debentures pursuant to exemptions from registration under
the Securities Act. Although we are obligated to file a Registration Statement
under the Securities Act relating to the resale of Debentures and the
Conversion Shares, there can be no assurance that we will be able to maintain
an effective and current Registration Statement as required. The absence of
such a Registration Statement may limit the holder's ability to sell such
Debentures and Conversion Shares or could adversely affect the price at which
such Debentures and Conversion Shares can be sold.

Governing Law

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

Registration Rights Agreement

We entered into a registration rights agreement (the "Registration Rights
Agreement") in connection with the initial offering of the Debentures, pursuant
to which we have caused the Debentures and the Conversion Shares to be
registered under the Securities Act with the Commission. We must use our best
efforts to keep the Registration Statement effective for a period of two years
from July 22, 1998, or such shorter period which will terminate when all of the
Debentures and the Conversion Shares have been sold pursuant to this
registration statement or when all Debentures and the Conversion Shares
otherwise have been sold pursuant to Rule 144 or are otherwise freely tradable.
The Registration Rights Agreement entitles us to suspend temporarily the right
of holders of Debentures and Conversion Securities to make dispositions of
their securities pursuant to the Registration Statement to the extent the Board
of Directors determines such suspension to be necessary in light of the
existence of any undisclosed acquisition, financing activity or other material
event the disclosure of which may reasonably be expected to materially
disadvantage us.

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DESCRIPTION OF CAPITAL STOCK

The following is a brief description of our capital stock, Chapter 78 of the
Nevada Revised Statutes (the "Nevada General Corporation Law" or "NGCL") and
the provisions contained in our Articles of Incorporation, as amended (the
"Charter") and By-Laws. The summary of the terms of our capital stock set forth
below does not purport to be complete and is subject to and qualified in its
entirety by reference to our Charter and By-Laws. See "Available Information."

Preferred Stock

Our charter authorizes us to issue 1,000,000 shares of preferred stock, par
value $.01 per share. Our Board of Directors is authorized to issue shares of
preferred stock in one or more series with such preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and other rights as the Board establishes at the time.
Stockholder approval is not required to issue preferred stock. Our 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.

The preferred stock and the variety of characteristics that the Board of
Directors may assign to it offers us 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
these shares could be used to enable the holder to block such a transaction.
Although the Board of Directors is required when issuing preferred stock to act
based on its judgment as to the best interests of our stockholders, the Board
could act in a manner which would discourage or prevent a transaction some
stockholders may deem desirable.

Series A Preferred Stock

On July 15, 1997, our Board of Directors created a class of preferred stock,
par value $0.01 per share, consisting of 800,000 shares and designated as
Series A Junior Participating Preferred Stock. Holders of shares of Series A
Preferred Stock are entitled to receive quarterly dividends in preference to
the holders of common stock and any other stock ranking junior to the Series A
Preferred Stock. The quarterly dividends will be in an amount per share equal
to the greater of $1.00 or 100 times the aggregate per share amount of all cash
and non-cash dividends (except for a dividend payable in shares of common
stock). These dividends are cumulative and do not bear interest.

Each share of Series A Preferred Stock entitles its holder to 100 votes on
all matters submitted to a vote of our stockholders. Shares of Series A
Preferred Stock may be issued in fractional amounts, may not be redeemed by the
Company and will rank, with respect to the payment of dividends and the
distribution of assets upon liquidation, dissolution or winding up, junior to
all series of any other class of our Preferred Stock (except to the extent that
any other series specifically provides that it will rank on a parity with or
junior to the Series A Preferred Stock). If we enter into any consolidation,
merger, combination or other transaction in which shares of common stock are
exchanged for or changed into other stock or securities, cash or any other
property, then each share of Series A Preferred Stock will at the same time be
similarly exchanged or changed into an amount per share equal to 100 times the
aggregate amount of stock, securities, cash or any other property into which or
for which each share of common stock is changed or exchanged. Any shares of
Series A Preferred Stock purchased or otherwise acquired by us must be promptly
canceled and upon this cancellation will become authorized but unissued shares
of preferred stock which may be reissued as part of a new series of preferred
stock.

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Common Stock

Our Charter authorizes us to issue 80,000,000 shares of common stock, par
value $.01 per share. Each share of common stock entitles the holder to one
vote on all matters submitted to the shareholders. A majority vote is required
for all actions 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 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 our Board of Directors. These dividends will be paid out of funds
legally available for that purpose, 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 we may enter into in the
future). The dividends will be distributed pro rata in accordance with the
number of shares of common stock held by each stockholder. See "Dividend
Policy."

As of December 31, 1999, there were 17,120,745 shares of common stock issued
and outstanding.

Rights Plan

On June 12, 1997, our Board of Directors declared a dividend of one
preferred share purchase right on each outstanding share of common stock. The
rights were payable to stockholders of record on June 30, 1997. After the
rights become exercisable and until June 30, 2007 (or the earlier redemption,
exchange of termination of the rights), each right entitles its holder to buy
one one-hundredth of a share of Series A Preferred Stock at an exercise price
of $54.00, subject to certain anti-dilution adjustments. The rights will be
represented by the common stock certificates. The rights will not be
exercisable or transferable apart from the common stock until the earlier of
(1) the tenth day after the public announcement that a person 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 (2) 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 (1) and (2) is referred to herein as the "Distribution
Date"). Prior to the Distribution Date, our Board of Directors has the power,
under certain circumstances, to postpone the Distribution Date. If the
Distribution Date occurs, we will mail separate certificates representing the
rights 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 our Board of
Directors), or

. we were the surviving corporation in a merger and our 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, will 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. The rights that are
acquired or beneficially owned by the Acquiring Person will be void. With
certain exceptions, in the event that

. we were acquired in a merger or other business combination transaction in
which we were not the surviving corporation or our common stock were
changed or exchanged (other than a merger which follows certain cash
offers for all outstanding common stock approved by our Board of
Directors), or

. more than 50% of our assets or earning power were sold

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We will make proper provision so that each holder of a right (except rights
which are void) will have the right to receive, upon exercise, that number of
shares of common stock of the acquiring company which at the time of the
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 our then-outstanding common stock by the
Acquiring Person, our Board of Directors may cause us to acquire the rights
(other than rights owned by an Acquiring 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,
our Board of Directors 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 will require
the concurrence of a majority of the continuing directors (those directors who
were members of the Board prior to the time that any person becomes an
Acquiring Person, and any other person who is subsequently elected to the Board
of Directors if the 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 of their
representatives.

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

. in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock,

. 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

. 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 above 125% of the last regular
periodic cash dividend previously paid, or in case regular periodic
dividends have not previously been paid, at a rate not in excess of 50%
of our average net income per share 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 long as the rights are attached to the common stock, we will issue one
right with each new share of common stock so that all new shares will have
attached rights. We have 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 us on terms
not approved by our Board, 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 our Board prior to
the time that a person or group has become an Acquiring Person, as we may
redeem the rights at $.01 per right prior to such time.

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Restrictions On Business Combinations And Corporate Control

The Nevada General Corporation Law 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 a
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 triggers 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.

Amendments to By-Laws

In December 1999, we amended our By-Laws. The amendment deleted the
provision of the By-Laws that required us to hold a special meeting of the
stockholders at the written request of a majority of the voting power of our
common stock. It also deleted the provision of the By-Laws that permitted our
stockholders to take action by written consent.

Limitations On Directors Liability

Our Charter limits the liability of directors and officers to us or our
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 us and our stockholders.

Transfer Agent and Registrar

Our transfer agent is American Stock Transfer & Trust Company.

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SHARES ELIGIBLE FOR FUTURE SALE

As of December 31, 1999, we have 17,120,745 shares of common stock issued
and outstanding, all of which are freely transferable without restriction in
the public market, except to the extent that these shares have been acquired by
our affiliates; resales of shares acquired by affiliates are subject to
restrictions under Rule 144 of the Securities Act. In general, under Rule 144,
as currently in effect, persons who may be deemed "affiliates" under Rule 144
are entitled to sell a number of shares within any three-month period that does
not exceed the greater of 1% of the then outstanding shares of the class of
common stock or the average weekly trading volume of such stock during the four
calendar weeks preceding such sale, subject to certain manner of sale
limitations.

In addition, there are 1,744,420 shares of common stock subject to
outstanding stock options (of which 982,973 are presently exercisable) and
6,685,790 shares subject to issuance upon conversion of outstanding convertible
indebtedness, including the Debentures. 8,348,210 of such shares are issuable
at exercise or conversion prices that are greater than current market price of
our common stock as of December 31, 1999.

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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following is a general discussion of certain U.S. federal income tax
considerations to holders of our Debentures. We have based this discussion upon
the Internal Revenue Code of 1986, as amended, Treasury Regulations, Internal
Revenue Service rulings, and judicial decisions now in effect, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. We cannot assure that the IRS will not challenge one or more
of the tax consequences described herein. We have not obtained a ruling from
the IRS with respect to the U.S. federal income tax consequences of acquiring
or holding our Debentures or our common stock.

This discussion does not deal with all aspects of U.S. federal income
taxation that may be important to you as a holder of our Debentures, or common
stock into which our Debentures may cover. This discussion does not deal with
tax consequences arising under the laws of any foreign, state or local
jurisdiction. This discussion is for general information purposes only, and
does not purport to address all tax consequences that may be important to you
in light of your personal circumstances (for example, persons subject to the
alternative minimum tax provisions of the Code). This discussion also does not
purport to address all the tax consequences that may be important to you if you
are subject to special rules such as those applicable to:

. certain financial institutions;

. insurance companies;

. tax exempt entities;

. dealers in securities;

. persons who hold our Debentures or common stock as part of a hedging,
conversion transaction, straddle, or other integrated transactions; or

. persons deemed to sell any of our Debentures or common stock under the
constructive sale provisions of the Code.

This discussion assumes that you hold our Debentures and that you will hold
the common stock received upon conversion thereof as capital assets under
Section 1221 of the Code, and that our Debentures are properly characterized as
debt instruments for federal income tax purposes.

For the purpose of this discussion, a "U.S. Holder" refers to any holder of
our Debentures that is a U.S. person, and a "Non-U.S. Holder" refers to any
holder of our Debentures who is not a U.S. person. The term "U.S. person" means
any of the following:

. a citizen or resident of the United States;

. a corporation, partnership (or other entity treated as a corporation or a
partnership for U.S. federal income tax purposes) created or organized in
the United States or any state thereof or the District of Columbia;

. an estate the income of which is includible in income for U.S. federal
income tax purposes regardless of its source; or

. a trust subject to primary supervision by a court in the United States
and control by one or more U.S. persons.

WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING THE FEDERAL STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF OWNERSHIP AND DISPOSITION OF OUR
DEBENTURES, INCLUDING CONVERSION OF OUR DEBENTURES, AND OUR COMMON STOCK AND
THE EFFECT THAT YOUR PARTICULAR CIRCUMSTANCES MAY HAVE ON SUCH TAX
CONSEQUENCES.

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<PAGE>

Tax Consequences to U.S. Holders

Ownership of Debentures

Interest on Debentures. The stated interest on our Debentures generally
will be includible in your gross income and taxable to you as ordinary income
in accordance with your method of tax accounting.

Adjustments to conversion price. The conversion price of our Debentures may
change under certain circumstances. In such a case, Section 305 of the Code
and the Treasury Regulations issued thereunder may treat you as having
received a constructive distribution whether or not you ever exercise your
conversion privilege. The constructive distribution will be taxed as ordinary
income (subject to a possible dividends received deduction if you are a
corporate holder) to the extent our current and/or accumulated earnings and
profits, if, and to the extent that, the adjustment in the conversion price
increases your proportionate interest in the fully diluted common stock.
Moreover, common stock holders themselves will generally be treated as having
received a constructive distribution if there is not a full adjustment to the
conversion price of our Debentures to reflect a stock dividend or other event
increasing the proportionate interest of the common stock holders in our
assets or earnings and profits. In such an event, the constructive
distribution will be taxable as ordinary income (subject to a possible
dividends received deduction if you are a corporate holder) to the extent of
our current and/or accumulated earnings and profits.

Sale, exchange or retirement of Debentures. In general, you will recognize
gain or loss upon the sale, exchange, redemption, retirement or other
disposition of our Debentures. The gain or loss will equal:

(1) the amount realized; minus

(2) your adjusted tax basis in our Debentures.

Your adjusted tax basis in our Debentures generally will equal:

(1) the amount you paid for our Debentures; plus

(2) the amount of any market discount (as discussed below) you
previously recognized; or minus

(3) any amortized bond premium (as discussed below).

Any such gain or loss you recognize on the sale, exchange, redemption,
retirement or other disposition of any of our Debentures should be capital
gain or loss. Such gain or loss also will generally be long term capital gain
or loss if you held or are deemed to have held the Debentures for more than
one year at the time of the sale or exchange.

Conversions of Debentures into common stock. In general, you will not
recognize gain or loss on the conversion of our Debentures into shares of our
common stock, unless you receive cash in lieu of a fractional share. Your tax
basis in the shares of our common stock received upon conversion of our
Debentures will equal your aggregate basis in our Debentures exchanged
therefor (less any portion thereof allocable to a fractional share). Your
holding period of the shares of common stock you receive upon conversion of
our Debentures generally will include the period during which you held our
Debentures prior to the conversion. Any cash you receive in lieu of a
fractional share of common stock should be treated as a payment in exchange
for such fractional share. Any gain or loss you recognize on the receipt of
cash paid in lieu of a fractional share generally will equal the difference
between the amount of cash you receive and the amount of tax basis allocable
to the fractional share.

Our common stock. Any distribution paid to you with respect to our common
stock after a conversion of any of our Debentures will constitute ordinary
income (subject to a possible dividends received deduction if

81
<PAGE>

you are a corporate holder) to the extent made from our current and/or
accumulated earnings and profits. The amount of gain or loss you realize on the
sale or exchange of common stock will equal:

(1) the amount you realize on such sale or exchange; minus

(2) your adjusted tax basis in such common stock.

Such gain or loss will generally be long term capital gain or loss if you have
held or are deemed to have held the common stock for more than one year.
However, special rules may apply if you originally purchased our Debentures at
a market discount (as discussed below).

Market discount. If you purchase any of our Debentures at a lower price than
their principal amount, you may be affected by the "market discount" provisions
of the Code. Market discount on any of our Debentures will generally equal:

(1) the principal amount of the Debentures; minus

(2) the price at which you sell the Debenture.

The market discount provisions generally require a U.S. Holder acquiring any of
our Debentures at market discount to treat as ordinary income any gain
recognized on a subsequent disposition of such Debenture to the extent of the
"accrued market discount" at the time of subsequent disposition. If any of our
Debentures with accrued market discount is converted into common stock, the
amount of such accrued market discount generally will be taxable as ordinary
income upon disposition of the common stock. Unless a purchaser of our
Debentures with market discount elects otherwise, market discount on our
Debentures will be treated as accruing on a straight line basis over the term
of such Debenture. In addition, if a purchaser of any of our Debentures with
market discount incurs or maintains indebtedness to purchase or carry the
Debenture, an interest deduction attributable to such indebtedness may be
disallowed until the Debenture is disposed of in a taxable transaction.

Amortizable premium. If you purchase any of our Debentures at a premium over
its stated principal amount, plus any accrued interest, you generally may elect
to amortize such premium ("Section 171 premium") from the purchase date to the
Debenture's maturity date under a constant yield method. Section 171 premium,
however, will not include any amount attributable to any of our Debentures'
conversion feature. The amount attributable to the conversion feature generally
equals:

(1) the purchase price of the Debenture; minus

(2) what the Debenture's fair market value would be if there were no
conversion feature.

Amortized Section 171 premium is treated as an offset to interest income on any
of our Debentures and not as a separate deduction.

Tax Consequences to Non-U.S. Holders

Interest on Notes. Generally, if you are a Non-U.S. Holder, stated interest
paid to you on our Debentures will not be subject to U.S. federal income tax if
such interest is not effectively connected with the conduct of a trade or
business by you within the United States, and you meet the following three
requirements:

(1) you do not actually or constructively own 10% or more of the total
voting power of all classes of our stock entitled to vote;

(2) you are not a "controlled foreign corporation" with respect to which
we are a "related person" within the meaning of the Code; and

(3) you certify, under penalty of perjury, that you are not a U.S.
person and such certificate provides your name and address.

82
<PAGE>

If you meet certain requirements, the certification described in paragraph
3 above may be provided by:

. a securities clearing organization;

. a bank, or

. other financial institution that holds customers' securities in the
ordinary course of its trade or business.

For purposes of paragraph (2) above, the Non-U.S. Holder of our Debentures
would be deemed to own constructively the common stock into which it could be
converted.

A Non-U.S. Holder that is not exempt from tax under the above rules
generally will be subject to U.S. federal income tax withholding at a rate of
30% unless:

(1) the interest is effectively connected with the conduct of a U.S.
trade or business, in which case the interest will be subject to the U.S.
federal income tax on net income that applies to U.S. persons generally; or

(2) an applicable income tax treaty provides for a lower rate of, or
exemption from, withholding tax.

If you are a foreign corporation, such U.S. trade or business income may also
be subject to the branch profits tax at a 30% rate. (The branch profits tax
generally is imposed on a foreign corporation on the actual or deemed
repatriation from the United States of earnings and profits attributable to
U.S. trade or business income.) The branch profits tax may not apply (or may
apply at a reduced rate) if the foreign corporation is a qualified resident of
a country with which the United States has an income tax treaty.

To claim either (A) the benefit of a tax treaty, or (B) an exemption from
withholding because the income is effectively connected with a U.S. trade or
business, the Non-U.S. Holder must provide a properly executed Form 1001 or
4224, as applicable, prior to the payment of interest. These forms must be
periodically updated. Under new rules that will apply to payments made after
December 31, 2000, the Forms 1001 and 4224 will be replaced by Form W-8. Also,
under the new rules, a Non-U.S. Holder who is claiming the benefits of a
treaty may be required:

(1) to obtain a U.S. taxpayer identification number; and/or

(2) to prove residence in a foreign country by providing certain
documentary evidence issued by foreign governmental authorities.

In addition, the new rules provide certain special procedures for payments
through qualified intermediaries.

Sale, exchange or redemption of notes or shares of common stock. A Non-U.S.
Holder generally will not be subject to U.S. federal income tax on gain
recognized upon the sale or other disposition of our Debentures or shares of
our common stock received in exchange therefor unless:

(1) the gain is effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder; or

(2) the Non-U.S. Holder:

(A) is a nonresident alien individual;

(B) holds the common stock as a capital asset; and

(3) the Company is a United States real property holding corporation
under the Code.

A Non-U.S. Holder will be subject to federal withholding tax at 10% of the
proceeds from, and federal income tax with respect to gain realized on, the
disposition of Debentures or shares of common stock if the Company

83
<PAGE>

is a "United States real property holding corporation" under the Code. In that
case, such Non-U.S. Holder can credit any withholding tax withheld pursuant to
the rules applicable to dispositions of a "United States real property
interest" against such Non-U.S. Holder's U.S. federal income tax liability.
Based on the current and projected value of the assets of the Company, the
Company may currently be a United States real property holding corporation
under the Code. Even if the Company is a United States real property holding
corporation, however, the 10% withholding tax and the income tax will not
apply to a Non-U.S. Holder upon the disposition of Debentures or shares of
common stock provided that:

(1) common stock of the Company is and continues to be regularly traded
on an established securities market for U.S. federal income tax purposes;
and

(2) a Non-U.S. Holder does not hold, and has not held during certain
periods, directly or indirectly, more than 5% of the common stock (or, in
the case of Debentures, such Debentures that have a fair market value
greater than 5% of the common stock).

Conversion of Notes. A Non-U.S. Holder generally will not be subject to
U.S. federal income tax on the conversion of any of our Debentures into shares
of our common stock. However, a Non-U.S. Holder may recognize gain to the
extent of cash received in lieu of a fractional share on conversion. Such gain
would be subject to the rules described above with respect to the rules
regarding the sale or exchange of any of our Debentures or shares of common
stock by a Non-U.S. Holder.

Dividends on shares of common stock. Generally, any distribution on shares
of our common stock to a Non-U.S. Holder will be subject to U.S. federal
income tax withholding at a rate of 30% unless:

(1) the dividend is effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder; or

(2) an applicable income tax treaty provides for a lower rate of, or
exemption from, withholding tax.

If the dividend is effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder, the dividend will be
subject to:

(A) the U.S. federal income tax on net income that applies to U.S.
persons generally; and

(B) with respect to corporate Non-U.S. Holders under certain
circumstances, the branch profits tax.

A Non-U.S. Holder may be required to satisfy certain certification
requirements in order to claim a reduction of or exemption from withholding
under the foregoing rules.

Information Reporting and Backup Withholding

U.S. Holders. Information reporting and backup withholding may apply to
payments of principal, interest or dividends on, or the proceeds from the sale
or other disposition of, our Debentures or common stock with respect to
certain noncorporate U.S. Holders. If you are such a U.S. Holder, then you
generally will be subject to backup withholding at a rate of 31% unless, among
other conditions, you supply a taxpayer identification number and certain
other information, certified under penalties of perjury, to the payer or you
otherwise establish an exemption from backup withholding. Any amount withheld
under backup withholding is allowable as a credit against the U.S. Holder's
federal income tax liability.

Non-U.S. Holders. Generally, information reporting will apply to payments
of interest on our Debentures or dividends on our common stock, and backup
withholding at a rate of 31% will apply unless the payee certifies that it is
not a U.S. person or otherwise establishes an exemption. The 31% backup
withholding tax will not apply, however, to interest or dividends subject to
the 30% withholding tax described above. In addition, information reporting
and backup withholding will apply to payments of principal on our Debentures
unless you certify that you are not a U.S. person or otherwise establish an
exemption.

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<PAGE>

The payment of the proceeds from the disposition of any of our Debentures or
common stock to or through the U.S. office of a U.S. or foreign broker will be
subject to information reporting and possible backup withholding, unless the
Non-U.S. Holder certifies as to its Non-U.S. Holder status or otherwise
establishes an exemption, provided that the broker does not have actual
knowledge that the holder is a U.S. person or that the conditions of any other
exemption are not, in fact, satisfied. The proceeds of the disposition by a
Non-U.S. Holder of our Debentures or common stock to or through a foreign
office of a broker generally will not be subject to information reporting or
backup withholding. However, if the broker is either:

(1) a U.S. person;

(2) a controlled foreign corporation for U.S. tax purposes; or

(3) a foreign person 50% or more of whose gross income from all sources
for certain periods is from activities that are effectively connected with
a U.S. trade or business,

information reporting generally will apply unless the broker has documentary
evidence in its files of the Non-U.S. Holder's foreign status and has no actual
knowledge to the contrary.

New Withholding Regulations

The recently finalized withholding rules referred to above (the "New
Regulations") make certain modifications to the withholding and information
reporting rules described above. The New Regulations attempt to unify
certification requirements and modify reliance standards. The New Regulations
generally will be effective for payments made after December 31, 2000, subject
to certain transition rules. We urge you to consult your own tax advisors
regarding the New Regulations.

THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, YOU SHOULD CONSULT YOUR OWN TAX ADVISER AS TO PARTICULAR TAX
CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF OUR DEBENTURES AND
OUR COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAWS.

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<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During 1999, Supportive Housing Services, Inc. ("SHS") provided services to
us for market feasibility analysis, site pre-acquisition services, construction
management oversight and building setup in conjunction with our development
activities. SHS is owned 75% by Dr. Wilson's spouse. We paid SHS approximately
$1.6 million for such services in 1999 (including $255,000 reflecting payment
to CCL (as defined below) in 1999). Such agreement was terminated effective
January 2000.

During 1999, Concepts in Community Living, Inc. ("CCL"), a company owned by
Dr. Wilson's spouse, provided feasibility studies and pre-development
consulting services to SHS and certain developers with respect to certain
assisted living residence sites we were developing and constructing. We paid
CCL approximately $255,000 indirectly through SHS for rendering such services
in 1999. In June 1999, we entered into a new agreement with CCL pursuant to
which CCL will provide market research, demographic review and competitor
analysis in many of our current markets. We paid CCL $157,000 for such services
in 1999. We terminated the June 1999 agreement on December 12, 1999.

We lease six residences from Assisted Living Facilities, Inc., in which Dr.
Wilson's spouse owns a 25% interest. During 1999, we paid Assisted Living
Facilities, Inc. approximately $1.4 million for building rent and escrow
reserves.

During 1999, Mr. McBride owned a $400,000 or 16.6% interest, and Dr.
Wilson's spouse owned a $200,000 or 8.3% interest, in Health Equity Investors
("HEI"). In the second quarter of 1997, we entered into joint venture
agreements with HEI to operate certain new assisted living residences that we
owned or leased. The joint venture concurrently entered into a non-cancelable
management agreement with us pursuant to which we managed 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 residence. Through February 10, 1999, we
consolidated 100% of the revenues and expenses attributable to these residences
with our revenues and expenses, and HEI reimbursed us for 90.0% of the start-up
losses of the joint venture. We received loss reimbursements from HEI of $4.7
million for the year ended December 31, 1998, and no loss reimbursements in
1999. As of December 31, 1998, 17 residences owned or leased by us were being
operated by the joint venture.

On February 10, 1999, we purchased HEI's joint venture interest with respect
to the 17 properties then being operated by the joint venture for an aggregate
purchase price of approximately $3.8 million. HEI's investment with respect to
such properties was $3.2 million. As a result of such purchases, Mr. McBride
and Dr. Wilson's spouse received distributions of approximately $537,000 and
$269,000, respectively, in 1999.

In October 1997, we acquired Home and Community Care, Inc. ("HCI"). Certain
of our officers and directors were officers, directors or stockholders of HCI.
Mr. McBride and Dr. Wilson's spouse owned 13.9% and 4.7%, respectively, of
HCI's outstanding common stock at the time of acquisition, substantially all of
which was acquired in March 1997. The terms of the acquisition were approved by
a committee of independent directors. Pursuant to the HCI acquisition
agreement, Mr. McBride and Dr. Wilson's spouse received "earnout" payments from
us in 1999 of $207,000 and $75,000, respectively, related to HCI sites we
elected to develop. No further "earnout" payments are expected.

In March 1999, one of our directors, Mr. Razook, became President and
Managing Director at Cohen & Steers Capital Advisors LLC ("C&S Advisors").
Pursuant to an agreement entered into during 1999 with Cohen & Steers Capital
Management, Inc., an affiliate of C&S Advisors ("CSCM"), we paid CSCM and C&S
Advisors an aggregate of $1.3 million in 1999 for financial advisory services.
On January 24, 2000, our agreement with CSCM was terminated by mutual consent,
and a new agreement with C&S Advisors was entered into. Pursuant to our new
agreement, we anticipate that we may pay C&S Advisors approximately $600,000
for financial advisory services plus customary fees and commissions in the
event that we are advised by C&S Advisors in connection with certain financing
and merger and acquisition transactions. The new agreement terminates on
December 31, 2000, except that (a) we may terminate the agreement at any time
upon 90 days written notice and (b) even after the expiration or termination of
the new agreement we will be required to pay C&S Advisors fees under the new
agreement if we complete certain financing and merger and acquisition
transactions on or prior to December 31, 2001.

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<PAGE>

SELLING DEBENTUREHOLDERS

The Debentures being offered were acquired by the Selling Debentureholders
in connection with a private placement of the Debentures by Assisted Living
Concepts on April 13, 1998. The offering was pursuant to Rule 144A and
Regulation D under the Securities Act or in permitted resale transactions from
the initial purchasers of the Debentures or holders acquiring these Debentures
from prior holders in permitted resale transactions.

The following table sets forth the following information:

. names of the Selling Debentureholders

. the number of shares of common stock owned by each of them as of the date
of this supplement

. the principal amount of Debentures which may be offered pursuant to this
Prospectus

Other than as a result of the ownership of Debentures or common stock, none
of the Selling Debentureholders has had any position, office or other material
relationship with Assisted Living Concepts or any of its predecessors or
affiliates within the past three years, except as noted. The information in the
table and accompanying footnotes has been prepared based upon information
furnished to Assisted Living Concepts by or on behalf of the Selling
Debentureholders.

We cannot provide an estimate as to the principal amount of Debentures or
shares of common stock that will be held by the Selling Debentureholders after
completion of this offering. This is because the Selling Debentureholders may
offer all or some of the Debentures which they hold and/or shares of common
stock issued upon conversion pursuant to this offering. Furthermore, there are
currently no agreements, arrangements or understandings with respect to the
sale of any of the Debentures or shares of common stock that will be held by
the Selling Debentureholders after completion of this Offering. See "Plan of
Distribution."

<TABLE>
<CAPTION>
Principal Principal
Amount of Amount of
Debentures Debentures
Beneficially That May be
Name Owned Sold
---- ------------ -----------
<S> <C> <C>
Deephaven Domestic Convertible Trading Ltd. .......... 3,340,000 3,340,000
Donaldson Lufkin & Jenrette........................... 6,585,000 6,585,000
Forest Alternative Strategies Fund A-5................ 4,287,000 4,287,000
Fortis Growth and Income Fund......................... 2,000,000 2,000,000
Fortis Growth and Income Series Portfolio............. 2,000,000 2,000,000
Goldman Sachs and Company............................. 130,000 130,000
JMG Convertible Investments, L.P. .................... 500,000 500,000
Lehman Brothers Inc. ................................. 1,580,000 1,580,000
Lewco Securities, Corp................................ 5,445,000 5,445,000
McMahan Securities Company, L.P. ..................... 500,000 500,000
Merrill Lynch Convertible Fund, Inc. ................. 400,000 400,000
Merrill Lynch Multinational Investment Portfolio
Equity/Convertible Series Convertible Securities
Portfolio (Offshore Fund)............................ 300,000 300,000
Merrill Lynch World Income Fund, Inc. ................ 1,300,000 1,300,000
Salomon Smith Barney.................................. 1,170,000 1,170,000
Schroders & Co. ...................................... 4,700,000 4,700,000
Triton Capital Investments, Ltd. ..................... 500,000 500,000
Winchester Convertible Plus, Ltd...................... 255,000 255,000
----------- -----------
Total............................................... $34,992,000 $34,992,000
=========== ===========
</TABLE>

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PLAN OF DISTRIBUTION

We will not receive any of the proceeds from this Offering. We have been
advised by the Selling Debentureholders that they may sell all or a portion of
the Debentures and Conversion Shares offered from time to time on AMEX (or
through the facilities of any national securities exchange or U.S. automated
interdealer quotation system of a registered national securities association,
on which any of the Debentures or Conversion Shares are then listed, admitted
to unlisted trading privileges or included for quotation) on terms to be
determined at the times of such sales. The Selling Debentureholders may also
make private sales, including "block transfers," directly or through a broker
or brokers. Alternatively, any of the Selling Debentureholders may from time to
time offer the Debentures or Conversion Shares through underwriters, including
any of the initial purchasers of the Debentures, dealers or agents. The
underwriters may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Debentureholders and the purchasers
of the Debentures or Conversion Shares. To the extent required, the aggregate
principal amount of Debentures and number of Conversion Shares to be sold, the
names of the Selling Debentureholders, the purchase price, the name of any such
agent, dealer or underwriter and any applicable commissions with respect to a
particular offer will be set forth in an accompanying prospectus supplement.
The aggregate proceeds to the Selling Debentureholders from the sale of the
Debentures and Conversion Shares offered will be the purchase price of such
Debentures and Conversion Shares less any commissions. There is no assurance
that the Selling Debentureholders will sell any or all of the Debentures or
Conversion Shares offered.

The Debentures and the Conversion Shares may be sold from time to time in
one or more transactions at fixed offering prices, which may be changed, or at
varying prices determined at the time of sale or at negotiated prices. These
prices will be determined by the holders of the securities or by agreement
between such holders and underwriters or dealers who may receive fees or
commissions in connection therewith.

The Debentures are listed on AMEX. However, there can be no assurance that
an active market for the Debentures will develop.

Under the securities laws of certain states, the Debentures and Conversion
Shares may be sold in such states only through registered or licensed brokers
or dealers.

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

We originally sold the Debentures on April 13, 1998 in a private placement
at a purchase price of 100% of their principal amount. We agreed to indemnify
and hold the initial purchasers and certain subsequent holders of the
Debentures harmless against certain liabilities under the Securities Act that
could arise in connection with the sale of the Debentures by the initial
purchasers or such subsequent holders.

We will pay all expenses incident to the offering and sale of the Debentures
and common stock to the public other than underwriting discounts and selling
commissions and fees. See "Selling Debentureholders."

88
<PAGE>

LEGAL MATTERS

Latham & Watkins, Los Angeles, California and New York, New York and Schreck
Morris, Las Vegas, Nevada, have passed upon certain legal matters with respect
to the Debentures and the Conversion Shares being offered.

EXPERTS

The consolidated financial statements and schedule of Assisted Living
Concepts, Inc., as of December 31, 1998 and 1999 and for each of the years in
the three-year period ended December 31, 1999, have been included herein and in
the Registration Statement in reliance upon the reports of KPMG LLP,
independent certified public accountants, appearing elsewhere herein and in the
Registration Statement, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG LLP, dated March 29, 2000 refers to
a change in accounting for pre-opening costs in 1998.

89
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
I. Audited Financial Statements as of and for the Years Ended December
31, 1998 and 1999

Independent Auditors' Report............................................. F-2

Consolidated Balance Sheets, December 31, 1998 and 1999.................. F-3

Consolidated Statements of Operations, Years Ended December 31, 1997,
1998 and 1999........................................................... F-4

Consolidated Statements of Comprehensive Loss, Years Ended December 31,
1997, 1998 and 1999..................................................... F-4

Consolidated Statements of Shareholders' Equity, Years Ended December 31,
1997, 1998 and 1999..................................................... F-5

Consolidated Statements of Cash Flows, Years Ended December 31, 1997,
1998 and 1999........................................................... F-6

Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Assisted
Living Concepts, Inc. and subsidiaries as of December 31, 1998 and 1999, and
the related consolidated statements of operations, comprehensive loss,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with 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. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.

As discussed in note 14 to the consolidated financial statements, in 1998
the Company changed its method of accounting for pre-opening costs associated
with newly developed residences.

KPMG LLP

Portland, Oregon

March 29, 2000

F-2
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 55,036 $ 7,606
Restricted cash.......................................... -- 7,555
Marketable securities, available for sale................ 4,000 1,680
Accounts receivable, net of allowance for doubtful
accounts of $179 at 1998 and $1,062 at 1999............. 5,127 4,069
Prepaid expenses......................................... 992 948
Other current assets..................................... 4,472 3,419
-------- --------
Total current assets.................................... 69,627 25,277
-------- --------
Property and equipment..................................... 284,754 321,622
Construction in process.................................... 51,304 --
-------- --------
Total property and equipment............................ 336,058 321,622
Less accumulated depreciation........................... 9,133 15,974
-------- --------
Property and equipment--net............................. 326,925 305,648
-------- --------
Goodwill, net.............................................. 5,371 5,077
Other assets, net.......................................... 12,746 10,186
-------- --------
Total assets............................................ $414,669 $346,188
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 1,622 $ 1,318
Construction payable..................................... 6,942 1,078
Accrued real estate taxes................................ 4,837 4,466
Accrued interest expense................................. 2,268 1,940
Accrued payroll expense.................................. 1,382 2,773
Other accrued expenses................................... 2,477 2,030
Other current liabilities................................ 4,857 2,586
Current portion of long-term debt........................ 1,386 1,494
-------- --------
Total current liabilities............................... 25,771 17,685
-------- --------
Other liabilities.......................................... 3,415 5,960
Long-term debt............................................. 105,036 71,949
Convertible subordinated debentures........................ 161,250 161,250
-------- --------
Total liabilities....................................... 295,472 256,844
-------- --------
Commitments and contingencies
Shareholders' 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; issued and outstanding 17,344,143 shares in
1998 and 17,120,745 shares in 1999...................... 173 171
Additional paid-in capital............................... 148,533 144,443
Unearned compensation expense............................ (3,492) --
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions............................................ (239) (239)
Accumulated other comprehensive loss..................... -- (320)
Accumulated deficit...................................... (25,778) (54,711)
-------- --------
Total shareholders' equity.............................. 119,197 89,344
-------- --------
Total liabilities and shareholders' equity.............. $414,669 $346,188
======== ========
</TABLE>

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

F-3
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Revenue........................................... $49,605 $ 89,384 $117,489
Operating expenses:
Residence operating expenses.................... 31,591 57,443 81,767
Corporate general and administrative............ 4,050 11,099 21,178
Building rentals................................ 2,691 11,400 14,103
Building rentals to related party............... 5,278 1,364 1,264
Depreciation and amortization................... 3,683 6,339 8,981
Terminated merger expense....................... -- 1,068 228
Site abandonment costs.......................... -- 2,377 4,912
Write-off of impaired assets and related
expenses....................................... -- 8,521 --
------- -------- --------
Total operating expenses...................... 47,293 99,611 132,433
------- -------- --------
Operating income (loss)........................... 2,312 (10,227) (14,944)
------- -------- --------
Other income (expense):
Interest expense................................ (4,946) (11,039) (15,200)
Interest income................................. 1,526 3,869 1,598
Loss on sale of assets.......................... (1,250) (651) (127)
Other income (expense), net..................... (121) (1,174) (260)
------- -------- --------
Total other (income) expense.................. (4,791) (8,995) (13,989)
------- -------- --------
Loss before cumulative effect of change in
accounting principle............................. (2,479) (19,222) (28,933)
Cumulative effect of change in accounting
principle........................................ -- (1,523) --
------- -------- --------
Net loss.......................................... $(2,479) $(20,745) $(28,933)
======= ======== ========
Basic and diluted net loss per common share:
Loss before cumulative effect of change in
accounting principle........................... $ (0.21) $ (1.18) $ (1.69)
Cumulative effect of change in accounting
principle...................................... -- (0.09) --
------- -------- --------
Basic and diluted net loss per common share....... $ (0.21) $ (1.27) $ (1.69)
======= ======== ========
Basic and diluted weighted average common shares
outstanding...................................... 11,871 16,273 17,119
======= ======== ========
</TABLE>

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net loss.......................................... $(2,479) $(20,745) $(28,933)
Other comprehensive loss:
Unrealized loss on investments.................. -- -- (320)
------- -------- --------
Comprehensive loss................................ $(2,479) $(20,745) $(29,253)
======= ======== ========
</TABLE>

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

F-4
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)

<TABLE>
<CAPTION>
Fair Market
Value in Accumulated
Common Stock Additional Unearned Excess of Other Total
-------------- Paid-In Compensation Historical Comprehensive Accumulated Shareholders'
Shares Amount Capital Expense Cost Loss Deficit Equity
------ ------ ---------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 11,030 110 $ 59,678 $ -- $(239) -- $ (2,554) $ 56,995
Net proceeds from public
offering............... 4,140 42 72,086 -- -- -- -- 72,128
Shares issued for
acquisition............ 337 3 5,073 -- -- -- -- 5,076
Exercise of employee
stock options.......... 139 1 373 -- -- -- -- 374
Grant of restricted
stock.................. -- -- 4,250 (4,250) -- -- -- --
Compensation expense
earned on restricted
stock.................. -- -- -- 150 -- -- -- 150
Net loss................ -- -- -- -- -- -- (2,479) (2,479)
------ ---- -------- ------- ----- ----- -------- --------
Balance at December 31,
1997................... 15,646 $156 $141,460 (4,100) $(239) -- $ (5,033) $132,244
Common stock
repurchased............ (529) (5) (7,057) -- -- -- -- (7,062)
Conversion of
subordinated
debentures............. 1,855 19 13,387 -- -- -- -- 13,406
Exercise of employee
stock options.......... 122 1 745 -- -- -- -- 746
Issuance of restricted
stock.................. 250 2 (2) -- -- -- -- --
Compensation expense
earned on restricted
stock.................. -- -- -- 608 -- -- -- 608
Net loss................ -- -- -- -- -- -- (20,745) (20,745)
------ ---- -------- ------- ----- ----- -------- --------
Balance at December 31,
1998................... 17,344 $173 $148,533 $(3,492) $(239) -- $(25,778) $119,197
Exercise of employee
stock options.......... 27 -- 158 -- -- -- -- 158
Compensation expense
earned on restricted
stock.................. -- -- -- 180 -- -- -- 180
Retirement of restricted
stock.................. (250) (2) (4,248) 3,312 -- -- -- (938)
Other comprehensive
loss................... -- -- -- -- -- (320) -- (320)
Net loss................ -- -- -- -- -- -- (28,933) (28,933)
------ ---- -------- ------- ----- ----- -------- --------
Balance at December 31,
1999................... 17,121 $171 $144,443 $ -- $(239) $(320) $(54,711) $ 89,344
====== ==== ======== ======= ===== ===== ======== ========
</TABLE>

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

F-5
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net loss...................................... $ (2,479) $ (20,745) $(28,933)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 3,683 6,339 8,981
Provision for doubtful accounts............. 23 359 883
Site abandonment costs...................... -- 2,377 4,912
Write-off of impaired assets and related
expenses................................... -- 8,521 --
Loss on sale of assets...................... 1,250 651 127
Cumulative effect of change in accounting
principle.................................. -- 1,523 --
Compensation expense earned on restricted
stock...................................... 150 608 180
Changes in assets and liabilities, excluding
effects of acquisitions:
Accounts receivable......................... (808) (3,302) 175
Prepaid expenses............................ (530) (88) 44
Other current assets........................ (3,039) (909) 953
Other assets................................ (633) 1,314 564
Accounts payable............................ (155) (237) (304)
Accrued expenses............................ 3,616 2,840 245
Other current liabilities................... 1,824 2,922 (2,271)
Other liabilities........................... 1,595 823 2,545
--------- --------- --------
Net cash provided by (used in) operating
activities................................... 4,497 2,996 (11,899)
--------- --------- --------
Investing activities:
Sale of marketable securities, available for
sale......................................... -- -- 2,000
Purchase of marketable securities, available
for sale..................................... -- (4,000) --
Restricted cash............................... -- -- (7,555)
Funds held in trust........................... 6,559 1,956 --
Proceeds from sale and leaseback
transactions................................. 51,671 8,113 --
Proceeds from sale of land.................... -- -- 19
Purchases of property and equipment........... (148,139) (117,972) (27,824)
Acquisitions, net of cash, debt acquired and
issuance of common stock..................... (4,064) (11,366) --
--------- --------- --------
Net cash used in investing activities......... (93,973) (123,269) (33,360)
--------- --------- --------
Financing activities:
Proceeds from construction financing.......... 43,210 -- --
Repayments of construction financing.......... (63,497) -- --
Proceeds from long-term debt.................. 21,854 49,004 --
Payments on long-term debt.................... (5,516) (289) (1,491)
Proceeds from issuance of common stock, net... 72,502 746 158
Repurchase of common stock.................... -- (7,062) --
Debt issuance costs of offerings and long-term
debt......................................... (4,163) (5,359) --
Proceeds from issuance of convertible
subordinated debentures...................... 86,250 75,000 --
Retirement of restricted stock................ -- -- (838)
--------- --------- --------
Net cash provided by (used in) financing
activities................................... 150,640 112,040 (2,171)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents.................................. 61,164 (8,233) (47,430)
Cash and cash equivalents, beginning of year.. 2,105 63,269 55,036
--------- --------- --------
Cash and cash equivalents, end of year........ $ 63,269 $ 55,036 $ 7,606
========= ========= ========
Supplemental disclosure of cash flow
information:
Cash payments for interest.................. $ 9,741 $ 16,480 $ 15,528
Cash payments for income taxes.............. $ 1,547 $ -- $ --
Non-cash transactions:
Increase (decrease) in construction payable
and property and equipment................. $ 2,881 $ (11,941) $ (5,864)
Conversion of subordinated debentures (net
of $509 of unamortized financing costs in
1998)...................................... -- 13,406 --
Conversion of construction financing to sale
leaseback.................................. -- 2,150 --
Unrealized loss on investment............... -- -- (320)
Amendment of leases and removal of related
assets..................................... -- -- 29,492
Retirement of restricted stock.............. -- -- 3,412
Amendment of leases and removal of related
debt....................................... -- -- 31,488
</TABLE>

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

F-6
<PAGE>

ASSISTED LIVING CONCEPTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Summary of Significant Accounting Policies

The Company

Assisted Living Concepts, Inc. ("the Company") owns, operates and develops
assisted living residences which provide housing to older persons who need help
with the activities of daily living such as bathing and dressing. The Company
provides personal care and support services and makes available routine health
care services designed to meet the needs of its residents. The accompanying
financial statements reflect the operating results of 109, 165 and 185
residences for the years ended December 31, 1997, 1998 and 1999, respectively.
Residences are included in operating results as of the first day of the month
following licensure.

On November 22, 1994, the Company sold 4,000,000 shares of common stock at
$4.625 per share in an initial public offering realizing net proceeds of
approximately $16.4 million after underwriter discounts, commissions and other
expenses.

In August 1995, the Company completed the offering of $20.0 million 7%
Convertible Subordinated Debentures ("7% Debentures") due August, 2005
realizing net proceeds of approximately $19.2 million after discounts,
commissions and other expenses. In September 1996, $6.1 million of the 7%
Debentures were converted into 811,333 shares of the Company's common stock
which resulted in $13.9 million of 7% Debentures outstanding. In August 1998,
the Company called for redemption all of the remaining $13.9 million of the 7%
Debentures. All of the 7% Debentures were converted into shares of the
Company's common stock, resulting in the issuance of 1,855,334 additional
shares of common stock.

In July 1996, the Company sold 4,192,500 shares of common stock at $9.50 per
share in a public offering realizing net proceeds of $37.3 million, after
underwriter discounts, commissions and other expenses.

In June 1997, the Company's Board of Directors declared a two for one stock
split on the Company's common stock. The record date for the stock split was
June 30, 1997 and the stock split occurred on July 10, 1997. All information in
the accompanying consolidated financial statements has been restated to reflect
the stock split.

In addition, in June 1997 the Company's Board of Directors declared a
dividend distribution of one preferred share purchase right ("Preferred Share
Purchase Right") on each outstanding share of the Company's common stock. In
the event that a person or group of persons acquires or announces a tender
offer to acquire 15% or more of the common stock (the "Acquiring Person"), the
Preferred Stock Purchase Rights, subject to certain limited exceptions, will
entitle each shareholder (other than the Acquiring Person) to buy one one-
hundredth of a share of newly created Series A Junior Participating Preferred
Stock of the Company at an exercise price of $54 (after giving effect to the
stock split). The Company may redeem the rights at one cent per right at any
time before a person or group has acquired 15% or more of the outstanding
common stock. The record date for Preferred Share Purchase Right distribution
was June 30, 1997. The stock split occurred immediately prior to the Preferred
Share Purchase Right distribution.

In October 1997 the Company sold 4,140,000 shares of common stock at $18.50
per share in a public offering realizing net proceeds of $72.1 million, after
underwriter discounts, commissions and other expenses.

In October 1997, the Company completed the public offering of $86.3 million
of 6% Convertible Subordinated Debentures ("6% Debentures") due November 2002
realizing net proceeds of $82.9 million after underwriter discounts,
commissions and other expenses. The 6% Debentures are convertible at any time
at or prior to maturity, unless previously redeemed, at a conversion price of
$22.57 per common share, which equates to an aggregate of 3,821,444 shares of
the Company's common stock.

F-7
<PAGE>

In April 1998, the Company completed the offering of $75.0 million of 5.625%
Convertible Subordinated Debentures ("5.625% Debentures") due May 2003
realizing net proceeds of $72.2 million after discounts, commissions and other
expenses. The 5.625% Debentures are convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $26.184 per
common share, which equates to an aggregate of 2,864,345 shares of the
Company's common stock.

Principles of Consolidation

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

Restatement of Historical Financial Statements

On February 1, 1999, the Company announced that after consultation with its
independent auditors the Company would restate its financial statements for the
fiscal quarter ended June 30, 1997, the fiscal quarter ended September 30,
1997, the fiscal year ended December 31, 1997, the fiscal quarter ended March
31, 1998, the fiscal quarter ended June 30, 1998 and the fiscal quarter ended
September 30, 1998. On March 31, 1999, the Company announced that the
restatement would be more extensive than the Company had previously believed,
and might include periods prior to the second quarter of 1997, including the
fiscal year ended December 31, 1996. After further consultation with its
independent auditors, the Company determined to restate its consolidated
financial statements for the fiscal year ended December 31, 1996, the fiscal
year ended December 31, 1997, and the first three fiscal quarters of the fiscal
year ended December 31, 1998. On September 30, 1999, the Company filed restated
financial statements with the Securities and Exchange Commission ("SEC") for
the fiscal years ended December 31, 1996 and 1997 and for each of the first
three fiscal quarters of the fiscal year ended December 31, 1998.

The restatement reduced the net income for the fiscal years ended December
31, 1996 and 1997 and for the nine months ended September 30, 1998 by $2.1
million, $6.7 million and $11.0 million, respectively. The cumulative effect of
the restatement reduced shareholders' equity by $19.7 million through September
30, 1998. As a result of the restatement, the Company reported net losses of
$1.9 million, $2.5 million and $13.3 million for the fiscal years 1996 and 1997
and the nine months ended September 30, 1998 respectively, compared to
previously reported net income of $149,000 and $4.2 million, and net loss of
$2.4 million, respectively. The Company reported net loss per diluted share of
$0.23, $0.21 and $0.84 for the fiscal years ended December 31, 1996 and 1997
and the nine months ended September 30, 1998, respectively, compared to
previously reported net income per diluted share of $0.03 and $0.34 and net
loss per diluted share of $0.14, respectively. After the restatement, the
Company's cash position as of December 31, 1996 and 1997 and as of September
30, 1998 was $2.1 million, $63.3 million and $79.6 million, respectively, as
compared to $2.1 million, $63.4 million and $79.8 million respectively, as
previously reported. As a result of the restatement, the Company's working
capital position as of December 31, 1996 and 1997 and as of September 30, 1998
was negative $27.1 million, positive $40.1 million and positive $63.0 million,
respectively, compared to previously reported working capital of negative $26.4
million, positive $41.0 million and positive $64.1 million, respectively.

The restatement resulted primarily from: (i) the earlier recognition of
certain expenses which were previously capitalized in association with the
Company's development and financing activities; (ii) a modification in how the
Company accounted for certain lease arrangements; (iii) a modification in how
the Company accounted for certain of its acquisitions and its joint venture
arrangements; (iv) the capitalization of fees received by the Company from
Supportive Housing Services, Inc. and Home and Community Care, Inc. which were
previously recognized as either a reduction of expenses or as other income;
(v) the elimination of a previously recorded impairment write-down recorded in
the second quarter of 1998 on three of its residences which the Company later
determined were not impaired based on a subsequent cash flow analysis performed
by the Company; (vi) elimination of certain accrued expenses previously
recorded pursuant to a change in a

F-8
<PAGE>

ccounting principle; and (vii) the increase in goodwill written off in the
second quarter of 1998 relating to exiting the Company's home health operation.

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents include cash on deposit and highly liquid
investments with maturities of three months or less at the date of purchase.
The Company's investments in cash equivalents are classified as held to
maturity and are stated at cost which approximates fair value. The Company's
investments in marketable securities are classified as available for sale.
These investments are stated at fair value with any unrealized gains or losses
included as accumulated other comprehensive loss in shareholders' equity.
Interest income is recognized when earned.

Leases

The Company determines the classification of its leases as either operating
or capital at their inception. The Company reevaluates such classification
whenever circumstances or events occur that require the reevaluation of the
leases.

The Company accounts for arrangements entered into under sale and leaseback
agreements pursuant to Statement of Financial Accounting Standards (SFAS) No.
98, "Accounting for Leases." For transactions that qualify as sales and
operating leases, a sale is recognized and the asset is removed from the books.
For transactions that qualify as sales and capital leases, the sale is
recognized, but the asset remains on the books and a capital lease obligation
is recorded. Transactions that do not qualify for sales treatment are treated
as financing transactions. In the case of financing transactions, the asset
remains on the books and a finance obligation is recorded as part of long-term
debt. Losses on sale and leaseback agreements are recognized at the time of the
transaction absent indication that the sales price is not representative of
fair value. Gains are deferred and recognized on a straight-line basis over the
initial term of the lease.

All of the Company's leases contain various provisions for annual increases
in rent, or rent escalators. Certain of these leases contain rent escalators
with future minimum annual rent increases that are not considered contingent
rents. The total amount of the rent payments under such leases with non-
contingent rent escalators is being charged to expense on the straight-line
method over the term of the leases. The Company records a deferred credit,
included in other liabilities, to reflect the excess of rent expense over cash
payments. This deferred credit is reduced in the later years of the lease term
as the cash payments exceed the rent expense (See Note 6).

Property and Equipment

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

<TABLE>
<S> <C>
Buildings....................................................... 40 years
Furniture and equipment......................................... 3 to 7 years
</TABLE>

Asset impairment is analyzed on assets to be held and used by the rental
demand by market to determine if future cash flows (undiscounted and without
interest charges) are less than the carrying amount of the asset. If an
impairment is determined to have occurred, an impairment loss is recognized to
the extent the assets carrying amount exceeds its fair value. Assets the
Company intends to dispose of are reported at the lower of (i) fair carrying
amount or (ii) fair value less the cost to sell. The Company has not recognized
any impairment losses on property through the year ended December 31, 1999.

Interest and certain payroll costs incurred during construction periods are
capitalized as part of the building costs. Maintenance and repairs are charged
to expense as incurred, and significant betterments and

F-9
<PAGE>

improvements are capitalized. Construction in process includes pre-acquisition
costs and other direct costs related to acquisition, development and
construction of residences. If a project is abandoned, any costs previously
capitalized are expensed.

Goodwill

Costs in excess of the fair value of the net assets acquired in purchase
transactions as of the date of acquisition have been recorded as goodwill and
are being amortized over periods ranging between 15 and 20 years on a straight-
line basis. Amortization of goodwill was $128,000, $398,000 and $294,000,
respectively, for the years ended December 31, 1997, 1998 and 1999. Accumulated
amortization of goodwill at December 31, 1998 and 1999 was $278,000 and
$629,000, respectively. Management maintains an impairment review policy
whereby the future economic benefit of the recorded balance is substantiated at
the end of each reporting period.

During the year ended December 31, 1998, the Company wrote-off all the
unamortized goodwill (approximately $7.5 million) associated with Pacesetter
Home Health Care, Inc. ("Pacesetter"), a wholly owned subsidiary of Home and
Community Care, Inc. The shut-down of Pacesetter operations was a result of a
change in the regulatory reimbursement environment during the quarter ended
June 30, 1998 (See Note 12).

Pre-Opening Costs

Prior to the adoption of AICPA Statement of Position 98-5, Reporting on the
Costs of Start-up Activities (SOP 98-5), pre-opening costs associated with
newly developed residences, prior to the commencement of their operations were
capitalized and amortized over 12 months. As a result of the Company's adoption
of SOP 98-5 (effective as of January 1, 1998), pre-opening costs are expensed
as incurred (See Note 14).

Deferred Financing Costs

Financing costs related to the issuance of debt are capitalized as other
assets and amortized to interest expense over the term of the related debt
using the straight-line method, which approximates the interest method.

Income Taxes

The Company uses the asset and liability method of accounting for income
taxes under which deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to the differences between the
financial statement carrying amounts of the existing assets and liabilities and
their respective tax bases (temporary differences). Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.

Revenue Recognition

Revenue is recognized when services are rendered and consists of residents'
fees for basic housing and support services and fees associated with additional
services such as routine health care and personalized assistance on a fee for
service basis. Management of the Company assesses the collectibility of the
accounts receivable periodically and records a provision for doubtful accounts
as considered necessary.

Classification of Expenses

Residence operating expenses exclude all expenses associated with corporate
or support functions which have been classified as corporate general and
administrative expense.

F-10
<PAGE>

Comprehensive Loss

On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive loss consists of net loss and several other
items that current accounting standards require to be recognized outside of net
loss and is presented in the consolidated statements of shareholders' equity
and comprehensive loss. The Statement requires only additional disclosures in
the consolidated financial statements; it does not affect the Company's
financial position or net loss. The Company recorded an unrealized loss on
marketable securities of $320,000 for the year ended December 31, 1999.

Net Income (Loss) Per Common Share

Basic earnings per share (EPS) is calculated using net loss attributable to
common shares divided by the weighted average number of common shares
outstanding for the period. Diluted EPS is calculated in periods with net
income using income attributable to common shares considering the effects of
dilutive potential common shares divided by the weighted average number of
common shares and dilutive potential common shares outstanding for the period.

Vested options to purchase 568,000, 833,000 and 983,000 shares of common
stock were outstanding during the years ended December 31, 1997, 1998 and 1999,
respectively. These options were excluded from the respective computations of
diluted loss per share, as their inclusion would be antidilutive.

Also excluded from the computations of diluted loss per share, for the years
ended December 31, 1997, 1998 and 1999 were 5,676,777, 6,685,789 and 6,685,789
shares of common stock, respectively, issuable upon conversion of the Company's
convertible subordinated debentures (see Note 10) and 250,000 shares of
restricted stock for the year ended December 31, 1998 (see Note 18) as their
inclusion would be antidilutive.

Segment Reporting

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." This SFAS
requires public enterprises to report certain information about their operating
segments in a complete set of financial statements to shareholders. It also
requires reporting of certain enterprise-wide information about the Company's
products and services, its activities in different geographic areas, and its
reliance on major customers. The basis for determining the Company's operating
segments is the manner in which management operates the business. This SFAS is
effective for financial statements for periods beginning after December 15,
1997 and, as such, was adopted by the Company in 1998. The Company has no
foreign operations, no customers which provide over 10 percent of gross
revenue, and has determined that it has only one operating segment.

Use of Estimates

Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities, and the disclosure of
contingent assets and liabilities, and the reported amounts of revenue and
expenses during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.

Reclassifications

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

F-11
<PAGE>

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximates fair value because of the
short-term nature of the accounts and/or because they are invested in accounts
earning market rates of interest. The carrying value of marketable debt
securities and funds held in trust approximates fair value because they bear
interest at market rates. The carrying amount of the Company's long-term debt
and construction financing approximate fair value as the interest rates
approximate the current rates available to the Company. The following table
sets forth the carrying amount and approximate fair value (based on quoted
market values) of the Company's subordinated debentures as of December 31, 1998
and 1999 (in thousands):

<TABLE>
<CAPTION>
1998 1999
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
6% Debentures...................... $86,250 $71,156 $86,250 $50,888
5.625% Debentures.................. 75,000 58,500 75,000 43,500
</TABLE>

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 changes
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 of employee stock-based compensation is
not mandatory, SFAS 123 requires companies that choose to continue applying the
provisions of APB No. 25 to disclose pro forma net loss and loss per share data
(See Note 18).

The Amended and Restated 1994 Employee Stock Option Plan combines an
incentive and nonqualified stock option plan, a stock appreciation rights
("SAR") plan and a stock award plan (including restricted stock). The 1994 Plan
is a long-term incentive compensation plan and is designed to provide a
competitive and balanced incentive and reward program for participants.

The Company's Non-Officer Stock Option Plan (the "Non-Officer Plan") is a
non-qualified stock option plan intended as a long-term incentive compensation
plan designed to provide a competitive and balanced incentive and reward
programs for participants.

Concentration of Credit Risk

The Company depends on the economies of Texas, Indiana, Oregon, Ohio and
Washington and to some extent, on the continued funding of State Medicaid
waiver programs in some of those states. As of December 31, 1999, 21.6% of the
Company's properties were in Texas, 11.4% in Indiana, 10.3% in Oregon, 9.7% in
Ohio and 8.6% in Washington. Adverse changes in general economic factors
affecting the respective health care industries or laws and regulator
environment in each of these states, including Medicaid reimbursement rates,
could have a material adverse effect on the Company's financial condition and
results of operations.

State Medicaid reimbursement programs constitute a significant source of
revenue for the Company. During the years ended December 31, 1997, 1998 and
1999, direct payments received from state Medicaid agencies accounted for
approximately 11.1%, 10.7% and 10.4%, respectively, of the Company's revenue
while the tenant paid portion received from Medicaid residents accounted for
approximately 5.9%, 5.8% and 5.9%, respectively, of the Company's revenue
during these periods. The Company expects in the future that State Medicaid
reimbursement programs will constitute a significant source of revenue for the
Company.

F-12
<PAGE>

2. Acquisitions and Joint Venture

Acquisitions

Effective October 23, 1997, the Company acquired 98.8% of the outstanding
capital stock of Home and Community Care, Inc. ("HCI"). The Company had
acquired an initial 1.2% interest in HCI as a result of HCI's acquisition of
Pacesetter, a home health care agency in which the Company had made an
investment in November 1996. Several employees of the Company, including
members of the Board of Directors, owned collectively approximately 40.0% of
the outstanding common stock in HCI (See Notes 16 and 17). In the second
quarter of 1997 the Company signed a licensing agreement with HCI, pursuant to
which the Company agreed to allow HCI to use certain of the Company's
proprietary information and materials in connection with the development of
HCI's assisted living residences. During the second quarter of 1997, the
Company received $178,000 in fees from HCI and recorded such fees as other
income included in other income/expenses. The HCI purchase was completed at a
purchase price of approximately $4.0 million in cash (which reflects
approximately $5.3 million of cash paid net of (i) approximately $250,000 in
cash acquired, (ii) approximately $850,000 in fees from HCI for services
rendered during 1997, and (iii) $150,000 in dividends received from HCI during
1997), and the assumption of approximately $6.6 million in liabilities. HCI
stockholders were entitled to receive certain "earnout" payments over a two-
year period based on the number of HCI's assisted living residence sites, which
the Company elected to complete. At the time of the acquisition, HCI had 20
sites under development. For each completed residence, HCI stockholders
received an additional $7,500 per unit (approximately $300,000 per residence)
in cash. During the years ended December 31, 1997, 1998 and 1999, the Company
paid earnout payments of $0, $1.7 million and $1.5 million, respectively, and
capitalized such payments in property and equipment.

The acquisition was accounted for as a purchase, and the operating results
of HCI have been included in the Company's consolidated financial statements
since the date of acquisition. The cost of the acquisition has been allocated
based on the estimated fair value of the net assets acquired of approximately
$3.4 million. The excess of the aggregate purchase price over the fair market
value of net assets acquired of approximately $7.5 million was recorded as
goodwill and amortized on a straight-line basis over 20 years.

During the second quarter of 1998 the Company announced a plan to exit all
home health business operations being conducted by Pacesetter. During the year
ended December 31, 1998, the Company incurred a $8.5 million charge to earnings
associated with exiting the Pacesetter operations. Such charge consisted of (i)
a $7.5 million write-off of all unamortized goodwill associated with Pacesetter
and (ii) a $1.0 million provision for exit costs expected to be incurred during
the phase out of the Pacesetter business. During the fourth quarter 1998, the
$1.4 million provision for exit costs was reduced by $400,000 to $1.0 million
as a result of a change in the estimate for such exit costs. In addition, the
Company incurred a $1.0 million charge recorded as site abandonment expense
during second quarter 1998 for previously capitalized development costs
relating to 11 sites acquired in the HCI acquisition that it had determined not
to develop (See Note 7 and Note 12).

Effective October 23, 1997, the Company acquired the 90.1% of the
outstanding capital stock of Carriage House Assisted Living Inc. ("Carriage
House") it did not already own. Several employees of the Company, including
members of the Board of Directors, owned collectively approximately 23.0% of
the outstanding common stock of Carriage House (See Notes 16 and 17). The
Company had acquired its initial 9.9% ownership in Carriage House's outstanding
capital stock during 1996. The acquisition was completed at a purchase price of
$5.2 million with the exchange of 337,460 shares of Common Stock (based on a
stock price of $15.41 per share) for all of the outstanding common stock of
Carriage House and the assumption of approximately $3.2 million in liabilities.

The acquisition was accounted for as a purchase and the operating results of
Carriage House have been included in the Company's consolidated financial
statements since the acquisition date. The cost of the acquisition has been
allocated based on the estimated fair value of the net assets acquired of
approximately $3.4 million. The excess of the aggregate purchase price over the
fair market value of net assets acquired of

F-13
<PAGE>

approximately $4.7 million has been recorded as goodwill and is being amortized
on a straight-line basis over 20 years.

The following unaudited pro forma consolidated results of operations for the
Company for the year ended December 31, 1997 assume that HCI and Carriage House
acquisitions had occurred as of January 1, 1997 (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
(Unaudited) Total
----------- --------
<S> <C>
Net revenue..................................................... $55,241
Net loss........................................................ (2,680)
Basic and diluted net loss per common share..................... $ (0.23)
</TABLE>

The unaudited pro forma consolidated results of operations do not purport to
be indicative of the results that would have been reported if the acquisitions
had been completed as of the beginning of the period presented.

On April 30, 1998, the Company completed the acquisitions of two assisted
living residences in Plano and McKinney, Texas, having units of 64 and 50,
respectively. The residences were acquired for a total purchase price of
approximately $5.2 million. The acquisitions were accounted for as purchases
and the operating results of the facilities have been included in the Company's
consolidated financial statements since the acquisition date. The cost of the
acquisitions has been allocated based on the estimated fair value of the net
assets acquired of approximately $5.2 million. No goodwill was recorded.

On July 1, 1998, the Company completed the acquisition of an assisted living
residence in Alexandria, Louisiana having 48 units. The residence was acquired
for a purchase price of approximately $2.8 million. The acquisition was
accounted for as a purchase and the operating results of the facility have been
included in the Company's consolidated financial statements since the
acquisition date. The cost of the acquisition has been allocated based on the
estimated fair value of the net assets acquired of approximately $2.8 million.
No goodwill was recorded.

On December 1, 1998, the Company completed the acquisition of an assisted
living residence in Paris, Texas, having 50 units. The residence was acquired
for a purchase price of approximately $3.4 million. The acquisition was
accounted for as a purchase and the operating results of the facility have been
included in the Company's consolidated financial statements since the
acquisition date. The cost of the acquisition has been allocated based on the
estimated fair value of the net assets acquired of approximately $3.0 million.
The excess of the aggregate purchase price over the fair market value of net
assets acquired is approximately $432,000 and has been recorded as goodwill and
is being amortized on a straight-line basis over 20 years.

Pro forma consolidated results of operations including the four facilities
acquired during 1998 are excluded, as they are not considered significant to
the Company's operations.

Joint Venture

During 1997, the Company entered into joint venture agreements with a joint
venture partner to operate certain new assisted living residences which
commenced operations during the second, third and fourth quarters of 1997. Of
the $2.3 million of total capital raised by the joint venture partner to invest
in such arrangements, the Company contributed $300,000 and recorded such
investment in other non-current assets. In addition, certain members of
management held interests in the joint venture partner (See Note 16). Pursuant
to the joint venture agreements, the Company entered into non-cancelable
management agreements under which the Company managed the residences operated
by the joint venture for an amount equal to the greater of 8% of gross revenues
or $2,000 per month per residence. Because the Company retained direct control
of the residences operated by the joint venture, the Company consolidated the
operations of the residences subject to the joint venture agreements in its
consolidated financial statements. The joint venture partner reimbursed the

F-14
<PAGE>

Company for 90.0% of the start-up losses of the joint venture, and the Company
recognized such reimbursements as loans included in other liabilities. The
Company also reflected amounts paid to repurchase the joint venture partner's
interest in excess of reimbursed losses as interest and other expense. Interest
was calculated based on the average loan balance using an imputed 20.0%
interest rate and other expense was calculated based on a $10,000
administrative fee per residence. The Company received loss reimbursements of
$2.3 million and $4.7 million for the years ended December 31, 1997 and 1998,
respectively. The Company did not repay any of these loans, and incurred
interest expense of $52,000 in connection with these loans, during the year
ended December 31, 1997. The Company repaid $4.0 million of these loans in
1998, and incurred interest and other expense of $687,000 in connection with
these loans, for the year ended December 31, 1998. As of December 31, 1998, 17
residences owned or leased by the Company were being operated by the joint
venture. During the first quarter of 1999 the Company announced that it had
negotiated with the joint venture partner to purchase, for approximately
$3.8 million, all of the joint venture partner's interest in the remaining 17
residences subject to the joint venture agreements (See Note 16).

3. Restricted Cash

During 1999, the Company restricted $8.7 million of cash balances in
accordance with certain loan and lease agreements. The agreements provide for
the release of this collateral upon the achievement of specified performance
targets, provided that the Company is in compliance with the other terms of the
loan agreements (see Notes 6 and 9). The Company achieved certain of these
targets and obtained a release of $1.2 million of restricted cash in December
1999.

4. Funds Held In Trust

During 1996, the Company issued $8.5 million in tax-exempt bonds to provide
permanent financing on five Washington residences. As of December 31, 1997,
four of the five properties had been completed and the Company had received
proceeds of $6.5 million. The remaining $2.0 million of proceeds was released
during the first quarter of 1998 once the remaining residence had been
completed and licensed.

5. Marketable Securities

Marketable securities consist of U.S. Treasury securities and other highly
liquid marketable debt securities. The aggregate market value of securities
held at December 31, 1998 and 1999 was $4.0 million and $1.7 million,
respectively. The investments held at December 31, 1999 have a historical cost
of $2.0 million and have been classified as available for sale in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investment in Debt and Equity Securities." As a result, unrealized
investment losses of $320,000 are included as a component of comprehensive loss
and shareholders' equity at December 31, 1999. There were no unrealized
investment losses at December 31, 1998.

F-15
<PAGE>

6. Leases

A summary of leases that the Company has entered into since its inception is
as follows:

<TABLE>
<CAPTION>
Number of
Sale and Number of
Number of Leaseback Sale and Units under
Leased Residences Total Leaseback Leases
Residences Accounted for Number of Residences Units under Accounted
("Oregon as Operating Operating Accounted for Operating for as
Leases") Leases Leases as Financings Leases Financings
---------- ------------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Leases at December 31,
1994................... 4 -- 4 -- 114 --
Leases entered into
during 1995............ -- 5 5 -- 150 --
------ ------ ------ ------ ------ ------
Leases at December 31,
1995................... 4 5 9 -- 264 --
Leases entered into
during 1996............ 1 19 20 9 763 316
Residences repurchased
during 1996............ -- (4) (4) -- (146) --
------ ------ ------ ------ ------ ------
Leases at December 31,
1996................... 5 20 25 9 881 316
Leases entered into
during 1997............ 2 24 26 7 1,025 247
------ ------ ------ ------ ------ ------
Leases at December 31,
1997................... 7 44 51 16 1,906 563
Leases entered into
during 1998............ -- 4 4 -- 139 --
Lease expansions during
1998................... -- -- -- -- 47 10
Leases terminated during
1998................... (1) -- (1) -- (45) --
------ ------ ------ ------ ------ ------
Leases at December 31,
1998................... 6 48 54 16 2,047 573
Lease expansions during
1999................... -- -- -- -- 13 --
Leases modified and
reclassified during
1999................... -- 16 16 (16) 573 (573)
------ ------ ------ ------ ------ ------
Leases at December 31,
1999................... 6 64 70 -- 2,633 --
====== ====== ====== ====== ====== ======
</TABLE>

The Company has entered into agreements to lease six assisted living
residences in Oregon from Assisted Living Facilities, Inc., a related party
(the "Oregon Leases"). During 1998 the Company terminated a lease with Oregon
Heights Partners ("OHP"). The lessor in each case obtained funding through the
sale of bonds issued by the state of Oregon, Housing and Community Services
Department ("OHCS"). In connection with the Oregon Leases, the Company entered
into "Lease Approval Agreements" with OHCS and Assisted Living Facilities,
Inc., pursuant to which the Company is obligated to comply with the terms and
conditions of certain regulatory agreements to which the lessor is a party (See
Note 9). The leases, which have fixed terms of 10 years, have been accounted
for as operating leases. Aggregate deposits on these residences as of
December 31, 1997, 1998 and 1999 were $176,000, $126,000 and $126,000
respectively, which are reflected in other assets.

During the years ended December 31, 1997 and 1998 the Company completed the
sale of 24 and 4 residences under sale and leaseback arrangements,
respectively. The Company sold the residences for approximately $51.7 million
in 1997 and $10.3 million in 1998 and leased them back over initial terms
ranging from 12 to 20 years. In addition, the Company assumed four leases under
sale and leaseback agreements that were acquired with the Carriage House
purchase that was completed in October of 1997. The Company did not enter into
any sale and leaseback agreements in 1999.

The Company recognized losses of $1.3 million and $651,000 on the above sale
and leaseback transactions for the years ended December 31, 1997 and 1998,
respectively. The losses are presented in the Consolidated Statements of
Operations as net loss on sale of assets. Gains on sale and leaseback
transactions of $1.1 million and $508,000 for the years ended December 31, 1997
and 1998 respectively, have been recorded as deferred income included in other
liabilities and are being amortized over the initial terms of the corresponding
leases. For the year ended December 31, 1997, a substantial portion of such
gains and losses resulted from sale and leaseback transactions with LTC (See
Note 17).

F-16
<PAGE>

In March 1999, the Company amended 16 leases, resulting in the
reclassification of such leases from financings to operating leases (see Notes
7 and 9).

In June 1999, the Company amended all of its 37 leases with LTC. These
amendments included provisions to restructure future minimum annual rent
increases, or "rent escalators," that were not deemed to be contingent rents.
Because of the rent escalators, prior to the amendments, the Company accounted
for rent expense related to such leases on a straight-line basis. From the date
of the amendment forward, the Company will account for the amended leases on a
contractual cash payment basis and amortize the deferred rent balance at the
date of the amendment over the remaining initial term of the lease. Those
amendments also redefined the lease renewal option with respect to certain
leases and provided the lessor with the option to declare an event of default
in the event of a change of control under certain circumstances. In addition,
the amendments also provide the Company with the ability, subject to certain
conditions, to sublease or assign its leases with respect to two Washington
residences.

Certain of the Company's leases and loan agreements contain covenants and
cross-default provisions such that a default on one of those instruments could
cause the Company to be in default on one or more other instruments. The
Company was in compliance with these lease and loan covenants at December 31,
1999. During the third quarter of 1999, the Company agreed to provide $418,000
of additional cash collateral pursuant to certain lease agreements with one of
its lessors. The Company restricted $418,000 of cash balances as a result of
such action (see Note 3).

As of December 31, 1999, future minimum annual lease payments under
operating leases are as follows (in thousands):

<TABLE>
<S> <C>
2000................................ $ 16,641
2001................................ 16,638
2002................................ 16,638
2003................................ 16,638
2004................................ 16,638
Thereafter.......................... 95,960
--------
$179,153
========
</TABLE>

7. Property and Equipment

As of December 31, 1998 and 1999, property and equipment, stated at cost,
consist of the following (in thousands):

<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Land...................................................... $ 18,217 $ 21,329
Buildings................................................. 256,904 286,347
Equipment................................................. 2,865 5,344
Furniture................................................. 6,768 8,602
-------- --------
Property and equipment.................................... 284,754 321,622
Construction in process................................... 51,304 --
-------- --------
Total property and equipment............................ 336,058 321,622
Less accumulated depreciation............................. 9,133 15,974
-------- --------
Property and equipment--net............................. $326,925 $305,648
======== ========
</TABLE>

Land, buildings and certain furniture and equipment relating to 37
residences serve as collateral for long-term debt (See Note 9). Depreciation
expense was $2.9 million, $5.9 million and $8.7 million, for the years ended
December 31, 1997, 1998 and 1999, respectively.

F-17
<PAGE>

As of December 31, 1998 construction in process consists of the following
(in thousands):

<TABLE>
<S> <C>
Land purchased and earnest deposits................................. $ 4,230
Construction costs.................................................. 39,030
Capitalized interest, insurance and legal fees...................... 5,518
Capitalized payroll................................................. 1,478
Other costs......................................................... 1,048
-------
$51,304
=======
</TABLE>

During the years ended December 31, 1997, 1998 and 1999, the Company
capitalized interest costs of $6.6 million, $6.0 million and $2.0 million,
respectively, relating to financing of construction in process. In addition,
the Company capitalized payroll costs that are directly related to the
construction and development of the residences of $1.8 million, $1.8 million
and $617,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.

As a result of the Company's decision to reduce the number of new residence
openings during the year ended December 31, 1998 and beyond, the Company wrote-
off $2.4 million of capitalized costs during 1998 relating to the abandonment
of 36 development sites. In 1999, the Company wrote-off $4.9 million of
capitalized costs relating to the abandonement of all remaining development
sites, with the exception of 10 sites where the Company owns the land. Of these
10 sites, 7 are being held for future development ($1.0 million) and are
included in land, and 3 sites ($452,000) are listed for sale and included in
other current assets.

The Company had certificates of occupancy for 185 residences, all of which
were included in the operating results as of December 31, 1999, as compared to
173 residences with certificates of occupancy, 165 of which were included in
the operating results as of December 31, 1998. Of the residences with
certificates of occupancy, the Company owned 115 residences and leased 70
residences (all of which are operating leases) as compared to 115 owned
residences and 70 leased residences (54 of which were operating leases and 16
of which were accounted for as financings) as of December 31, 1998. At December
31, 1998, property and equipment included $31.4 million in land and buildings
related to sale and leaseback transactions accounted for as financings (See
Note 6).

During 1996 and 1997 the Company entered into 16 sale and leaseback
transactions which contained purchase options entitling the Company to purchase
the properties at fair market value at the end of initial lease terms ranging
from 14 to 15 years. As a result of the purchase options the Company accounted
for these sale and leaseback transactions using the financing method in SFAS
No. 98, "Accounting for Leases." In March 1999, the Company amended these
leases. The amendments eliminated the Company's purchase option; therefore, the
leases were reclassified as operating leases at that date. As a result of the
amendments, the Company recorded (i) the disposal of net property and equipment
in the amount of $29.5 million, (ii) the extinguishment of long-term debt in
the amount of $31.5 million and (iii) a deferred gain of $2.0 million. The
deferred gain is included in other non-current liabilities and is being
amortized over the remaining initial lease term as an offset to rent expense.

8. Resident Deposits

Pursuant to lease agreements, residents are required to provide security
deposits, and in certain cases, the last month's rent. As of December 31, 1998
and 1999, such deposits of $1.6 million and $2.2 million, respectively have
been recorded as other current liabilities.

F-18
<PAGE>

9. Long-Term Debt

As of December 31, 1998 and 1999, long-term debt consists of the following
(in thousands):

<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Trust Deed Notes, payable to the State of Oregon Housing
and Community Services Department (OHCS) through 2028..... $ 10,155 $10,025
Variable Rate Multifamily Revenue Bonds, payable to the
Washington State Housing Finance Commission Department
through 2028.............................................. 8,500 8,235
Variable Rate Demand Revenue Bonds, Series 1997 payable to
the Idaho Housing and Finance Association through 2017.... 7,350 7,120
Variable Rate Demand Revenue Bonds, Series A-1 and A-2
payable to the State of Ohio Housing Finance Agency
through 2018.............................................. 13,220 12,845
Finance lease obligations (Note 6)......................... 31,488 --
Mortgages payable.......................................... 35,627 35,218
Capital lease obligations payable through 2002 with a
weighted average interest rate of 10.1%................... 82 --
-------- -------
Total long-term debt....................................... $106,422 $73,443
Less current portion....................................... 1,386 1,494
-------- -------
Long-term debt............................................. $105,036 $71,949
======== =======
</TABLE>

The Trust Deed Notes payable to OHCS are secured by buildings, land,
furniture and fixtures of six Oregon residences. The notes are payable in
monthly installments including interest at effective rates ranging from 7.375%
to 11.80%.

The Variable Rate Multifamily Revenue Bonds are payable to the Washington
State Housing Finance Commission Department and at December 31, 1999 were
secured by an $8.7 million letter of credit and by buildings, land, furniture
and fixtures of the five Washington residences. The letter of credit expires in
2003. The bonds had a weighted average interest rate of 3.42% during 1999.

The Variable Rate Demand Housing Revenue Bonds, Series 1997 are payable to
the State of Idaho Housing and Finance Association and at December 31, 1999
were secured by a $7.5 million letter of credit and by buildings, land,
furniture and fixtures of four Idaho residences. The letter of credit expires
in 2004. The bonds had a weighted average interest rate of 3.41% during 1999.

In July 1998, the Company obtained $12.7 million in Variable Rate Demand
Housing Revenue Bonds with the State of Ohio Housing Finance Agency ("OHFA")
and $530,000 in Taxable Variable Rate Demand Housing Revenue Bonds with OHFA.
The bonds are due July 2018 and are secured by a $13.5 million letter of credit
and by buildings, land, furniture and fixtures of seven Ohio residences. The
letter of credit expires in 2005. The bonds had a weighted average interest
rate of 3.26% during 1999.

In April 1998, the Company obtained $14.6 million in mortgage financing at a
fixed interest rate of 7.73% and secured by a mortgage encumbering each of
seven Texas residences. The mortgage is amortized with monthly payments of
$110,000 over 25 years with a balloon payment of $11.8 million due at maturity
in May 2008.

In July 1998, the Company obtained $6.6 million in mortgage financing at an
initial interest rate of 7.58% and secured by a mortgage encumbering each of
three Oregon residences. The interest rate increases 15 basis points per year
through maturity. The mortgage is amortized with monthly payments of $49,000
over 25 years with a balloon payment of $5.3 million due at maturity in August
2008.

In September 1998, the Company obtained $5.9 million in mortgage financing
at an interest rate of 8.79% and secured by one Pennsylvania residence and one
South Carolina residence. The mortgage is amortized with

F-19
<PAGE>

monthly payments of $43,000 over 25 years with a balloon payment of $5.9
million due at maturity in September 2008.

In November 1998, the Company obtained $8.7 million in mortgage financing at
a fixed interest rate of 8.65% and secured by a mortgage encumbering each of
three New Jersey residences. The mortgage is amortized with monthly payments of
$71,000 over 25 years with a balloon payment of $7.2 million due at maturity in
December 2008.

As of December 31, 1999, the following annual principal payments are
required (in thousands):

<TABLE>
<S> <C>
2000................................. $ 1,494
2001................................. 1,600
2002................................. 1,695
2003................................. 1,804
2004................................. 1,921
Thereafter........................... 64,929
-------
Total.............................. $73,443
=======
</TABLE>

The Company's credit agreements with U.S. National Bank Association ("U.S.
Bank") contain restrictive covenants which include compliance with two
financial ratios. The Company complied with all required covenants at December
31, 1999; accordingly, the related debt is classified as long-term. The
financial ratio covenant becomes more restrictive commencing the quarter ending
June 30, 2000. The Company has determined that it is probable that it will not
meet this more restrictive covenant at June 30, 2000. Failure to comply with
any covenant constitutes an event of default, which will allow U.S. Bank (at
its discretion) to declare any amounts outstanding under the credit agreements
to be due and payable. In addition, certain of the Company's leases and loan
agreements contain covenants and cross-default provisions such that a default
on one of those instruments could cause the Company to be in default on one or
more other instruments.

In August 1999, the Company amended certain loan agreements with one of its
creditors. Pursuant to the amendment, the Company agreed to provide $8.3
million of additional cash collateral in exchange for the waiver of certain
possible defaults, including an amendment to certain financial covenants. In
August 1999, the Company restricted $8.3 million of cash balances as a result
of such amendment. The amendment also provides for the release of the
additional collateral upon the achievement of specified performance targets,
provided the Company is in compliance with other terms of the loan agreements.
During the fourth quarter of 1999, the Company achieved certain of the
specified targets and received a release of $1.2 million of such funds.

In addition to the debt agreements with OHCS related to the six owned
residences in Oregon, the Company has entered into Lease Approval Agreements
with OHCS and the lessor of the Oregon Leases, which obligates the Company to
comply with the terms and conditions of the underlying trust deed relating to
the leased buildings. Under the terms of the OHCS debt agreements, the Company
is required to maintain a capital replacement escrow account to cover expected
capital expenditure requirements for the Oregon Leases and the six OHCS loans,
which as of December 31, 1998 and 1999 was $286,000 and $378,000, respectively,
and is reflected in other assets in the accompanying financial statements. In
addition, for the six OHCS loans in the Company's name, a contingency escrow
account is required. This account had a balance of $351,000, $240,000 and
$172,000 as of December 31, 1997, 1998 and 1999, respectively, and is reflected
in other current assets. Distribution of any assets or income of any kind by
the Company is limited to once per year after all reserve and loan payments
have been made, and only after receipt of written authorization from OHCS.

As of December 31, 1997, 1998 and 1999, the Company was restricted from
distributing $318,200, $380,100 and $233,000, respectively, of income, in
accordance with the terms of the loan agreements and Lease Approval Agreements
with OHCS.

F-20
<PAGE>

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.

10. Convertible Subordinated Debentures

In August 1995, the Company completed the offering of $20.0 million of 7%
Debentures due August 2005 realizing net proceeds of approximately $19.2
million. The 7% Debentures were convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $7.50 per common
share.

In September 1996, $6.1 million of the 7% Debentures were converted into
811,333 shares of the Company's common stock which resulted in $13.9 million of
7% Debentures remaining outstanding. The Company incurred a charge of $426,000
in 1996 in connection with the conversion, which was included in other expense.
In August 1998, the Company called for redemption of all of the remaining $13.9
million of the 7% Debentures. All of the 7% Debentures were converted into
shares of the Company's Common Stock, resulting in the issuance of 1,855,334
additional shares of common stock.

In October 1997, the Company completed the offering of $86.3 million of 6%
Debentures due November 2002, realizing net proceeds of approximately $82.9
million. The 6% Debentures are convertible at any time at or prior to maturity,
unless previously redeemed, at a conversion price of $22.57 per common share,
which equates to an aggregate of 3,821,444 shares of the Company's common stock
and bear interest payable semi-annually on May 1 and November 1 of each year,
commencing May 1, 1998. The 6% Debentures are unsecured and subordinated to all
senior indebtedness of the Company. The 6% Debentures are subject to
redemption, as a whole or in part, at any time from time to time commencing on
or after November 15, 2000 at the Company's option at a redemption price equal
to 100% of the principal amount thereof, plus accrued and unpaid interest to
the redemption date.

In April 1998, the Company completed the private placement of $75.0 million
of 5.625% Debentures due May 2003, realizing net proceeds of approximately
$72.2 million. The 5.625% Debentures are convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $26.184 per
common share, which equates to an aggregate of approximately 2,864,345 shares
of the Company's common stock and bear interest payable semiannually on May 1
and November 1 of each year, commencing November 1, 1998. The 5.625% Debentures
are unsecured and subordinated to all senior indebtedness of the Company. The
5.625% Debentures are subject to redemption, as a whole or in part, at any time
from time to time on or after May 15, 2001 at the Company's option at a
redemption price equal to 100% of the principal amount thereof, plus accrued
and unpaid interest to the redemption date.

11. Stock Repurchase

During the year ended December 31, 1998, the Company purchased approximately
529,000 shares of its common stock for a total purchase price of approximately
$7.1 million in accordance with a stock repurchase plan initiated in May 1998.
The Board of Directors terminated the stock repurchase plan in November 1998.

12. Write-off of Impaired Assets and Related Expenses

In June 1998, the Company announced a plan to exit all home health business
operations being conducted by Pacesetter. The decision to exit Pacesetter's
operations was a result of certain laws becoming effective that adversely
affected the prospective payment system for home health care services. Based on
this decision, the Company recorded a $8.9 million charge to earnings during
the second quarter 1998. Such charge consisted of

F-21
<PAGE>

(i) a $7.5 million write-off of all unamortized goodwill associated with
Pacesetter and (ii) a $1.4 million provision for estimated exit costs expected
to be incurred during the phase out period. Of this $1.4 million provision,
$560,000 related to severance, salaries and benefits incremental to the shut
down effort; $720,000 related to leases, equipment and related costs of closing
offices; and $150,000 related to travel and moving costs. During the fourth
quarter 1998, the $1.4 million provision for exit costs was reduced by
$400,000 to $1.0 million as a result of a change in the estimate for such exit
costs. During the years ended December 31, 1998 and 1999, approximately
$760,000 and $154,000, respectively of this reserve was utilized. The remaining
reserve of approximately $86,000 at December 31, 1999 consists primarily of
lease termination costs. Expenses related to Pacesetter's final operations of
$430,000 and $1.8 million for the six month period of June 1998 through
December 1998 and for the year ended December 31, 1999 have been expensed as
incurred. The phase out period concluded during 1999. The $1.8 million in 1999
includes bad debt expense of $510,000, recorded in the fourth quarter, and is
included in corporate, general and administrative expense.

13. Termination of Merger Agreement

On February 1, 1999, the Company agreed with American Retirement Corporation
("ARC") to terminate its previously announced merger agreement, which had been
entered into during November 1998. The Company recorded charges of
approximately $1.1 million and $228,000 in 1998 and 1999, respectively, for
costs relating to the terminated merger agreement.

14. Cumulative Effect of Change in Accounting Principle

Effective January 1, 1998, the Company adopted SOP 98-5, which requires that
pre-opening costs be expensed as incurred. In connection with such adoption,
$1.5 million of previously capitalized, unamortized pre-opening costs were
written off as of January 1, 1998 and presented in the accompanying 1998
statement of operations for fiscal year 1998 as the cumulative effect of a
change in accounting principle.

15. Income Taxes

The Company incurred a loss for both financial reporting and tax return
purposes for the years ended December 31, 1997, 1998, and 1999 and, as such,
there was no current or deferred tax provision.

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

<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory federal tax
rate................... (34.0)% (34.0)% (34.0)%
Non deductible
goodwill............... -- % 12.4 % 0.3 %
Losses for which no
benefit is provided.... 34.6 % 21.5 % 33.6 %
Other................... (0.6)% 0.1 % 0.1 %
----- ----- -----
Effective tax rate...... -- % -- % -- %
===== ===== =====
</TABLE>

F-22
<PAGE>

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

<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward...................... $ 6,635 $ 19,876
Investment in joint venture operations............... 1,996 2,815
Deferred gain on sale and leaseback transactions..... 631 1,555
Debt financing recorded for books.................... 12,174 --
Other................................................ 4,841 3,836
Valuation allowance.................................... (8,937) (19,422)
Deferred tax liabilities:
Property and equipment, primarily due to
depreciation........................................ (5,722) (8,316)
Debt financing capitalized asset basis............... (11,364) --
Other................................................ (254) (344)
-------- --------
Net deferred tax asset (liability)................... $ -- $ --
======== ========
</TABLE>

The valuation allowance for deferred tax assets as of December 31, 1998 and
1999 was $8.9 million and $19.4 million, respectively. The increase in the
total valuation allowance for the years ended December 31, 1997, 1998 and 1999
was $2.0 million, $6.1 million and $10.5 million, respectively.

As a result of the acquisitions discussed in Note 2, the Company acquired
net operating loss carryforwards for federal and state tax purposes
approximating $950,000 which are available to offset future taxable income, if
any, through 2011. The future use of these net operating loss carryforwards is
subject to certain limitations under the Internal Revenue Code and therefore,
the Company has established a valuation allowance of $358,000 to offset the
deferred tax asset related to the loss carryforwards. Additionally, any tax
benefit realized from the use of approximately $300,000 of the acquired
operating loss carryforwards will be applied to reduce goodwill.

At December 31, 1999, the Company had net operating loss carryforwards of
approximately $52.6 million available to reduce future taxable income. The
carryforwards expire at various dates beginning in the year 2009 through the
year 2020.

The portion of the valuation allowance for deferred tax assets for which
subsequently recognized tax benefits will be applied directly to contributed
capital is $1.4 million as of December 31, 1999. This amount is attributable to
differences between financial and tax reporting of employee stock option
transactions.

16. Related Party Transactions

The Company leases six residences from Assisted Living Facilities, Inc. The
spouse of the Company's president and chief executive officer owns a 25%
interest in Assisted Living Facilities, Inc. During the year ended December 31,
1997, the Company paid such entity aggregate lease deposits of $31,500, and
incurred lease rental expense of $1.1 million, $1.2 million, and $1.3 million
for the years ended December 31, 1997, 1998 and 1999, respectively. In
addition, in 1997 the Company leased one residence from Oregon Heights
Partnership ("OHP") in which the president and chief executive officer's spouse
owns an interest. The Company paid OHP $50,000 in lease deposits in 1997 and
$278,000 and $195,000 in rent payments in 1997 and 1998, respectively. The
lease with OHP was terminated in September 1998, effective October 1, 1998.

In 1997, the Company contracted with Supportive Housing Services, Inc.
("SHS") to provide services to the Company for market feasibility analysis,
site pre-acquisition services, field construction supervision and construction
management oversight in conjunction with the Company's development activities.
SHS is owned 75% by the president and chief executive officer's spouse. The
Company paid $480,000, $3.8 million, and

F-23
<PAGE>

$1.6 million during the years ended December 31, 1997, 1998 and 1999,
respectively, (including the amounts paid to CCL (as defined below)) for such
development services. The Company capitalized such payments as construction in
process. In July 1999 the Company delivered 180 days' written notice
terminating their agreement with SHS for such consulting services.

In addition, the Company and SHS entered into a consulting agreement whereby
the Company agreed to provide SHS with consulting services in the assisted
living industry, including providing data on the Company's facility prototypes,
facilitating the introduction to other potential customers and providing market
analysis on the assisted living industry. The Company received fees for such
services from SHS of $195,000 and $906,000 during the years ended December 31,
1997 and 1998, respectively, and has recorded such fees as a reduction of
construction in process.

Commencing in 1995, the Company contracted with Concepts in Community
Living, Inc. ("CCL"), directly and through its developers, to perform
feasibility studies and pre-development consulting services for the developers
on the Company's behalf. CCL is owned 100% by the president and chief executive
officer's spouse. For the years ended December 31, 1997, 1998 and 1999, the
Company paid CCL indirectly through SHS for these services fees of $568,000,
$566,000 and $255,000, respectively, which were capitalized in construction in
process on the consolidated balance sheets. In June 1999 the Company entered
into a new agreement with CCL pursuant to which CCL provided market research,
demographic review and competitor analysis in many of our current markets. The
agreement provided that Company pay CCL a retainer of $10,000 per month, plus
fees in excess of the retainer, if any, in connection with specific projects
that the Company authorizes under the agreement. The Company paid CCL $157,000
for such services in 1999. The Company terminated the June 1999 agreement by
notice dated December 12, 1999.

The Company acquired HCI and Carriage House in October of 1997 (See Note 2).
Several employees of the Company, including members of the Board of Directors,
owned collectively 40.0% of the outstanding common stock in HCI and
approximately 23.0% of the outstanding common stock of Carriage House. In
addition, LTC held substantial interests in HCI and Carriage House prior to
their acquisition by the Company (See Note 17). Pursuant to the HCI acquisition
agreement, during 1998 and 1999, related parties (current or former officers,
directors, or employees) received "earnout" payments from the Company of
$428,000 for 1998 and $416,000 for 1999, respectively, related to HCI sites the
Company elected to develop.

During 1997, the Company entered into joint venture agreements with a joint
venture partner to operate certain new assisted living residences which
commenced operations during the second, third and fourth quarters of 1997 (See
Note 2). The Company, Mr. McBride, the Company's former Chairman and Chief
Executive Officer, Dr. Wilson, the Company's President and Chief Executive
Officer, and Dr. Wilson's spouse each acquired interests in the joint venture
partner. During 1998, Mr. McBride owned a $400,000 or 16.6% interest, and Dr.
Wilson's spouse owned a $200,000 or 8.3% interest, in the joint venture. On
February 10, 1999, the Company announced with respect to these joint venture
agreements that it had negotiated with the joint venture partner to purchase,
for approximately $3.8 million, all of the joint venture partner's interests in
the operation of the remaining 17 residences subject to the joint venture
agreements. As a result of such purchases, Mr. McBride and Dr. Wilson's spouse
received distributions of approximately $537,000 and $269,000, respectively in
1999. The Company has no current intention of entering into similar
arrangements in the future.

During 1998 Mr. Razook, one of the Company's directors, was Managing
Director and Head of the Health Care Industry Group of Schroder & Co. Inc.
("Schroders"), an investment banking firm. During 1998 Schroders served as the
initial purchaser of our $75.0 million offering of 5.625% Debentures for which
Schroders received a customary commission. Also during 1998, Schroders provided
financial advisory services and delivered a fairness opinion in connection with
a proposed merger for which we paid Schroders a fee of $200,000. In March 1999,
Mr. Razook became President and Managing Director at Cohen & Steers Capital
Advisors LLC ("C&S Advisors"). Pursuant to an agreement with Cohen & Steers
Capital Management, Inc., an affiliate of C&S Advisors ("CSCM"), the Company
paid CSCM and C&S Advisors $1.3 million in 1999 for financial advisory
services. On January 24, 2000, the Company's agreement with CSCM was terminated
by

F-24
<PAGE>

mutual consent, and a new agreement with C&S Advisors was entered into.
Pursuant to the new agreement, the Company anticipates that it may pay C&S
Advisors approximately $700,000 for financial advisory services plus customary
fees and commissions in the event that the Company is advised by C&S Advisors
in connection with certain financing and merger and acquisition transactions.
The new agreement terminates on December 31, 2000, except that (a) the Company
may terminate the agreement at any time upon 90 days written notice and (b)
even after the expiration or termination of the new agreement the Company will
be required to pay C&S Advisors fees under the new agreement if the Company
completes certain financing and merger and acquisition transactions on or prior
to December 31, 2001.

17. Transactions with LTC Properties, Inc.

During the period November 1994 to September 1997, two members of the
Company's Board of Directors served as executive officers and directors of LTC.
In September 1997, Mr. Dimitriadis resigned from the Company's Board of
Directors and Mr. McBride resigned as an executive officer and director of LTC.
The Company engaged in the following transactions with LTC since January 1,
1995.

<TABLE>
<CAPTION>
Number of Sale
and Leaseback
Residences
Accounted for as Sales price
Operating Leases Number of units (in millions)
---------------- --------------- -------------
<S> <C> <C> <C>
Leases at December 31,
1994....................... -- -- $ --
Leases entered into during
1995....................... 2 60 3.2
--- ----- -----
Leases at December 31,
1995....................... 2 60 3.2
Leases entered into during
1996....................... 16 591 34.1
Residences purchased during
1996....................... (4) (146) (7.6)
--- ----- -----
Leases at December 31,
1996....................... 14 505 29.7
Leases entered into during
1997....................... 21 832 52.7
--- ----- -----
Leases at December 31,
1997....................... 35 1,337 82.4
Leases entered into during
1998....................... 2 89 5.0
--- ----- -----
Leases at December 31,
1998....................... 37 1,426 $87.4
Leases entered into during
1999....................... -- -- --
--- ----- -----
Leases at December 31,
1999....................... 37 1,426 $87.4
=== ===== =====
</TABLE>

The Company incurred annual lease expense of $4.3 million, $9.1 million and
$9.0 million for the years ended December 31, 1997, 1998 and 1999,
respectively, pursuant to leases with LTC (See Note 6). The Company recognized
losses of $1.1 million and $504,000 on these sale and leaseback transactions
for the years ended December 31, 1997 and 1998, respectively. For the same
periods, the Company deferred gains of $951,000 and $55,000, respectively.

During 1995 the Company sold and leased back from LTC two residences for
$3.2 million with annual lease payments of $380,000. During 1996 the Company
sold and leased back 16 residences for $34.1 million with annual lease payments
of $3.3 million. Subsequently, the Company repurchased four of the 16
residences at a cost of $7.6 million plus a $214,000 administrative fee. During
1997, the Company sold and leased back 21 residences for $52.7 million with
annual rent payments of $5.3 million. During 1998, the Company sold and leased
back two residences for $5.0 million with annual rent payments of $447,000. As
of December 31, 1998 the Company had sold and leased back 37 residences for
$87.4 million with annual lease payments of $8.8 million.

During 1996 and 1997, the Company received from LTC $18.9 million and $43.2
million, respectively, of mortgage financing on eight and 19 residences,
respectively. As of December 31, 1997, the Company had repaid all of such
mortgage financing, except for one mortgage ($2.2 million) which was converted
to a sale

F-25
<PAGE>

and leaseback financing during the year ended December 31, 1998. Interest was
paid on a monthly basis ranging from 9.9% to 10.4% per annum. The Company
incurred $5.4 million, $180,000 and $0 in interest expense related to these
mortgage financings during the years ended 1997, 1998 and 1999, respectively.

The Company acquired Carriage House in October 1997. LTC owned 9.9% of the
outstanding common stock of Carriage House (Notes 2 and 16). As a result, the
Company became the tenant on four assisted living residences leased by Carriage
House from LTC. These four leases are included in the table above and the lease
table in Note 6.

The Company acquired HCI in October of 1997. LTC owned 41.2% of the
outstanding common stock in HCI (See Notes 2 and 16).

During 1997, the Company contracted with LTC Development Company, Inc. to
provide services to the Company for market feasibility analysis, pre-
acquisition services and construction management oversight on several of the
residences under development. LTC Development Company, Inc. is owned 100% by
LTC. The Company paid approximately $415,000 for these services during 1997 and
capitalized such fees and recorded them as construction in process. During 1998
and 1999 LTC Company, Inc. did not provide such services, and did not receive
any such fees.

During the year ended December 31, 1996 the Company entered into a $50.2
million sale and leaseback financing commitment with LTC. This commitment was
renegotiated in November 1997 committing the Company to complete sale and
leaseback transactions with LTC with respect to nine residences during 1998. In
November 1997 the Company paid LTC $614,000 in connection with such commitment
and recorded such costs as deferred financing costs. In addition, the Company
entered into a commitment with LTC in October 1997 to complete $50.0 million of
sale and leaseback transactions by December 2000. Pursuant to this commitment,
the Company was obligated to pay a 2.0% fee on any unused portion of the
commitment as of the expiration date (or up to a maximum of $1.0 million if
none of the commitment were utilized). As a result of the Carriage House
acquisition in October 1997 the Company also became obligated to enter into
sale and leaseback arrangements with LTC by September 1998 with respect to six
Carriage House residences which were under development or construction. In
addition, HCI entered into a commitment with LTC in September 1997, which was
assumed by the Company as part of the HCI acquisition, to complete $50.0
million of sale and leaseback transactions by December 1999. Pursuant to this
commitment, the Company was obligated to pay a 2.0% fee on any unused portion
of the commitment as of the expiration date (or up to a maximum of $1.0 million
if none of the commitment were utilized).

During the second quarter of 1998, the Company determined that it would not
enter into sale and leaseback arrangements with LTC to the full extent of
certain of the sale and leaseback commitments, and recorded a $1.2 million
liability for expenses expected to be incurred in connection with this
determination. In December 1998, the Company and LTC terminated the commitments
referred to above at no cost to the Company, other than approximately $200,000
of professional fees. As such, the Company reversed $1.0 million of the
previously recorded liability during the fourth quarter of 1998.

In December 1998, the Company determined that it would not utilize an
additional commitment to complete sale and leaseback transactions with LTC with
respect to nine residences which it had entered into during November 1997. As
such, the Company wrote-off $614,000 of previously capitalized deferred
financing costs relating to such commitment.

In June 1999, the Company amended all of its 37 LTC leases. These amendments
restructured provisions related to future minimum annual rent increases, or
"rent escalators," which prior to the amendments required the Company to
account for rent expense related to such leases on a straight-line basis. From
the date of the amendment forward, the Company is accounting for the amended
leases on a contractual cash payment basis and amortizing the deferred rent
balance as of the date of the amendment over the remaining initial term of the
leases. Those amendments also redefined the lease renewal option with respect
to certain leases and provided

F-26
<PAGE>

the lessor with the option to declare an event of default in the event of a
change of control under certain circumstances. In addition, the amendments
provide the Company with the ability, subject to certain conditions, to
sublease or assign its leases with respect to two Washington residences.

18. Stock Option Plan and Restricted Stock

The Company has two Stock Option Plans (the "Plans") which provide for the
issuance of incentive and non-qualified stock options and restricted stock. The
Plans are administered by the Compensation Committee of the Board of Directors
which set the terms and provisions of options granted under the Plans.
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.

Under the Amended and Restated 1994 Stock Option Plan (the "1994 Plan"), the
Company may grant options or award restricted stock to its employees,
consultants and other key persons for up to 2,208,000 shares of common stock.
The exercise price of each option 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. Options typically vest three years from the date
of issuance and typically are exercisable within seven to nine years from the
date of vesting. Each option is exercisable in equal installments as designated
by the Compensation Committee or the Board 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 or amend the 1994 Plan at any time.

During the year ended December 31, 1998, the Company's board of directors
adopted The Non-Executive Employee Equity Participation Plan of Assisted Living
Concepts, Inc. (the "Non-Officer Plan") pursuant to which up to 500,000 shares
of Common Stock are issuable pursuant to non-qualified options granted under
the Non-Officer Plan. Officers, directors and significant employees of the
Company are not eligible to participate in the Non-Officer Plan; however,
consultants and non-executives are eligible. On November 5, 1999, the board of
directors authorized an additional 500,000 shares of Common Stock to be
issuable pursuant to non-qualified options granted under the Non-Officer Plan.

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 1997, 1998 and 1999,
respectively: dividend yield of zero percent, expected volatility of 39.81%,
45.12% and 73.70%, respectively, risk-free interest rate has been fixed at
5.66% (based on the 10-year treasury rate), 5.56% (based on the 10-year
treasury rate) and 6.14% (based on the three year treasury rate), respectively,
and expected life of 10 years, 10 years and 3 years, respectively.

F-27
<PAGE>

The Company applies APB Opinion No. 25 in accounting for its Plans, and
accordingly, no compensation cost has been recognized for its stock options
issued to employees in the financial statements as all options were issued at
fair value on the date of the grant. 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 pro forma amounts
indicated below: (in thousands except per share data)

<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Net loss as reported.......................... $(2,479) $(20,745) $(28,933)
Net loss pro forma............................ (3,928) (23,990) $(31,772)
Basic and diluted net loss per common share as
reported..................................... $ (0.21) $ (1.27) $ (1.69)
Basic and diluted net loss per common share
pro forma.................................... $ (0.33) $ (1.47) $ (1.86)
</TABLE>

Pro forma net loss reflects only options granted in 1996 through 1999.
Therefore, the full impact of calculating compensation costs for stock options
under SFAS 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the option's vesting period
of three years and compensation cost for options granted prior to January 1,
1996 is not considered. The resulting pro forma compensation costs may not be
representative of that expected in the future years.

A summary of the status of the Company's stock options as of December 31,
1997, 1998 and 1999 and changes during the years ended on those dates is
presented below:

<TABLE>
<CAPTION>
1997 1998 1999
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of the year...... 1,105,202 $ 6.15 1,629,967 $10.82 1,867,169 $12.07
Granted............................... 940,350 15.08 674,132 15.76 460,250 3.71
Exercised............................. (139,770) 6.05 (121,606) 6.00 (26,934) 5.83
Canceled.............................. (275,815) 9.53 (315,324) 15.82 (556,065) 12.65
--------- ------ --------- ------ --------- ------
Options at end of the year............ 1,629,967 $10.82 1,867,169 $12.07 1,744,420 $ 9.78
========= ====== ========= ====== ========= ======
Options exercisable at end of year.... 567,756 833,465 982,973
Weighted-average fair value of options
granted during the year.............. $ 9.24 $ 10.22 $ 2.52
</TABLE>

The following table summarized information about stock options outstanding
at December 31, 1999.

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
---------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.00 to 1.69 74,000 9.83 $ 1.46 -- $ --
$ 1.75 to 2.88 179,500 9.49 2.81 -- --
$ 2.94 to 3.81 56,750 9.24 3.44 -- --
$ 4.00 to 4.63 272,250 4.15 4.62 265,000 4.63
$ 4.81 to 5.00 41,000 8.94 4.98 2,500 4.86
$ 5.75 to 6.50 185,668 5.76 6.49 180,168 6.50
$ 6.69 to 12.18 182,708 6.90 8.67 147,629 8.17
$12.25 to 14.50 234,854 8.75 14.16 79,424 14.17
$14.56 to 16.38 31,084 7.81 15.02 18,924 15.00
$16.50 to 21.25 486,606 8.02 16.85 289,328 16.75
---------------- --------- ---- ------ ------- ------
$ 0.00 to $21.25 1,744,420 7.44 $ 9.78 982,973 $10.04
================ ========= ==== ====== ======= ======
</TABLE>

F-28
<PAGE>

In October 1997, the Company awarded 250,000 shares of non-voting restricted
stock to two key executive officers. At the time of the grant the Company's
common stock had a fair market value of $17.00 per share. No cash consideration
was paid for such shares by the recipients. Such shares vested in three equal
annual installments, commencing on the fourth anniversary of grant. The Company
recorded unearned compensation expense of $4.3 million in connection with the
issuance of the restricted stock as of the date of the grant. This unearned
compensation expense has been reflected as a separate component of
shareholders' equity to be amortized as compensation expense over the seven
year vesting period. The Company recorded $150,000, $608,000 and $180,000 of
compensation expense with respect to such award for the years ended December
31, 1997, 1998 and 1999, respectively. The Company recorded the issuance of the
restricted stock in 1998 upon issuance. During the first quarter of 1999, the
Company retired the 250,000 shares of restricted stock upon payment to the two
key executives of $750,000 and $187,500 (the latter of which was reduced to
$87,500 to reflect repayment of a $100,000 bonus paid in 1998 to one of the key
executives) in consideration for the forfeiture of their interest in the
250,000 shares of restricted stock.

19. Non-cash Investing and Financing Activities

The following is a summary of non-cash investing and financing activities
related to acquisitions for the year ended December 31, 1997 (in thousands):

In October of 1997, the Company acquired all of the outstanding capital
stock of Carriage House as follows:

<TABLE>
<S> <C>
Fair value of assets acquired......................................... $8,279
Issuance of 337,460 shares of the Company's common stock.............. 5,076
------
Liabilities assumed................................................... $3,203
======
</TABLE>

In October of 1997, the Company acquired all of the outstanding capital
stock of HCI as follows:

<TABLE>
<S> <C>
Fair value of assets acquired........................................ $11,877
Cash paid............................................................ 5,262
-------
Liabilities assumed.................................................. $ 6,615
=======
</TABLE>

20. Legal Proceedings

Securityholder Litigation

Since February 1, 1999, 12 separate complaints were filed in the United
States District Court for the District of Oregon against the Company and
certain of its past and present officers and directors. Pursuant to Order
signed on June 1, 1999, those complaints were consolidated for all purposes. On
July 23, 1999, a consolidated complaint was filed, and on October 20, 1999, an
amended consolidated complaint ("Complaint") was filed.

The Complaint purports to be brought on behalf of a class of purchasers of:
(a) the Company's common stock from February 6, 1997 through March 31, 1999,
inclusive; (b) the Company's 6.0% convertible subordinated debentures due
November 1, 2002 ("6.0% Debentures") from October 21, 1997 through March 31,
1999, inclusive; and (c) the Company's 5.625% convertible subordinated
debentures due May 1, 2003 ("5.625% Debentures") from July 22, 1998 through
March 31, 1999, inclusive.

The Complaint also names as defendants Schroder & Co., Inc., Morgan Stanley
Dean Witter and Smith Barney, Inc. (solely as underwriters in connection with
the 6.0% Debentures) and KPMG LLP, the Company's independent auditors (in
connection with the Company's offerings of common stock, 6.0% Debentures and
5.625% Debentures).

F-29
<PAGE>

The Complaint alleges violations of the federal securities laws and seeks
unspecified damages. The Company filed an answer to the Complaint on December
7, 1999.

The Company cannot predict the outcome of the foregoing litigation and
currently is unable to evaluate the likelihood of success or the range of
possible loss. However, if the foregoing consolidated action was determined
adversely to the Company and/or to those to whom our Company's indemnity
obligations exist, such a determination could have a material adverse effect on
the Company's financial condition, results of operations, cash flow and
liquidity.

Other Litigation

In addition to the matter referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the
normal course of business. In the opinion of our management, although the
outcomes of these other suits and claims are uncertain and because of the early
stages of these matters, management cannot estimate the losses or range of
losses, should the outcomes be unfavorable. In the aggregate such other suits
and claims should not have a material adverse effect on our financial
condition, results of operations, cash flow or liquidity.

21. Employee Benefit Plan

Effective January 1, 1998, the Company implemented a 401 (k) Savings Plan
("the Plan"). The Plan is a defined contribution plan covering employees of
Asssisted Living Concepts, Inc. who have one year of service and are age 21 or
older. Each year participants may contribute up to 15% of pre-tax annual
compensation and 100% of any Employer paid cash bonus (not to exceed $10,000),
as defined in the Plan. ALC may provide matching contributions as determined
annually by ALC's Board of Directors. Contributions are subject to certain
limitations. The Company did not make contribution in 1998 or 1999.

F-30
<PAGE>

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

No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations in
connection with this offering must not be relied upon as having been
authorized by the Company or by any Selling Stockholder. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby by anyone in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such
offer or solicitation is not qualified to do so or to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that the information contained herein is correct as of any time
subsequent to the date of this Prospectus.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information.................................................... 2
Forward Looking Statements............................................... 2
Prospectus Summary....................................................... 3
Use of Proceeds.......................................................... 8
Price Range of Common Stock.............................................. 9
Dividend Policy.......................................................... 9
Capitalization........................................................... 10
Risk Factors............................................................. 11
Selected Financial and Other Data........................................ 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 39
Management............................................................... 53
Executive Compensation................................................... 56
Security Ownership of Certain Beneficial Owners and Management........... 64
Description of Debentures................................................ 66
Description of Capital Stock............................................. 75
Shares Eligible for Future Sale.......................................... 79
Certain Federal Income Tax Considerations................................ 80
Certain Relationships and Related Transactions........................... 86
Selling Debentureholders................................................. 87
Plan of Distribution..................................................... 88
Legal Matters............................................................ 89
Experts.................................................................. 89
Financial Statements..................................................... F-1
</TABLE>

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

$75,000,000
5.625% Convertible Subordinated
Debentures Due 2003

2,864,344 Shares
Common Stock

ASSISTED LIVING
CONCEPTS, INC.

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

PROSPECTUS

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

, 2000

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

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

<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 22,125
AMEX Filing Fee.................................................... 25,000
Printing Expenses.................................................. 30,000
Legal Fees and Expenses............................................ 70,000
Accounting Fees and Expenses....................................... 50,000
Registrar and Transfer Agent Fees and Expenses..................... 17,500
Miscellaneous Expenses............................................. 15,375
--------
Total............................................................ $230,000
========
</TABLE>

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

Item 14. Indemnification of Directors and Officers.

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

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

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

II-1
<PAGE>

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

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

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

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

The Company has also purchased insurance for its directors and officers for
certain losses arising from claims or charges made against them in their
capacities as directors and officers of the Company. In addition, the Company
has entered into agreements with certain present and former officers and
directors pursuant to which the Company will indemnify such officers and
directors from losses incurred in connection with their service to the Company,
to the maximum extent permissible by applicable law.

Item 15. Recent Sale of Unregistered Securities.

We issued 337,449 shares of common stock on October 31, 1997 to certain
selling stockholders in connection with our acquisition of Carriage House, Inc.

II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<C> <S>
1.1 Placement Agency Agreement, dated as of April 7, 1998 by and
between the Company and Schroder & Co., Inc.*

3.1 Articles of Incorporation of the Company (Incorporated by
reference to the same titled exhibit to the Company's
Registration Statement on Form S-1, File No. 33-83938).

3.2 By laws of the Company (Incorporated by reference to the same
titled exhibit to the Company's Registration Statement on Form S-
1, File No. 33-83938).

4.1 Indenture, dated as of April 13, 1998 by and between the Company
and Harris Trust and Savings Bank, as Trustee.*

4.2 Registration Rights Agreement, dated as of April 7, 1998 by and
between the Company and Schroder & Co., Inc.*

4.3 Form of Debenture.*

5.1 Opinion of Schreck Morris.*

5.2 Opinion of Latham & Watkins.*

10.1 Indemnification Agreement dated October 3, 1997 by and between the
Company and William McBride III. (Incorporated by reference to
the same titled exhibit to the Company's Report on Form 8-K,
dated October 20, 1997, File No. 1-13498).

10.2 Indemnification Agreement dated October 3, 1997 by and between the
Company and Keren Brown Wilson. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).

10.3 Amended and Restated 1994 Stock Option Plan of the Company
(Incorporated by reference to the same titled exhibit to the
Company's Report on Form 8-K, dated October 20, 1997,
File No. 1-13498).

10.4 Non-Executive Employee Equity Participation Plan of the Company
(Incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-8, dated July 13,
1998, Registration No. 333-58953).

10.5 Deferred Compensation Plan of the Company (Incorporated by
reference to same titled exhibit to the Company's Report on Form
10-K for the fiscal year ended December 31, 1998).

10.6 Consulting Agreement, dated as of March 15, 1999, by and between
the Company and William McBride III (Incorporated by reference to
same titled exhibit to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1998).

10.7 Amended and Restated Employment Agreement, dated October 1999, as
amended as of March 15, 1999, by and between the Company and
Keren Brown Wilson (Incorporated by reference to same titled
exhibit to the Company's Report on Form 10-K for the fiscal year
ended December 31, 1998).

10.8 Employment Agreement, dated as of December 31, 1997, by and
between the Company and Sandra Campbell (Incorporated by
reference to same titled exhibit to the Company's Report on
Form 10-K for the fiscal year ended December 31, 1998).

10.9 Employment Agreement, dated as of February 3, 1998, by and between
the Company and Nancy Gorshe (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1998).

10.10 Separation and Consulting Agreement, dated as of March 3, 2000, by
and between the Company and James Cruckshank (Incorporated by
reference to same titled exhibit to the Company's Report on Form
8-K dated March 3, 2000 File No. 001-13498).
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<C> <S>
10.11 Employment Agreement, dated as of March 15, 1999, by and between
the Company and Leslie Mahon (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1998).

10.12 Merger Agreement dated as of October 4, 1997 by and between the
Company and Home and Community Care, Inc. (Incorporated by
reference to the same titled exhibit to the Company's Report on
Form 8-K, dated October 20, 1997 File No. 1-13498).

10.13 Joint Venture Agreement dated as of April 1, 1997 by and between
the Company and Health Equity Investors, LLC. (Incorporated by
reference to the same titled exhibit to the Company's Report on
Form 8-K, dated October 20, 1997 File No. 1-13498).

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

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

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

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

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

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

10.20 Loan Agreement, dated as of September 3, 1998, by and between MLD
Delaware Trust and the Company (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1998).

10.21 Loan Agreement, dated as of September 3, 1998, by and between MLD
Delaware Trust and the Company (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1998).

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

10.23 Modification and Amendment to Employment Agreement, dated as of
January 19, 2000, by and between the Company and Nancy Inez
Gorshe (incorporated by reference to the same titled exhibit to
the Company's Report on Form 10-K for the fiscal year ended
December 31, 1999).

12.1 Computation of Ratio of Earnings to Fixed Charges.**

23.1 Consent of Schreck Morris.*

23.2 Consent of Latham & Watkins.*

23.3 Independent Auditors' Report on Schedule and Consent.**

24.1 Power of Attorney (included on the signature page).**

25.1 Form T-1 Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 of the Trustee*
</TABLE>
- --------
* Filed previously as part of this Registration Statement

** Filed herewith

II-4
<PAGE>

(b) Financial Data Schedules

SCHEDULE II

ASSISTED LIVING CONCEPTS, INC.

VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 1997 and 1998 and year ended December 31, 1999
(in thousands)

<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ---------- --------- ------------- ----------
Balance at Balance at
Beginning End of
Description of Period Additions Deductions(1) Period
----------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables................ $ 33 $ 83(3) $ 37 $ 79
---- ------ ---- ------
Year ended December 31, 1998:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables................ $ 79 $ 359(2) $259 $ 179
---- ------ ---- ------
Year ended December 31, 1999:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables................ $179 $1,071(4) $188 $1,062
---- ------ ---- ------
</TABLE>
- --------
(1) Represents amounts written off.

(2) Charged to residence operating expenses.

(3) $23,000 of additions were charged to operating expenses, $60,000 of
additions were a result of an acquisition.

(4) $561,000 of additions were charged to operating expenses, $510,000 of
additions related to home health operations which were shut down in 1998
and are reported in general and administrative expenses.

II-5
<PAGE>

Item 17. Undertakings.

(a) The undersigned registrant hereby undertakes:

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

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

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

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

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

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

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

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

II-6
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Portland, State of Oregon
on the 21 day of April 2000.

ASSISTED LIVING CONCEPTS, INC.

/s/ Keren Brown Wilson
By: _________________________________
Keren Brown Wilson
President and Chief Executive
Officer

KNOW ALL PERSONS BY THESE PRESENTS:

That each person whose signature appears below constitutes and appoints
Keren Brown Wilson or Drew Q. Miller, and each of them to be his or her true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign this Registration Statement, and any and all
amendments thereto (including post-effective amendments and any Registration
Statement pursuant to Rule 462(b)), and to file the same, with exhibits and
schedules thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, thereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----

<S> <C> <C>
/s/ Keren Brown Wilson President and Chief April 21, 2000
____________________________________ Executive Officer
Keren Brown Wilson

/s/ Drew Q. Miller Chief Financial Officer and April 21, 2000
____________________________________ Treasurer
Drew Q. Miller

/s/ M. Catherine Maloney Vice President, Controller April 21, 2000
____________________________________ and Chief Accounting
M. Catherine Maloney Officer

/s/ W. James Nicol Chairman of the Board and April 21, 2000
____________________________________ Director
W. James Nicol

/s/ Gloria Cavanaugh Director April 21, 2000
____________________________________
Gloria Cavanaugh

/s/ Richard C. Ladd Director April 21, 2000
____________________________________
Richard C. Ladd

/s/ Bradley Razook Director April 21, 2000
____________________________________
Bradley Razook

/s/ Jill Krueger Director April 21, 2000
____________________________________
Jill Krueger

/s/ John M. Gibbons Director April 21, 2000
____________________________________
John M. Gibbons
</TABLE>

II-7
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Placement Agency Agreement, dated as of April 7, 1998 by and between
the Company and Schroder & Co., Inc.*

3.1 Articles of Incorporation of the Company (Incorporated by reference to
the same titled exhibit to the Company's Registration Statement on
Form S-1, File No. 33-83938).

3.2 By laws of the Company (Incorporated by reference to the same titled
exhibit to the Company's Registration Statement on Form S-1, File No.
33-83938).

4.1 Indenture, dated as of April 13, 1998 by and between the Company and
Harris Trust and Savings Bank, as Trustee.*

4.2 Registration Rights Agreement, dated as of April 7, 1998 by and
between the Company and Schroder & Co., Inc.*

4.3 Form of Debenture.*

5.1 Opinion of Schreck Morris.*

5.2 Opinion of Latham & Watkins.*

10.1 Indemnification Agreement dated October 3, 1997 by and between the
Company and William McBride III. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).

10.3 Amended and Restated 1994 Stock Option Plan of the Company
(Incorporated by reference to the same titled exhibit to the
Company's Report on Form 8-K, dated October 20, 1997,
File No. 1-13498).

10.5 Deferred Compensation Plan of the Company (Incorporated by reference
to same titled exhibit to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1998).

10.6 Consulting Agreement, dated as of March 15, 1999, by and between the
Company and William McBride III (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K for the fiscal
year ended December 31, 1998).

10.7 Amended and Restated Employment Agreement, dated October 1999, as
amended as of March 15, 1999, by and between the Company and Keren
Brown Wilson (Incorporated by reference to same titled exhibit to the
Company's Report on Form 10-K for the fiscal year ended December 31,
1998).

10.8 Employment Agreement, dated as of December 31, 1997, by and between
the Company and Sandra Campbell (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K for the fiscal
year ended December 31, 1998).

10.9 Employment Agreement, dated as of February 3, 1998, by and between the
Company and Nancy Gorshe (Incorporated by reference to same titled
exhibit to the Company's Report on Form 10-K for the fiscal year
ended December 31, 1998).

10.10 Separation and Consulting Agreement, dated as of March 3, 2000, by and
between the Company and James Cruckshank (Incorporated by reference
to same titled exhibit to the Company's Report on Form 8-K dated
March 3, 2000 File No. 001-13498).
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.11 Employment Agreement, dated as of March 15, 1999, by and between the
Company and Leslie Mahon (Incorporated by reference to same titled
exhibit to the Company's Report on Form 10-K for the fiscal year
ended December 31, 1998).

10.12 Merger Agreement dated as of October 4, 1997 by and between the
Company and Home and Community Care, Inc. (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997 File No. 1-13498).

10.13 Joint Venture Agreement dated as of April 1, 1997 by and between the
Company and Health Equity Investors, LLC. (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997 File No. 1-13498).

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

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

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

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

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

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

10.23 Modification and Amendment to Employment Agreement, dated as of
January 19, 2000, by and between the Company and Nancy Inez Gorshe
(incorporated by reference to the same titled exhibit to the
Company's Report on Form 10-K for the fiscal year ended December 31,
1999).

12.1 Computation of Ratio of Earnings to Fixed Charges.**

23.1 Consent of Schreck Morris.*

23.2 Consent of Latham & Watkins.*

23.3 Independent Auditors' Report on Schedule and Consent.**

24.1 Power of Attorney (included on the signature page).**

25.1 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of the Trustee.*
</TABLE>
- --------
* Filed previously as part of this Registration Statement
** Filed herewith

<PAGE>

EXHIBIT 12.1

RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Net loss before cumulative effect of
change in accounting principle........ $(2,479) $(19,222) $(28,933)
Add fixed charges......................
Interest costs including amortization
of debt issuance cost................. 4,946 11,039 15,200
------- --------- --------
Earnings (loss) before fixed
charges............................. $ 2,467 $ (8,183) $(13,733)
======= ========= ========
Fixed charges:
Interest expense including amortization
of debt issuance costs................ 4,946 11,039 15,200
Capitalized interest................... 6,616 5,979 2,017
------- --------- --------
Total fixed charges.................. $11,562 17,018 17,217
======= ========= ========
Ratio of earnings to fixed charges..... -- -- --
======= ========= ========
Deficiency of earnings to cover fixed
charges............................... $ 9,095 $ 25,201 $ 30,950
======= ========= ========
</TABLE>

<PAGE>

EXHIBIT 23.3

Independent Auditors' Report on Schedule and Consent

The Board of Directors
Assisted Living Concepts, Inc.:

The audits referred to in our report dated March 29, 2000, included the
related financial statement schedule as of December 31, 1998 and 1999, and for
each of the years in the three-year period ended December 31, 1999, included in
the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" and "Selected Financial and Other Data" in
the prospectus.

/s/ KPMG LLP

Portland, Oregon

April 20, 2000