UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

þ		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 001-13498

Assisted Living Concepts, Inc.

(Exact name of registrant as specified in its charter)

Nevada		93-1148702
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

W140 N8981 Lilly Road, Menomonee Falls, Wisconsin 53051
(Address of Principal Executive Offices)
Telephone: (262) 257-8888
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

		Name of Each Exchange
Title of Each Class		On Which Registered
Class A Common Stock, $0.01 par value per share		New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $180 million. For purposes of this computation shares of Class B Common Stock were assumed to have the same market value as Class A Common Stock. Common shares held as of June 30, 2010 by executive officers, directors and holders of more than 5% of the outstanding common shares have been excluded from this computation because such persons or institutions may be deemed to be affiliates. This determination of affiliate status is not a conclusive determination for any other purpose.

As of March 3, 2011, the registrant had 10,003,069 shares of its Class A Common Stock, $0.01 par value outstanding and 1,468,553 shares of its Class B Common Stock, $0.01 par value outstanding.

Certain sections of the registrant’s definitive proxy statement relating to its 2011 annual stockholders’ meeting to be held on May 2, 2011, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

ASSISTED LIVING CONCEPTS, INC.

FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2010
TABLE OF CONTENTS

		PAGE
PART I
Item 1 Business			3
Item 1A Risk Factors			9
Item 1B Unresolved Staff Comments			15
Item 2 Properties			16
Item 3 Legal Proceedings			16
Item 4 (Removed and Reserved)			17
Executive Officers of the Registrant			17
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			18
Item 6 Selected Financial Data			20
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 7A Quantitative and Qualitative Disclosures About Market Risk			49
Item 8 Financial Statements and Supplementary Data			50
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			50
Item 9A Controls and Procedures			50
Item 9B Other Information			52
PART III
Item 10 Directors, Executive Officers and Corporate Governance			54
Item 11 Executive Compensation			54
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			54
Item 13 Certain Relationships and Related Transactions, and Director Independence			54
Item 14 Principal Accountant Fees and Services			54
PART IV
Item 15 Exhibits and Financial Statement Schedules			55
Index to Consolidated Financial Statements			F-1
Signatures			S-1
Exhibit Index		EI-1
EX-10.7
EX-10.10
EX-21.1
EX-23.1
EX-24.1
EX-31.1
EX-31.2
EX-32.1

ASSISTED LIVING CONCEPTS, INC.

PART I

ITEM 1		— BUSINESS

The Company

As of December 31, 2010, Assisted Living Concepts, Inc. (“ALC”) and its subsidiaries operated 211 senior living residences in 20 states in the United States totaling 9,305 units. ALC’s residences typically range from 40 to 60 units and offer residents a supportive, home-like setting and assistance with the activities of daily living.

ALC became an independent, publicly traded company listed on the New York Stock Exchange on November 10, 2006 (the Separation Date”) when shares of ALC Class A and Class B Common Stock were distributed by Extendicare Inc., now known as Extendicare Real Estate Investment Trust (“Extendicare”), to its stockholders (“the Separation”).

References in this report to “Assisted Living Concepts,” “ALC,” “we,” “our,” and “us” refer to Assisted Living Concepts, Inc. and its consolidated subsidiaries, as constituted after the Separation, unless the context otherwise requires.

Effective March 16, 2009, ALC implemented a one-for-five reverse stock split of its Class A and Class B Common Stock. All share and per share data in this report have been adjusted to reflect this reverse stock split.

History

ALC was formed as a Nevada corporation in 1994. ALC operated as an independent company until January 31, 2005 when it was acquired by Extendicare Health Services, Inc. (“EHSI”) (the “ALC Purchase”), a wholly-owned subsidiary of Extendicare. At that time, ALC operated 177 assisted living residences in 14 states with a total of 6,838 units.

Following the ALC Purchase, Extendicare consolidated its assisted living operations with ALC’s and reorganized ALC’s internal reporting structure and operations to include previously owned EHSI assisted living residences. Between January 31, 2005 and November 10, 2006, ALC operated its 177 original residences and between 29 and 35 residences owned by EHSI. Shortly before the Separation, ALC purchased 29 assisted living residences from EHSI consisting of approximately 1,412 units. In addition, on November 1, 2006, ALC acquired an assisted living residence in Escanaba, Michigan consisting of 40 units from an unrelated third party. Together with ALC’s original 6,838 units and after certain other adjustments, ALC operated a total of 8,302 units at December 31, 2006. On July 20, 2007 ALC acquired a 185 unit property in Dubuque, Iowa and in the fourth quarter of 2007, opened additions to two existing properties which added 48 units. ALC operated 8,535 units as of December 31, 2007. On January 1, 2008, ALC acquired the operations of eight leased residences totaling 541 units and at the end of the fourth quarter of 2008, ALC opened additions on four of its properties adding an additional 78 units. ALC operated 9,154 units at December 31, 2008. During 2009, ALC opened additions on 12 of its properties adding an additional 244 units and combined two residences located on the same campus. After the close of business on December 31, 2009, ALC ceased to operate four previously leased properties consisting of 118 units. As of January 1, 2010, ALC operated 211 properties with 9,280 units in 20 states. During 2010, ALC opened an addition on one property adding 25 additional units. ALC operated 9,305 units at December 31, 2010.

On June 19, 2006, ALC formed Pearson Insurance Company, LTD (“Pearson”), a wholly-owned, consolidated, Bermuda- based captive insurance company, to self-insure general and professional liability risks. On July 30, 2009, ALC formed Swan Home Health, LLC (“Swan Home Health”), a wholly-owned consolidated subsidiary, to provide health care services in certain of our residences. In addition, on October 14, 2010, ALC formed Swan Companion Care, LLC (“Swan Companion Care”) a wholly-owned consolidated subsidiary, to provide health care services in our residence located in Alabama.

Financial Presentation

For periods prior to the Separation Date, the historical consolidated financial and other data in this report have been prepared to include all of Extendicare’s assisted living business in the United States, consisting of:

	•		177 assisted living residences operated by ALC since the ALC Purchase:
	•		the assisted living residences operated by EHSI through the Separation Date, which ranged from 29 to 36 residences between January 1, 2003 and the date of the ALC Purchase and consisted of 32 residences operated by EHSI at December 31, 2005;

	•		three assisted living residences that were constructed and owned by EHSI (two of which were operated by ALC) during 2005;
	•		Pearson since its formation; and
	•		A residence in Escanaba, Michigan since its acquisition on November 1, 2006.

After the Separation Date, the consolidated financial statements represent Pearson, the 177 assisted living residences operated by ALC prior to the Separation, 29 residences purchased from EHSI shortly before the Separation (two of which were combined into one residence in 2009), one residence acquired by ALC in November 2006, one residence acquired by ALC in July 2007 and eight leased residences acquired by ALC in January 2008, from and after their respective dates of acquisition, 78 units opened as part of additions to existing residences in 2008, 244 units opened as part of additions to existing residences in 2009 and 25 units opened as part of additions in 2010 and Swan Home Health and Swan Companion Care since their formation.

After the close of business on December 31, 2009, ALC ceased to operate four previously leased properties consisting of 118 units. All previously reported data relating to these units have been reclassified to discontinued operations. As of December 31, 2010, ALC operated 211 residences with 9,305 units in 20 states.

ALC operates in a single business segment with all revenues generated from those properties located within the United States.

Our Business

We operate senior living residences that provide seniors with a supportive, home-like setting with care and services, including 24-hour assistance with activities of daily living, medication management, life enrichment, health and wellness, and other services either directly from ALC employees or indirectly through wholly-owned health care service subsidiaries. See “Our Services” below. Our residences are in the middle of a broad spectrum of senior living options that ranges from apartments to skilled nursing facilities. In general, the type of senior living residence that is appropriate for a senior depends on his or her particular preferences and life circumstances, especially health and physical condition and the corresponding level of care that he or she requires. Seniors may move into one of our residences by choice or by necessity. As of December 31, 2010, we provided senior living accommodations and services through 211 residences containing 9,305 units located in 20 states.

Our residences are purpose-built to meet the special needs of seniors and typically are located in targeted, middle-market suburban bedroom communities that were selected on the basis of a number of factors, including the size of our targeted demographic resident pool in the community. Our residences include features designed to appeal to seniors and their decision makers. The majority of our residences are 40 to 60 units, single story, square shaped buildings with an enclosed courtyard, a mix of studio and one-bedroom apartments, and wide hallways to accommodate our residents who use walkers and wheelchairs. The relatively small number of units in our residences and the design of our buildings enhance our ability to provide effective security and care, while also appealing to seniors who generally prefer easy access to their living quarters, pleasing aesthetics, and simplicity of design. At December 31, 2010, we owned 161 of our residences and operated 50 under various leases.

Our Services

Seniors in our residences are individuals who, for a variety of reasons, elect not to live alone, but do not need the 24-hour medical care provided in skilled nursing facilities. We design the services provided to these residents to respond to their individual needs and to improve their quality of life. This individualized assistance is available 24 hours a day and includes routine health-related services, which are made available and are provided according to the resident’s individual needs and state regulatory requirements. Available services include:

	•		general services, such as meals, activities, laundry and housekeeping,
	•		support services, such as assistance with medication, monitoring health status, coordination of transportation, and coordination with physician offices,
	•		personal care, such as dressing, grooming and bathing, and
	•		a safe and secure environment with 24-hour access to assistance.

We also arrange access to additional services from third-party providers beyond basic housing and related services, including physical, occupational and respiratory therapy, home health, hospice, and pharmacy services.

Although a typical package of basic services provided to a resident includes meals, housekeeping, laundry and personal care, we accommodate the varying needs of our residents through the use of individual service plans and flexible staffing patterns. Our rate structure for services is based upon the acuity, or level, of services needed by each resident and individual service plans are based on periodic assessments of residents’ care needs. 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 payer (such as Medicare, Medicaid or long-term care insurance).

Expansion Program

In February 2007, we announced plans to add a total of 400 units onto our existing owned residences. In 2008, 2009 and 2010, we completed, licensed and began accepting new residents in 78, 244, and 25 units, respectively, aggregating a total of 347 units. As of the date of this report, we are targeting completion of 20 units in the first quarter of 2011. Our cost has been approximately $113,000 per unit. We expended $41.1 million through December 31, 2010, and expect to spend an additional $0.4 million in 2011. We continue to evaluate expansion opportunities in promising markets.

Because we own rather than lease a significant number of our properties, we have the ability to add additional units onto existing properties without complications such as renegotiating leases with landlords. Expansions are targeted where existing residences have demonstrated the ability to support increased capacity. We continually evaluate ways to expand our portfolio of properties. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview,” in this Annual Report for a discussion of our business strategies.

Discontinued Operations

On January 1, 2005, ALC entered into a master lease agreement for five residences located in Oregon totaling 157 units. The master lease gave ALC the right to purchase all five buildings for total consideration of $10.3 million consisting of the assumption of $4.7 million of Oregon Housing and Community Services Bonds and $5.6 million in cash. The master lease provided that, in the event the option was not exercised, ALC would continue to lease one of the residences under a prior operating lease. Based upon the operating performance, the assumption of bonds with an average interest rate of 8.03%, and various operating restrictions under the bond indentures, ALC determined it was not economically or operationally prudent to exercise the option to purchase these properties.

ALC ceased operating four of these residences consisting of 118 units following the close of business on December 31, 2009, and has classified these residences as discontinued operations. ALC will continue operating one residence consisting of 39 units under an operating lease expiring in February 2014 (with a right to extend an additional five years).

Servicemarks

We market and operate all of our residences under their own unique names. We do not consider servicemarks to be important to our business.

Seasonality

While our business generally does not experience significant fluctuations from seasonality, winter months tend to result in more residents exiting our residences due to illnesses requiring hospitalization or skilled nursing facility services. Approximately 23%, 22%, and 21% of our residence operating expenses came from property related costs, including utilities, in 2010, 2009, and 2008, respectively. Because we operate in many four season states, utility costs associated with heating and cooling our residences tend to fluctuate by season. Generally, our first and third quarter utility costs tend to exceed our second and fourth quarter utility expenses by approximately 25% to 35%.

Working Capital

It is not unusual for us to operate with a negative working capital position because our revenues are collected more quickly, often in advance, than our obligations are required to be paid. This can result in a low level of current assets to the extent cash has been deployed in business development opportunities or used to repay longer term liabilities.

Customers

Payments from residents (or their responsible parties) who pay us directly (“private pay”) comprised approximately 98%, 95% and 92% of our revenues in 2010, 2009 and 2008, respectively. Our business is not materially dependent upon any single customer. Although our reliance has significantly diminished, we depend upon funding from various state Medicaid programs for payments of service fees for residents who pay through these programs. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Medicaid Programs” below.

Government Regulation

State licensing agencies regulate certain of our operations and where applicable monitor our compliance with a variety of state and local laws governing licensure, changes of ownership, personal and nursing services, accommodations, construction, life safety, food service, and cosmetology. Generally, the state oversight and monitoring of senior living operators has been less burdensome than experienced in the skilled nursing industry. Areas most often regulated by these state agencies include:

	•		Qualifications of management and health care personnel;
	•		Minimum staffing levels;
	•		Dining services and overall sanitation;
	•		Personal care and nursing services;
	•		Assistance or administration of medication/pharmacy services;
	•		Residency agreements;
	•		Admission and retention criteria;
	•		Discharge and transfer requirements; and
	•		Resident rights.

Our residences may be subject to periodic unannounced surveys by state and other local government agencies to assess and assure compliance with the respective regulatory requirements. A survey can also occur following a state’s receipt of a complaint regarding a residence. If one of our residences is cited for alleged deficiencies by the respective state or other agencies, we may be required to implement a plan of correction within a prescribed timeframe. Upon notification or receipt of a deficiency report, our regional and corporate teams assist the residence to develop, implement and submit an appropriate corrective action plan. Most state citations and deficiencies are resolved through the submission of a plan of correction that is reviewed and approved by the state agency. The survey team will conduct a re-visit to validate substantial compliance with the state rules and regulations.

Health Privacy Regulations and Health Insurance Portability and Accountability Act

Our residences are subject to state laws to protect the confidentiality of our residents’ health information. We have implemented procedures to meet the requirements of the state laws and we train our residence personnel on those requirements.

We are not a covered entity in respect of the Health Insurance Portability and Accountability Act of 1996, or HIPAA. However, residences which electronically invoice state Medicaid programs are considered covered entities and are subject to HIPAA and its implementing regulations. Currently, we electronically invoice state Medicaid programs in seventeen residences in three states. We use state provided software to reduce the complexity and risk in compliance with the HIPAA regulations. HIPAA requires us to comply with standards for the exchange of health information at those residences and to protect the confidentiality and security of health data. The Department of Health and Human Services has issued four rules that mandate the standards with respect to certain healthcare transactions and health information under HIPAA. The four rules pertain to:

	•		privacy standards to protect the privacy of certain individually identifiable health information;
	•		standards for electronic data transactions and code sets to allow entities to exchange medical, billing and other information and to process transactions in a more effective manner;
	•		security of electronic health information privacy; and
	•		use of a unique national provider identifier.

We believe we are in compliance with these rules as they currently affect our residences that electronically invoice state Medicaid programs. We monitor compliance with health privacy rules including the HIPAA standards. Should it be determined that we have not complied with the new standards, we could be subject to criminal penalties and civil sanctions.

Backlog

The nature of our business does not result in backlogs.

Medicaid Programs

As of December 31, 2010, 22 of our 211 residences participated in State Medicaid programs and at December 31, 2010, 97 of our 9,305 units were occupied by Medicaid residents. Medicaid programs generally reimburse providers for the cost associated with the service component of our operations. Medicaid residents are responsible to pay a certain amount of their available income each month to cover the room and board costs. The reimbursement rates paid to providers are established by state Medicaid departments. The same rates are paid to all providers irrespective of their actual costs. Reimbursement rates vary significantly from state to state.

In recent years, as state budgets have tightened, Medicaid annual rate increases for home and community-based services have decreased and in some instances rates have been frozen or have declined for several years. In order to reduce our reliance upon Medicaid funding, over the last year we decreased the number of our residences participating in the Medicaid program by approximately 56%. Medicaid revenues represented 2%, 5% and 8% of our overall revenues for 2010, 2009 and 2008, respectively. Our election to accept Medicaid within a state is on a residence by residence basis and we are not required to remain in any Medicaid programs (subject to notification requirements where required).

Competition

Although short-term data indicates limited new supply coming into the markets we serve, long-term, we expect to face increased competition from new market entrants as the demand for senior living grows. Providers of senior living residences compete for residents primarily on the basis of quality of care, price, reputation, physical appearance of the residences, services offered, family preferences, physician referrals, and location. Some of our competitors operate on a not-for-profit basis or as charitable organizations. In addition, we compete with home-based residential care, either provided by family members or other third parties. As the general economy declines and unemployment increases, families are less able to afford our residences or are more willing or available to care for family members at home.

We compete directly with companies that provide living services to seniors as well as other companies that provide similar long-term care alternatives. In most of the communities in which we operate, we face two or three competitors that offer senior living residences similar to ours in size, price and range of services offered. In addition, we face competition from other providers in the senior living industry including companies that provide adult day care in the home, congregate care residences where residents elect the services to be provided, continuing care retirement centers on campus-like settings, and nursing homes that provide long-term care services.

We prefer to own our residences and, therefore, compete with various real estate investors, such as joint ventures, real estate investment trusts (“REITs”) and real estate developers, for land and facility purchases. Generally, real estate investors purchase or construct senior living residences and enter into management agreements with operators. In July 2008, the Health Care REIT provision of the REIT Improvement Diversification and Empowerment Act was passed as part of the Housing Assistance Act of 2008 allowing REITs to realize more value from their existing properties. Real estate investment companies which may have substantially more resources and greater access to capital markets may compete with us for acquisitions in markets in which we operate or in which we look to operate.

The senior living industry, and specifically the independent living and assisted living segments, is large and fragmented. It is characterized by numerous local and regional operators, although there are several national operators similar in size or larger than us. The independent and senior living industry can be segregated into different market segments based upon the resources of the target population and the geographic area surrounding the operating residence. We compete with the national operators, as well as a combination of local and regional companies, several of which may have substantially more resources than us, directly or indirectly in the middle-market, suburban bedroom communities that we target.

We believe that some markets, including some of the markets in which we operate, may have been overbuilt, in part because regulations and other barriers to entry into the assisted living industry are not substantial. In addition, because the number of people who can afford to pay our daily resident fee is limited, the supply of senior living residences may outpace demand in some markets. The impacts of such overbuilding include:

•

increased time to reach capacity at assisted living residences;

•

loss of existing residents to new residences;

•

pressure to lower or refrain from increasing rates;

•

competition for workers in tight labor markets; and

•

lower margins until excess units are absorbed.

In general, the markets in which we currently operate are capable of supporting only three or four senior living residences.

We believe that each local market is different, and our responses to the specific competitive environment in any market will vary. However, if a competitor were to attempt to enter one of the markets in which we operate, we may be required to reduce our rates, provide additional services, or expand our residence to meet perceived additional demand. We may not be able to compete effectively in markets that become overbuilt.

We believe our major competitive strengths are:

•

the size and breadth of our portfolio, and the depth of our experience in the senior living industry, which allow us to achieve operating efficiencies that many of our competitors in the highly fragmented senior living industry cannot;

•

our ownership of 161 assisted living residences, or more than 76% of the total number of residences we operate, which increases our operating flexibility by allowing us to refurbish or expand residences to meet changing consumer demands without having to obtain landlord consent, and divest residences and exit markets at our discretion;

•

the staffing model of our residences which emphasizes the importance we place on delivering quality care to our residents, with a particular emphasis on preventative care and wellness; and

•

targeting communities based on their demographic profile, the average wealth of the population, and the cost of operating in the community.

Employees

As of December 31, 2010, we employed approximately 4,200 people, including approximately 300 registered and licensed practical nurses, 2,400 nursing assistants and 1,500 dietary, housekeeping, maintenance and other staff.

We have not been subject to union organization efforts at our residences. To our knowledge, we have not been and are not currently subject to any other organizational efforts.

We compete with other healthcare providers for nurses and residence directors and with various industries for healthcare assistants and other lower-wage employees. To the extent practicable, we avoid using temporary staff. We have been subject to additional costs associated with the increasing levels of reference and criminal background checks that we have performed on our hired staff to ensure that they are suitable for the functions they will perform within our residences. Our inability to control labor availability and costs could have a material adverse effect on our future operating results.

Corporate Organization

Our corporate headquarters is located in Menomonee Falls, Wisconsin, where we have centralized various functions in support of our operations, including our human resources, legal, purchasing, internal audit, and accounting and information technology support functions. At our corporate offices, senior management provides overall strategic direction, seeks development and acquisition opportunities, and manages the overall business. The human resources function implements corporate personnel policies and administers wage and benefit programs. We have dedicated clinical, accounting, legal, marketing, and risk management support groups for our operations. Senior departmental staff are responsible for the development and implementation of corporate-wide policies pertaining to resident care, employee hiring, training and retention, marketing initiatives and strategies, risk management, residence maintenance, and project coordination.

We have offices in Dallas, Texas, Seattle, Washington, and Menomonee Falls, Wisconsin that oversee our operations in our geographic divisions. A small staff in each office is responsible for overseeing all operational aspects of our residences in the respective divisions through teams of professionals located throughout the area. The area team is responsible for compliance with standards involving resident care, rehabilitative services, recruitment and personnel matters, state regulatory requirements, marketing and sales activities, transactional accounting support, and participation in state associations.

Our operations are organized into a number of different direct and indirect wholly-owned subsidiaries primarily for legal purposes. We manage our operations as a single unit. Operating policies and procedures are substantially the same at each subsidiary. Several of our subsidiaries own and operate a significant number of our total portfolio of residences. No single residence generates more than 2.0% of our total revenues.

Legal Proceedings and Insurance

The provision of services in senior living residences involves an inherent risk of personal injury liability. Senior living residences are subject to general and professional liability lawsuits alleging negligence of care and services and related legal theories. Some of these lawsuits may involve substantial claims and can result in significant legal defense costs.

We insure against general and professional liability risks in loss-sensitive insurance policies with affiliated and unaffiliated insurance companies with levels of coverage and self-insured retention levels that we believe are adequate based on the nature and risk of the business, historical experience, and industry standards. We are responsible for the costs of claims up to self-insured limits determined by individual policies and subject to aggregate limits.

On November 19, 2010, the New Jersey Department of Health and Senior Services (“DHSS”) issued a cease and desist order alleging that ALC was operating four unlicensed assisted living residences in the state of New Jersey. The order assessed a fine of $2,500 per day, per building beginning October 16, 2010. ALC management disagrees with DHSS’ allegations and has filed a timely appeal with the New Jersey Office of Administrative Law (“OAL”). This appeal is currently pending.

At the request of DHSS, ALC attended a meeting in January, 2011 with representatives from this agency and the Department of Community Affairs wherein the parties discussed the potential settlement of this dispute. An initial settlement proposal sent to ALC by DHSS included payments by ALC of certain administrative costs, but no monetary penalties related to the cease and desist order. Since the cease and desist order is based on a per day fine and limitations on the operation of the business in the state of New Jersey, the financial impact to ALC can not be determined at this time and could be material to the operations and financial condition of ALC. ALC believes the cease and desist order is without merit and that the resolution of this matter will not have a material effect on the operations or financial condition of ALC.

Available Information

Our Internet address is www.alcco.com. There we make available, free of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and any amendments to those reports as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. The information found on our website is not part of this or any other report we file with or furnish to the SEC.

ITEM 1A		— RISK FACTORS

If any of the risk factors described below develop into an actual event, it could have a material adverse effect on our business, financial condition, or results of operations. These are not the only risks facing our company. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could also adversely affect our business.

Risks Relating to Our Business

Unfavorable economic conditions, such as recessions, high unemployment, and declining housing markets, adversely affect the ability of seniors to afford our resident fees and could cause occupancy, revenues, and earnings to decline.

Economic downturns limit the ability of seniors to afford our resident fees. High unemployment levels may limit the ability of family members to provide financial support and may provide family members with the time necessary to take care of seniors in their homes. Some residents depend on income from the sale of their homes or from other investments or financial support from family members in order to afford our resident fees. Costs to seniors associated with senior living services are not generally reimbursable under government reimbursement programs such as Medicare and Medicaid. Our occupancy rates and revenues could decline if we are unable to retain or attract seniors with sufficient income, assets or other resources required to pay the fees associated with senior living services. If our average daily census in 2010 had decreased by one percentage point proportionately across all payer sources, we estimate our revenue would have decreased by approximately $2.3 million.

We face numerous competitors and, if we are unable to compete successfully, we could lose occupancy, revenues and earnings.

Our business is highly competitive, particularly with respect to private pay residents. We compete locally and regionally with other long-term care providers, including assisted and independent living providers, congregate care providers, home healthcare providers, skilled nursing facilities, and continuing care retirement communities, including both for-profit and not-for-profit entities. We compete based on price, the types of services provided, quality of care, reputation, and the age and appearance of residences. Because there are relatively few barriers to entry in the senior living industry, competitors could enter the areas in which we operate with new residences or upgrade existing residences and offer residents more appealing residences with more amenities than ours at a lower cost. The availability and quality of competing residences in the areas in which we operate can significantly influence occupancy levels in our residences. The entrance of any additional competitors or the expansion of existing competing residences could result in our loss of occupancy, revenues and earnings.

If we fail to cultivate new or maintain existing relationships with resident referral sources in the markets in which we operate, our occupancy, revenues, and earnings may deteriorate.

Our ability to improve our overall occupancy, revenues and earnings depends on our reputation in the communities we serve and our ability to successfully market to our target population. A large part of our marketing and sales efforts is directed towards cultivating and maintaining relationships with key community organizations who work with seniors, physicians and other healthcare providers in the communities we serve, whose referral practices significantly affect the choices seniors make with respect to their long-term care needs. If we are unable to successfully cultivate and maintain strong relationships with these community organizations, physicians and other healthcare providers, our occupancy, revenues and earnings could decline.

Events which adversely affect the perceived desirability, health or safety of our residences to current or potential residents could cause occupancy, revenues, and earnings to decline.

Our success depends upon maintaining our reputation for providing quality senior living services. In addition, our residents live in close proximity to one another and may be more susceptible to disease than the general population. Any event that raises questions about the quality of the management of one or more of our residences or that raises issues about the health or safety of our residents could cause occupancy, revenues, and earnings to decline.

Decisions by residents to terminate their residency agreements could adversely affect our occupancy revenues and earnings.

State regulations governing assisted living residences require a written residency agreement with each resident. These regulations also require that residents have the right to terminate their residency agreements for any reason on reasonable notice. Accordingly, many of our residency agreements allow residents to terminate their agreements upon 0 to 30 days’ notice. If multiple residents terminate their residency agreements at or around the same time, our occupancy, revenues and earnings could decrease.

Labor costs comprise a substantial portion of our operating expenses. An increase in wages, as a result of a shortage of qualified personnel or otherwise, or an increase in staffing requirements as a result of regulatory changes, could substantially increase our operating costs and reduce our earnings.

We compete with other healthcare providers for residence directors and nurses and with various industries for healthcare assistants and other employees. A shortage of nurses and other trained personnel and general inflationary pressures may force us to enhance our wage and benefits packages in order to compete for qualified personnel. In order to supplement staffing levels, we periodically may be forced to use more costly temporary help from staffing agencies. Because labor costs represent a substantial portion of our operating expenses, increases in wage rates could increase costs and reduce earnings. In addition, regulatory changes could increase staffing requirements which could increase costs and reduce earnings.

We may not be able to increase residents’ fees enough to cover increased energy, food or other costs, which could reduce our earnings.

Energy and food costs comprise a significant portion of our operating expenses. We generally try to pass increases in energy, food and other costs on to our residents but may not be able to if residents are not able to afford the increased costs. Increased energy, food, and other costs could reduce earnings, lower revenues from lower occupancy following rate increases, or both.

We may not be able to compete effectively in those markets where overbuilding exists and future overbuilding in markets where we operate could adversely affect our operations.

Overbuilding in the senior living industry in the late 1990s reduced occupancy and revenue rates at senior living residences. This, combined with unsustainable levels of indebtedness, forced several senior living operators, including ALC, into bankruptcy. The occurrence of another period of overbuilding could adversely affect our future occupancy and resident fee rates.

We may not be able to successfully complete the acquisition of new residences or the expansion of existing residences which could adversely affect our operations.

Our growth strategy includes the acquisition of new residences as well as the expansion of existing residences. We select acquisition and expansion candidates with the expectation that they will add value to ALC. However, there is no assurance that we will be successful in selecting the right residences to acquire or expand, that acquisitions or expansions will be completed without unexpected negative surprises, or that we will be successful in filling new residential units. Failure to successfully complete acquisitions or expansions could adversely affect our operations and financial results.

Competition for the acquisition of strategic assets from buyers with lower costs of capital than us or that have lower return expectations than we do could limit our ability to compete for strategic acquisitions and therefore to grow our business effectively.

Several real estate investment trusts, or REITs, have similar acquisition objectives as we do, as well as greater financial resources and lower costs of capital than we may be able to obtain. This may increase competition for acquisitions that would be suitable to us, making it more difficult for us to compete and successfully implement our growth strategy. There is significant competition among potential acquirers in the senior living industry, including REITs, and we may not be able to successfully implement our growth strategy or complete acquisitions as a result of competition from REITs.

We operate in an industry that has an inherent risk of personal injury claims. If one or more claims are successfully made against us, our financial condition and results of operations could be materially and adversely affected.

Personal injury claims and lawsuits can result in significant legal defense costs, settlement amounts and awards. In some states, state law may prohibit or limit insurance coverage for the risk of punitive damages arising from professional liability and general liability or litigation. As a result, we may be liable for punitive damage awards in these states that either are not covered or are in excess of our insurance policy limits. We insure against general and professional liability risks with affiliated and unaffiliated insurance companies with levels of coverage and self-insured retention levels that we believe are adequate based on the nature and risk of our business, historical experience and industry standards. We are responsible for the costs of claims up to a self-insured limit determined by individual policies and subject to aggregate limits. We accrue for self-insured liabilities based upon an actuarial projection of future self-insured liabilities, and have an independent actuary review our claims experience and attest to the adequacy of our accrual on an annual basis. Claims in excess of our insurance may, however, be asserted and claims against us may not be covered by our insurance policies. If a lawsuit or claim arises that ultimately results in an uninsured loss or a loss in excess of insured limits, our financial condition and results of operation could be materially and adversely affected. Furthermore, claims against us, regardless of their merit or eventual outcome, could have a negative effect on our reputation and our ability to attract residents and could cause us to incur significant defense costs and our management to devote time to matters unrelated to the day-to-day operation of our business.

We self-insure a portion of our general and professional liability, workers’ compensation, health and dental and certain other risks.

We insure against general and professional liability and workers’ compensation risks with levels of coverage and self-insured retention levels that we believe are adequate based upon the nature and risk of the business, historical experience, and industry standards. In addition, for the majority of our employees, we self-insure our health and dental coverage. Our costs related to our self-insurance are a direct result of claims incurred, some of which are not within our control. Although we employ risk management personnel to manage liability risks, maintain safe workplaces, and manage workers’ compensation claims and we use a third-party provider to manage our health claims, any materially adverse claim experience could have an adverse affect on our business.

Our planned exit from Medicaid programs has resulted in a significant number of vacancies.

Our strategy to increase revenues by increasing the proportion of units that are occupied by private pay residents included a planned, gradual exit from state Medicaid programs. As we exit these programs, units formerly occupied by Medicaid residents became available for private pay residents. There is no assurance that we will be successful in filling these vacant units with private pay residents. Failure to successfully fill vacated units with private pay residents on a timely basis could adversely affect our operations and financial results.

We operate in a regulated industry. Failure to comply with laws or government regulation could lead to fines and penalties.

The regulatory requirements for assisted living residence licensure generally prescribe standards relating to the provision of services, resident rights, qualification and level of staffing, employee training, administration and supervision of medication needs for the residents, and the physical environment and administration. These requirements could affect our ability to expand into new markets, to expand our services and residences in existing markets and, if any of our presently licensed residences were to operate outside of its licensing authority, may subject us to penalties including closure of the residence. Future regulatory developments as well as mandatory increases in the scope and severity of deficiencies determined by survey or inspection officials could cause our operations to suffer.

Compliance with the Americans with Disabilities Act, Fair Housing Act, and fire, safety and other regulations may require us to make unanticipated expenditures which could increase our costs and therefore adversely affect our earnings and financial condition.

Our residences are required to comply with the Americans with Disabilities Act, or ADA. The ADA generally requires that buildings be made accessible to people with disabilities. We must also comply with the Fair Housing Act, which prohibits discrimination against individuals on certain bases if it would cause such individuals to face barriers in gaining residency in any of our residences. In addition, we are required to operate our residences in compliance with applicable fire and safety regulations, building codes and other land use regulations and food licensing or certification requirements as they may be adopted by governmental agencies and bodies from time to time. We may be required to make substantial expenditures to comply with those requirements.

We face periodic reviews, audits and investigations from federal and state government agencies and these audits could have adverse findings that may negatively impact our business.

We are subject to various governmental reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. An adverse review, audit or investigation could result in refunding amounts we have been paid, fines, penalties and other sanctions, loss of our right to participate in the Medicaid programs or one or more private payer networks, and damage to our reputation. We also are subject to potential lawsuits under a federal whistleblower statute designed to combat fraud and abuse in the healthcare industry. These lawsuits can involve significant monetary awards to private plaintiffs who successfully bring these suits.

Market conditions could restrict our ability to fill refurbished residences and expansion units.

Our business strategies include refurbishing under-performing residences and expanding high-performing residences to attract new residents. If we fail to fill refurbished or expanded residences, it could adversely affect operating results.

State regulations affecting the construction or expansion of healthcare providers could impair our ability to expand through construction and redevelopment.

Several states have established certificate of need processes to regulate the expansion of assisted living residences. If additional states implement certificate of need or other similar requirements for assisted living residences, our failure or inability to obtain the necessary approvals, changes in the standards applicable to such approvals, and possible delays and expenses associated with obtaining such approvals, could adversely affect our ability to expand and, accordingly, to increase revenues and earnings.

Risks Relating to Our Indebtedness and Lease Arrangements

Financial market conditions could restrict the availability of credit which could adversely affect our ability to refinance indebtedness or to borrow funds for working capital, acquisitions, expansions and share repurchases.

We believe the lenders under our new $125 million revolving credit facility with U.S. Bank National Association will continue to meet their obligations to fund our borrowing requests. However, given uncertainty in financial markets, we can not provide assurance of their continued ability to meet their obligations under the credit facility. We believe that existing funds and cash flow from operations will be sufficient to fund our operations, expansion program, and required payments of principal and interest on our debt until the maturity of our $125 million credit facility in February 2016. In the event that our lenders were unable to fulfill their obligations to provide funds upon our request under the $125 million revolving credit facility, it could have a material adverse impact on our ability to fund future expansions, acquisitions and share repurchases.

Our credit facility, existing mortgage loans and lease agreements contain covenants that restrict our operations. Any default under such facilities, loans or leases could result in the acceleration of indebtedness, cross-defaults, or lease terminations, any of which would negatively impact our liquidity and our ability to grow our business and increase revenues.

Our credit facility contains financial covenants and cross-default provisions that may inhibit our ability to grow our business and increase revenues. In some cases, indebtedness is secured by both a mortgage on a residence (or residences) and a guaranty by us. In the event of a default under one of these scenarios, the lender could avoid judicial procedures required to foreclose on real property by declaring all amounts outstanding under the guaranty immediately due and payable and requiring us to fulfill our obligations to make such payments. In addition, our leases contain financial and operating covenants and cross default provisions. Breaches of certain lease covenants could give the landlord the right to require us to pre-pay future lease payments, write off our related assets, and replace us with new operators. The realization of any of these scenarios could have an adverse effect on our financial condition and capital structure. Further, because our mortgages and leases generally contain cross-default and cross-collateralization provisions, a default by us related to one residence could affect a significant number of residences and their corresponding financing arrangements and leases which could have a material adverse effect on our business as a whole.

If we do not comply with the requirements prescribed within our leases or debt agreements pertaining to revenue bonds, we would be subject to financial penalties.

In connection with the construction or lease of some of our residences, we or our landlord issued federal income tax exempt revenue bonds guaranteed by the states in which they were issued. Under the terms of the debt agreements relating to some of these bonds, we are required, among other things, to lease or make available 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. Non-compliance with these restrictions may result in an event of default and cause fines and other financial costs to us. For revenue bonds issued pursuant to our lease agreements, an event of default would result in a default of the terms of the lease and could adversely affect our financial condition and results of operations.

If we do not comply with terms of the leases related to certain of our assisted living residences, or if we fail to maintain the residences, we could be faced with financial penalties and/or the termination of the lease related to the residence.

Certain of our leases require us to maintain a standard of property appearance and maintenance, operating performance and insurance requirements and require us to provide the landlord with our financial records and grant the landlord the right to inspect the residences. Failure to meet the conditions of any particular lease could result in a default under such lease, which could lead to the loss of the right to operate on the premises, and financial and other costs.

Our indebtedness and long-term leases could adversely affect our liquidity and our ability to operate our business and our ability to execute our growth strategy.

Our level of indebtedness and our long-term leases could adversely affect our future operations or impact our stockholders for several reasons, including, without limitation:

•

we may have little or no cash flow apart from cash flow that is dedicated to the payment of any interest, principal or amortization required with respect to outstanding indebtedness and lease payments with respect to our long-term leases;

	•		increases in our outstanding indebtedness, leverage and long-term leases will increase our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure; and
	•		increases in our outstanding indebtedness may limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes.

Our ability to make payments of principal and interest on our indebtedness and to make lease payments on our leases depends upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our debt or to make lease payments on our leases, we may be required, among other things, to seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets, reduce or delay planned capital expenditures, or delay or abandon desirable acquisitions. Such measures might not be sufficient to enable us to service our debt or to make lease payments on our leases. The failure to make required payments on our debt or leases or the delay or abandonment of our planned growth strategy could result in an adverse effect on our future ability to generate revenues and sustain profitability. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms to us.

Increases in market interest rates or various financial indices could significantly increase the costs of our unhedged debt and lease obligations, which could adversely affect our liquidity and earnings.

To the extent they are unhedged, borrowings under our revolving credit facility are exposed to variable interest rates. In addition, some of our residences are leased under leases whose rental rates increase at their renewal dates based on financial indices such as the Consumer Price Index. Increases in prevailing interest rates, or financial indices, could increase our payment obligations which would negatively impact our liquidity and earnings.

Risks Relating to Our Class A Common Stock and Our Continuing Relationships with Thornridge Holdings Limited and Extendicare

Thornridge Holdings Limited has the ability to control the direction of our business. The concentrated ownership of our Class B Common Stock makes it difficult for holders of our Class A Common Stock to influence significant corporate decisions.

On December 6, 2010, Thornridge Holdings Limited (“Thornridge Holdings”) (which is owned directly or indirectly by members of the extended family of Jean Hennigar, a daughter of the late R.A. Jodrey) filed a Schedule 13D with the United States Securities and Exchange Commission reporting that on November 5, 2010, Blomidon Investments Limited, the ultimate parent of Scotia Investments Limited, and three holding companies of Blomidon that owned all of the common shares of Blomidon, including Thornridge Holdings, completed a reorganization pursuant to which, among other things, Thornridge Holdings acquired all of the shares of Class A Common Stock and Class B common stock of Assisted Living Concepts, Inc. previously owned directly or indirectly by Scotia Investments Limited. Scotia Investments was also owned by members of the R.A. Jodrey family. As of December 31, 2010, Thornridge Holdings and its subsidiaries, owned approximately 89% of the outstanding shares of our Class B Common Stock and approximately 2% of the outstanding shares of our Class A Common Stock, which together represents approximately 54% of the total voting power of our common stock. Accordingly, Thornridge Holdings generally has the ability to influence or control matters requiring stockholder approval, including the nomination and election of directors and the determination of the outcome of corporate transactions such as mergers, acquisitions and asset sales. Our chairman, Mr. Hennigar, is chairman, chief executive officer and a director of Thornridge Holdings. Mr. Hennigar disclaims beneficial ownership of the shares held by Thornridge Holdings. In addition, the disproportionate voting rights of our Class B Common Stock may make us a less attractive takeover target.

Our corporate governance documents may delay or prevent an acquisition of us that stockholders may consider favorable.

Our articles of incorporation and bylaws include a number of provisions that may deter hostile takeovers or changes of control. These provisions include:

•

the authority of our board of directors to issue shares of preferred stock and to determine the price, rights, preferences, and privileges of these shares, without stockholder approval;

•

all stockholder actions must be effected at a duly called meeting of stockholders or by the unanimous written consent of stockholders, unless such action or proposal is first approved by our board of directors;

•

special meetings of the stockholders may be called only by our board of directors;

•

stockholders are required to give advance notice of business to be proposed at a meeting of stockholders; and

•

cumulative voting is not allowed in the election of our directors.

We could be liable for taxes imposed on Extendicare with respect to the distribution of our common stock in connection with our separation from Extendicare.

Extendicare was subject to U.S. Federal income tax on the distribution of our common stock at the time of the Separation. Under U.S. Federal income tax law, ALC and Extendicare are jointly and severally liable for any taxes imposed on Extendicare for the periods during which we were a member of its consolidated group, including any taxes imposed with respect to the distribution of our common stock. Under our tax allocation agreement with Extendicare, Extendicare has agreed to indemnify us if we are held liable for any taxes imposed in connection with the distribution of common stock. However, Extendicare may not have sufficient assets to satisfy any such liability, and we may not successfully recover from Extendicare any amounts for which we are held liable. Our liability for any taxes imposed on Extendicare could have a material adverse effect on our results of operations and financial condition.

Conflicts of interest may arise between us and Extendicare that could be resolved in a manner unfavorable to us.

As part of the Separation, we entered into a number of transition agreements with Extendicare, including agreements dealing with tax allocations and a separation agreement which covers matters such as the allocation of responsibility for certain pre-existing liabilities. Questions relating to conflicts of interest may arise between us and Extendicare relating to our past and ongoing relationships. Our Vice Chair and director, Mr. Rhinelander, also serves as Chairman and a trustee of Extendicare. Decisions with the potential to create, or appear to create, conflicts of interest could relate to the nature, quality and cost of transitional services rendered to us by Extendicare, competition for potential acquisition or other business opportunities, or employee retention or recruiting.

If Extendicare engages in the same type of business we conduct or takes advantage of business opportunities that might be attractive to us, our ability to successfully operate and expand our business may be hampered.

Extendicare is not prohibited from entering the businesses similar to ours and could use the knowledge that it gained through its ownership of us to its advantage, which could negatively affect our ability to compete.

ITEM 1B		— UNRESOLVED STAFF COMMENTS

None.

ITEM 2		— PROPERTIES

As of December 31, 2010, we operated 211 residences across 20 states, with the capacity to serve 9,305 residents. Of the residences we operated at December 31, 2010, we owned 161 and leased 50 pursuant to operating leases.

Our senior living operations are outlined in the following table:

																						Total Residences Under
		Owned												Leased from Others								Operation
										Resident								Resident								Resident
		Number				Encumbered(1)				Capacity				Number				Capacity				Number				Capacity
Texas			34				21				1,386				7				276				41				1,662
Indiana			21				11				940				2				78				23				1,018
Washington			13				5				588				8				308				21				896
Ohio			15				12				623				5				191				20				814
Wisconsin			11				11				712				—				—				11				712
Oregon			11				7				382				4				158				15				540
Iowa			6				3				434				1				35				7				469
Pennsylvania			10				10				393				1				39				11				432
Arizona			7				7				324				2				76				9				400
South Carolina			6				4				234				4				160				10				394
Idaho			5				5				196				4				148				9				344
Nebraska			5				2				168				4				156				9				324
New Jersey			7				2				273				1				39				8				312
Georgia			—				—				—				5				290				5				290
Louisiana			4				3				195				—				—				4				195
Michigan			4				1				180				—				—				4				180
Alabama			—				—				—				1				164				1				164
Minnesota			1				1				60				—				—				1				60
Kentucky			1				1				55				—				—				1				55
Florida			—				—				—				1				44				1				44
Total			161				106				7,143				50				2,162				211				9,305

On February 18, 2011, we simultaneously entered into a new $125 million credit facility and terminated our $120 million credit facility. See Managements Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Debt Instruments — $120 Million Credit Facility and $125 Million Credit Facility in Item 7 of part II of this report. As a result, we reduced the number of encumbered properties by 33 properties from 106 at December 31, 2010 to 73 at February 18, 2011.

Corporate Offices

We own our corporate headquarters which is located in Menomonee Falls, Wisconsin. Our regional offices in Dallas, Texas and Seattle, Washington are leased.

ITEM 3		— LEGAL PROCEEDINGS

We are involved in various unresolved legal matters that arise in the normal course of operations, the most prevalent of which relate to commercial contracts and premises and professional liability matters. Although the outcome of these matters cannot be predicted with certainty and favorable or unfavorable resolutions may affect the results of operations on a quarter-to-quarter basis, we believe that the outcome of such legal and other matters will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity. See “Legal Proceedings and Insurance in Item 1 of this report.

ITEM 4		— (REMOVED AND RESERVED)

Executive Officers of the Registrant

Listed below are the executive officers of ALC, together with their ages, positions and business experience for the past five years. All executive officers hold office at the pleasure of the Board of Directors.

Name		Age		Position
Laurie A. Bebo		40		President and Chief Executive Officer
John Buono		47		Senior Vice President, Chief Financial Officer and Treasurer
Walter A. Levonowich		54		Vice President and Controller
Mary T. Zak-Kowalczyk		47		Vice President and Corporate Secretary

Laurie A. Bebo. Ms. Bebo was Chief Operating Officer of ALC from February 2005 to November 2006 when she became President and Chief Executive Officer of ALC. She was elected a director of ALC in May 2008. Prior to February 2005, Ms. Bebo was employed by EHSI and was responsible for EHSI’s skilled nursing, assisted living and independent living operations.

John Buono. From 2005 until joining ALC in October 2006, Mr. Buono was a consultant to Wind Lake Solutions, Inc., an engineering consulting firm. From 2003 to 2005, Mr. Buono was the Chief Financial Officer and Secretary of Total Logistics, Inc., a publicly-owned provider of logistics services and manufacturer of refrigerator casements, and from 1988 until 2001 Mr. Buono was the Corporate Director-Accounting and Assistant Treasurer of Sybron International, Inc., a publicly-owned manufacturer of products for the laboratory and dental industries.

Walter A. Levonowich. Mr. Levonowich has been Vice President and Controller of ALC since February 2005. Prior to February 2005, he held a number of positions in various financial capacities with EHSI and its subsidiaries, including Vice President of Reimbursement Services and Vice President of Accounting.

Mary T. Zak-Kowalczyk. Ms. Zak-Kowalczyk was appointed Vice President and Corporate Secretary in December 2010. Prior to this appointment, Ms. Zak-Kowalczyk has been Senior Corporate Counsel for ALC since May 2006. From 2000 to 2006, she was employed by EHSI as corporate counsel and advised EHSI’s skilled nursing, assisted living and independent living operations on a variety of legal matters.

PART II

ITEM 5		— MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Effective March 16, 2009, we implemented a one-for-five reverse stock split of our Class A Common Stock, par value $0.01 per share, and Class B Common Stock, par value $0.01 per share. All share amounts, stock prices, and per share data in this report have been adjusted to reflect this reverse stock split.

On November 10, 2006, we issued 11,508,633 shares of Class A Common Stock, $0.01 par value, and 2,355,687 shares of Class B Common Stock, $0.01 par value in connection with the Separation.

Our Class A Common Stock is listed and began trading on the New York Stock Exchange under the symbol “ALC” on November 10, 2006. The following table shows the high and low sales prices of our Class A Common Stock during the last two fiscal years as reported by the NYSE.

		High				Low
2010:
First quarter		$	35.98			$	24.24
Second quarter		$	37.48			$	29.00
Third quarter		$	33.87			$	26.15
Fourth quarter		$	35.00			$	29.01
2009:
First quarter		$	23.90			$	12.07
Second quarter		$	20.18			$	12.76
Third quarter		$	23.65			$	12.98
Fourth quarter		$	26.75			$	19.56

The closing sale price of our Class A Common Stock as reported on the NYSE on March 3, 2011, was $37.04 per share. As of that date there were 273 holders of record.

Our Class B Common Stock is neither listed nor publicly traded. On March 3, 2011, there were 58 holders of record of our Class B Common Stock.

The relative rights of the Class A Common Stock and the Class B Common Stock are substantially identical in all respects, except for voting rights, conversion rights and transferability. Each share of Class A Common Stock entitles the holder to one vote and each share of Class B Common Stock entitles the holder to ten votes with respect to each matter presented to our stockholders on which the holders of common stock are entitled to vote.

Each share of Class B Common Stock is convertible at any time and from time to time at the option of the holder thereof into 1.075 shares of Class A Common Stock. In addition, any shares of Class B Common Stock transferred to a person other than a permitted holder (as described in our amended and restated articles of incorporation) of Class B Common Stock will automatically convert into shares of Class A Common Stock on a 1:1.075 basis upon any such transfer. Shares of Class A Common Stock are not convertible into shares of Class B Common Stock.

A reconciliation of our outstanding shares since the Separation is as follows:

				Class A				Class B
				Common				Common				Treasury
				Stock				Stock				Stock
November 10, 2006					11,508,633				2,355,687				—
		Conversion of Class B to Class A			391,751				(364,419	)			—
December 31, 2006					11,900,384				1,991,268				—
		Conversion of Class B to Class A			264,203				(245,776	)			—
		Repurchase of Class A Common Stock			(938,212	)			—				938,212
December 31, 2007					11,226,375				1,745,492				938,212
		Conversion of Class B to Class A			197,125				(183,391	)			—
		Repurchase of Class A Common Stock			(980,187	)			—				980,187
December 31, 2008					10,443,313				1,562,101				1,918,399
		Conversion of Class B to Class A			35,813				(33,451	)			—
		Repurchase of Class A Common Stock			(430,452	)			—				430,452
December 31, 2009					10,048,674				1,528,650				2,348,851
		Conversion of Class B to Class A			8,844				(8,340	)			—
		Repurchase of Class A Common Stock			(92,485	)			—				92,485
		Issuance of shares for stock options			2,000				—				—
December 31, 2010					9,967,033				1,520,310				2,441,336

ISSUER PURCHASES OF EQUITY SECURITIES

The following summary of repurchases of Class A Common Stock during the fourth quarter of 2010 is provided in compliance with Item 703 of Regulation S-K.

														(d)
														Maximum Number
										(c)				(or Approximate
										Total Number of				Dollar Value) of
										Shares Purchased as				Shares that May Yet
		(a)				(b)				Part of Publicly				Be Purchased Under
		Total Number of				Average Price Paid				Announced Plans or				the Plans or
Period		Shares Purchased (1)				Per Share				Programs				Programs (1)
October 1, 2010 to October 31, 2010			5,600			$	29.38				5,600			$	14,669,460
November 1, 2010 to November 30, 2010			12,800			$	30.42				12,800			$	14,280,115
December 1, 2010 to December 31, 2010			6,700			$	31.00				6,700			$	14,072,417
Total			25,100			$	30.34				25,100			$	14,072,417

Performance Graph

The following Performance Graph shows the changes for the period beginning November 10, 2006 (the Separation Date) and ended December 31, 2010 in the value of $100 invested in: (1) ALC’s Class A Common Stock; (2) the Standard & Poor’s Broad Market Index (the “S&P 500”); and (3) the common stock of the peer group (as defined below) of companies, whose returns represent the arithmetic average for such companies. The values shown for each investment are based on changes in share price and assume the immediate reinvestment of any cash dividends.

COMPARISON OF CUMULATIVE TOTAL RETURN SINCE NOVEMBER 10, 2006
AMONG ASSISTED LIVING CONCEPTS, INC.,
THE S&P 500 INDEX, AND THE PEER GROUP

The following graph assumes $100 invested at the beginning of the measurement period in our Class A Common Stock, the S&P 500 and the peer group, with reinvestment of dividends, and was plotted using the following data:

After reviewing publicly filed documents of various companies, ALC determined that a peer group consisting of Brookdale Senior Living, Inc., Capital Senior Living Corporation, Emeritus Corporation, Five Star Quality Care, Inc. and Sunrise Assisted Living, Inc. most closely matches ALC in terms of market capitalization and market niche.

Dividends

We presently do not intend to pay dividends. Payment of future cash dividends, if any, will be at the discretion of our Board of Directors in accordance with applicable law after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, plans for expansion, and contractual restrictions with respect to the payment of dividends. Dividends may be restricted under our revolving credit agreement if we fail to maintain consolidated leverage ratio levels specified in that facility.

ITEM 6		— SELECTED FINANCIAL DATA

The following selected financial data as of and for each of the five years in the period ended December 31, 2010 have been derived from our audited consolidated financial statements. The selected financial data do not purport to indicate results of operations as of any future date or for any future period. The selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this report.

The consolidated financial statements of ALC have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s most significant estimates include measurement of acquired assets and liabilities in business combinations, valuation of assets and determination of asset impairment, self-insured liabilities for general and professional liability, workers’ compensation and health and dental claims, valuation of conditional asset retirement obligations, and valuation of deferred tax assets. Actual results could differ from those estimates.

Certain reclassifications have been made to the consolidated financial statements to conform to the presentation for 2010.

The financial information presented below may not reflect what our results of operations, financial position and cash flows will be in the future.

		Years Ended December 31,
		2010				2009				2008				2007				2006
										[-------------------- (Reclassified)1--------------------]
		(In thousands, except per share data)
Income Statement Data:
Revenues		$	233,128			$	228,723			$	231,576			$	225,906			$	227,427
Expenses:
Residence operations (exclusive of depreciation and amortization and residence lease expense shown below)			139,689				142,048				150,645				149,168				151,125
General and administrative			15,080				13,515				12,789				13,073				10,857
Residence lease expense			19,846				20,044				19,910				14,323				14,302
Depreciation and amortization			22,806				21,219				18,333				17,290				16,363
Goodwill impairment			—				16,315				—				—				—
Impairment of long-lived assets			—				148				—				—				3,080
Transaction costs			—				—				—				56				4,415
Total operating expenses			197,421				213,289				201,677				193,910				200,142
Income from operations			35,707				15,434				29,899				31,996				27,285
Other expense:
Other-than- temporary investments impairment			(2,026	)			—				—				—				—
Other			23				—				—				—				—
Interest income			11				54				614				1,631				852
Interest expense			(7,782	)			(7,343	)			(7,149	)			(6,201	)			(9,444	)
Income from continuing operations before income taxes			25,933				8,145				23,364				27,426				18,693
Income tax expense			(9,449	)			(7,343	)			(8,652	)			(10,287	)			(8,508	)
Net income from continuing operations			16,484				802				14,712				17,139				10,185
Net income (loss) from discontinued operations			—				(957	)			(389	)			40				(1,176	)
Net income (loss)		$	16,484			$	(155	)		$	14,323			$	17,179			$	9,009
Per share data:
Basic earnings per common share:
Income from continuing operations		$	1.43			$	0.07			$	1.18			$	1.26			$	0.73
Loss from discontinued operations			—				(0.08	)			(0.03	)			—				(0.08	)
Net income (loss)		$	1.43			$	(0.01	)		$	1.15			$	1.26			$	0.65
Diluted earnings per common share:
Income from continuing operations		$	1.41			$	0.07			$	1.17			$	1.25			$	0.73
Loss from discontinued operations			—				(0.08	)			(0.03	)			—				(0.08	)
Net income (loss)		$	1.41			$	(0.01	)		$	1.14			$	1.25			$	0.65

		Years Ended December 31,
		2010				2009				2008				2007				2006
										[-------------------- (Reclassified)1--------------------]
		(In thousands)
Balance Sheet Data (at end of period):
Cash and cash equivalents		$	13,364			$	4,360			$	19,905			$	14,066			$	19,951
Property and equipment			437,303				415,454				413,149				385,539				364,763
Total assets			485,104				455,369				498,621				476,241				447,340
Total debt			132,110				121,737				147,756				120,797				81,366
Stockholders’ equity			289,259				272,971				279,739				294,534				316,838

ITEM 7		— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. Forward-looking statements are subject to risks, uncertainties and assumptions which could cause actual results to differ materially from those projected, including those described in Item 1A, “Risk Factors,” in Part I of this report and in “Forward-Looking Statements and Cautionary Factors” in Item 9B, “Other Information,” in Part II of this report.

The following discussion should be read in conjunction with our consolidated financial statements and the related notes to the consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” in Part II of this report.

Executive Overview

In 2010, we continued to pursue our strategy of increasing both revenues and profitability by increasing private pay occupancy.

On a continuing residence basis, average private pay occupancy in the year ended December 31, 2010 increased by 90 units as compared to the year ended December 31, 2009. Over the course of 2010, private pay average occupancy levels trended up. Average private pay occupied units in continuing residences in 2010 were 5,468, 5,476, 5,492 and 5,495 for the first, second, third and fourth quarters, respectively. We believe our success in attracting and maintaining private pay residents in 2010 was, and may continue to be, affected by the current poor general economic conditions. Poor general economic conditions, especially those related to high unemployment levels and poor housing markets, affect private pay occupancy because:

•

family members are more willing and able to provide care at home;

•

residents have insufficient investment income or are unable to obtain necessary funds from the sale of their homes or other investments; and

•

independent living facilities are accepting traditional assisted living residents with home care services.

The impact of these factors is referred to in this report as the “Recession Impact”. In the event general economic conditions fail to improve or get worse, we believe there can be negative pressure on our private pay occupancy.

Historically, a relatively large proportion of our residents paid for assisted living services through Medicaid programs. Since December 31, 2005, we have reduced the proportion of our residents who pay through Medicaid programs from 30% to less than 2% at December 31, 2010. We believe the planned reduction in Medicaid occupancy is a necessary part of our long-term operating strategy to improve our overall revenue base because:

•

our private pay rates generally exceed those paid through Medicaid reimbursement programs by 50% to 70%;

•

we reduce our exposure to reductions in reimbursement rates provided by government programs; and

•

our private pay residents typically have less severe health needs and require fewer services than residents funded by Medicaid programs, resulting in:

	•		a better fit for our social and wellness model; and
	•		a safer environment for employees and the other residents in our communities.

On a continuing residence basis, average Medicaid occupancy in the year ended December 31, 2010 decreased by 257 units as compared to the year ended December 31, 2009. Our Medicaid census continues to decline overall because we no longer accept new Medicaid residents at all but one of our residences. This planned reduction in Medicaid occupancy is referred to in this report as the “Medicaid Impact”. We expect the Medicaid Impact to lessen in 2011 and beyond. Our fourth quarter 2010 Medicaid occupancy represents less than 2% of our overall revenue.

We review our rates on an annual basis or as market conditions dictate. As in past years, we implemented rate increases as of the first of January. On a continuing residence basis, for the year ended December 31, 2010, rate increases, combined with our improved mix of private pay occupancy, resulted in an overall average rate increase of 5.0%. The increase in overall rates was attributable to an average private pay rate increase of 3.4%, enhanced by an improvement in our private pay mix. These increases compared to rate increases in the year ended December 31, 2009 of 5.7% and 4.4% for average overall and average private pay rates, respectively. Our private pay rate increases in 2010 were affected by the Recession Impact. We expect private pay rate increases in 2011 to range from 2.5% to 3.0%. Because our census of residents paying through Medicaid programs has and is expected to continue to decline, we expect our future overall rate increases to be impacted less by changes in payer mix.

Average occupancy as a percentage of total available units for all continuing residences in the years ended December 31, 2010, 2009 and 2008 was 62.5%, 64.2%, and 69.1%, respectively. Average private pay occupancy as a percentage of total occupied units in the years ended December 31, 2010, 2009 and 2008 for all continuing residences was 97.3%, 93.0%, and 88.6%, respectively. Private pay revenue as a percentage of total revenues for all continuing residences in the years ended December 31, 2010, 2009 and 2008 was 98.3%, 95.3% and 91.9%, respectively.

From time to time, we may increase or reduce the number of units we actively operate, which may affect reported occupancy and occupancy percentages.

Unit expansions

We have opened 347 units as part of our previously announced expansion program. These openings added 96 units to the average number of available units in the year ended December 31, 2010 as compared to the year ended December 31, 2009. The additional average occupied units from the expansion increased private pay occupancy during the year ended December 31, 2010 by 54 units as compared to the year ended December 31, 2009.

Acquisitions

On November 1, 2010, ALC completed the acquisition of nine senior living residences from HCP, Inc. The nine residences were previously leased and operated by ALC under leases expiring between November 2010 and May 2012. The purchase price was $27.5 million in cash plus certain transaction costs. As part of the consideration, ALC reclassified $0.5 million of unamortized leasehold improvements to property and equipment. The nine residences, two of which are located in New Jersey and seven in Texas, contain a total of 365 units.

Discontinued Operations

In the third quarter of 2009, ALC elected not to exercise a purchase option on five residences it operated under a master lease agreement. As a result, after the close of business on December 31, 2009 ALC ceased operating four of the five residences and has classified these four residences (consisting of 118 units) as discontinued operations. The remaining residence (consisting of 39 units) will continue to be operated by ALC under an operating lease which expires in February 2014 (with a right to extend an additional five years). For the year ended December 31, 2009, the discontinued units were occupied by an average of 59 private pay residents and 9 Medicaid residents.

Business Strategies

We plan to grow our revenue and operating income and improve our overall revenue base by:

•

increasing our private pay occupancy;

•

increasing the overall size of our portfolio by building additional capacity and making acquisitions;

•

applying operating efficiencies achievable from owning a large number of senior living residences; and

•

increasing the attractiveness and operating results of our portfolio by refurbishing and repositioning residences or eliminating residences that do not meet our internal goals.

Increasing our private pay occupancy

One of our continuing strategies is to increase the number of residents in our communities by filling existing vacancies with private pay residents. Prior strategies to decrease the number of units available for residents who rely on Medicaid have resulted in a significant number of unoccupied units. We use a focused sales and marketing effort designed to increase demand for our services among private pay residents and to establish ALC as the provider of choice for residents who value wellness and quality of care.

If general economic conditions fail to improve, our ability to fill vacant units with private pay residents may continue to be limited and the occupancy and revenue challenges may continue.

Increasing the overall size of our portfolio by building additional capacity and making acquisitions

We continually review our portfolio for opportunities to add capacity to our best performing buildings.

In February 2007, we announced plans to add a total of 400 units to our existing owned buildings. By the end of 2010, we had completed, licensed, and begun accepting new residents in 367 of these units.

Construction continues on the remaining expansion units. As of the date of this report, we are targeting completion of 20 units in the first quarter of 2011. Since the inception of our expansion program we have spent $41.1 million through December 31, 2010, and our cost for the program has been $113,000 per unit, or a total of $41.5 million. This unit cost includes the addition of common areas such as media rooms, family gathering areas and exercise facilities. Our process of selecting buildings for expansion consisted of identifying what we believe to be our best performing buildings as determined by factors such as occupancy, strength of the local management team, private pay mix, and demographic trends for the area.

We expect to continue to evaluate our portfolio of properties for potential expansion opportunities.

We intend to continue to grow our portfolio of residences by making selective acquisitions in markets with favorable private pay demographics. Because of the size of our operations and the depth of our experience in the senior living industry, we believe we are able to effectively identify and maximize cost efficiencies and expand our portfolio by investing in attractive assets in our target markets. Additional regional, divisional and corporate costs associated with our growth are anticipated to be proportionate to current operating levels. Acquiring additional properties can require significant outlays of cash. Our ability to make future acquisitions may be limited by general economic conditions affecting credit markets. See “Future Liquidity and Capital Resources” below.

Applying efficiencies achievable from operating a large number of senior living residences

The senior living industry is large and fragmented and characterized by many small and regional operators. According to figures available from the American Seniors Housing Association, the top five operators of senior living residences measured by total resident capacity service less than 14% of total capacity. We leverage the efficiencies of scale we have achieved through the consolidated purchasing power of our residences, our standardized operating model, and our centralized financial and management functions to lower costs at our residences.

Increasing the attractiveness and operating results of our portfolio by refurbishing and repositioning residences or eliminating residences that do not meet our internal goals

We continually evaluate our portfolio to identify opportunities to improve the attractiveness and operating results of our residences. We regularly upgrade and replace items such as flooring, wall coverings, furniture and dishes and flatware at our residences. In addition, from time to time we may temporarily close residences to facilitate refurbishing and repositioning them in the marketplace. If we determine that the investment necessary to refurbish and reposition a residence is not warranted, we may seek to remove the residence from our portfolio through sale or other disposition.

In April 2008 we temporarily closed a 50 unit residence in Texas. In 2009 we temporarily closed three residences consisting of 109 units in Oregon and subsequently reopened two of them consisting of 76 units in the fourth quarter of 2009 after refurbishment. Also in the fourth quarter of 2009, we closed two properties consisting of a total of 100 units in Arizona and one property consisting of 35 units in Idaho. In the first quarter of 2010, we closed a property in New Jersey consisting of 39 units. On January 1, 2011 we closed 2 properties consisting of 39 units in Washington and 35 units in Idaho. While we currently expect to refurbish all of our closed residences, we are also considering a variety of other options, including the sale of one or more of these residences. We believe the temporarily closed residences are located in markets with strong growth potential but require some updating and repositioning in the market. Once underway, refurbishments are expected to take three to six months to complete. Following refurbishment, we expect these projects will take approximately twelve additional months to stabilize occupancy. We spent approximately $200,000 to $400,000 on each of our reopened refurbishment projects and expect the cost of other refurbishments to be in that range.

In the third quarter of 2009 we elected not to exercise a purchase option on five residences in Oregon. As a result, we ceased operating four of the five residences following the close of business on December 31, 2009.

The remainder of this Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:

•

Business Overview: This section provides a general financial description of our business, including the sources and composition of our revenues and operating expenses. In addition, this section outlines the key performance indicators that we use to monitor and manage our business and to anticipate future trends.

•

Consolidated Results of Operations: This section provides an analysis of our results of operations for the year ended December 31, 2010 compared to the year ended December 31, 2009 and the year ended December 31, 2009 compared to the year ended December 31, 2008.

•

Liquidity and Capital Resources: This section provides a discussion of our liquidity and capital resources as of December 31, 2010, and our expected future cash needs.

•

Critical Accounting Policies: This section discusses accounting policies which we consider to be critical to obtain an understanding of our consolidated financial statements because their application on the part of management requires significant judgment and reliance on estimations of matters that are inherently uncertain.

In addition to our core business, ALC holds share investments in Omnicare, Inc., a publicly traded corporation in the United States, BAM Investments Corporation, a Canadian publicly traded company, and MedX Health Corporation, a Canadian publicly traded corporation, and cash or other investments held by Pearson Indemnity Company Ltd. (“Pearson”), our wholly-owned consolidated Bermuda based captive insurance company formed primarily to provide self insured general and professional liability coverage.

Basis of Presentation of Historical Consolidated Financial Statements

The following is a description of significant events that occurred in our business since January 2008 and how those events affected the basis of presentation of our historical consolidated financial statements:

•

Effective January 1, 2008, we acquired the operations of BBLRG, LLC doing business as CaraVita (the “CaraVita Acquisition”), consisting of eight leased residences. The operations included a total of 541 units for a purchase price including expenses of $14.8 million. The residences, five of which are located in Georgia and one in each of South Carolina, Alabama and Florida, were occupied with 481 private pay residents at the time of acquisition. The lease has an initial term expiring in March 2015 with three five-year renewal options.

•

From December 31, 2007 to December 31, 2010, we constructed and opened 17 new additions consisting of a total of 347 units.

•

Effective December 31, 2009, we terminated the lease of four residences consisting of 118 units. For purposes of the audited consolidated financial statements, these residences have been reported as discontinued operations.

•

Effective November 1, 2010, we purchased nine residences consisting of 365 units which we had previously leased.

Business Overview

Revenues

We generate revenue from private pay and Medicaid sources. For the years ended December 31, 2010, 2009 and 2008, approximately 98%, 95% and 92%, respectively, of our revenues were generated from private pay sources. Residents are charged an accommodation fee that is based on the type of accommodation they occupy and a service fee that is based upon their assessed level of care. We generally offer studio, one-bedroom and two-bedroom accommodations. The accommodation fee is based on prevailing market rates of similar senior living accommodations. The service fee is based upon periodic assessments, which include input of the resident and the resident’s physician and family and establish the additional hours of care and service provided to the resident. We offer various levels of care for our residents who require less or more frequent and intensive care or supervision. For the years ended December 31, 2010, 2009 and 2008 approximately 76%, 77% and 78%, respectively, of our private pay revenue was derived from accommodation fees with the balance derived from service fees. Both the accommodation and level of care service fees are charged on a per day basis, pursuant to residency agreements.

Medicaid rates are generally lower than rates earned from private payers. Therefore, we consider our private pay mix an important performance indicator.

Although we intend to continue to reduce the number of units occupied by residents paying through Medicaid, as of December 31, 2010, we provided assisted living services to Medicaid funded residents at 22 of the residences we operate. Medicaid programs in each state determine the revenue rates for accommodations and levels of care. The basis of the Medicaid rates varies by state.

Residence Operations Expenses

For all continuing residences, as defined below, residence operations expense percentages consisted of the following:

		2010				2009				2008
Wage and benefit costs			60	%			61	%			61	%
Property related costs			23				22				21
Other operating costs			17				17				18
Total			100	%			100	%			100	%

The largest component of our residence operations expense consist of wages and benefits and property related costs which include utilities, property taxes, and building maintenance related costs. Other operating costs include food, advertising, insurance, and other operational costs related to providing services to our residents. Wage and benefit costs are generally variable (with the exception of minimum staffing requirements as provided from state to state) and can be adjusted with changes in census. Property related costs are generally fixed while other operating costs are a mix of fixed (i.e. insurance) and variable costs (i.e. food).

Key Performance Indicators

We manage our business by monitoring certain key performance indicators. We believe our most important key performance indicators are:

Census

Census is defined as the number of units that are occupied at a given time.

Average Daily Census

Average daily census, or ADC, is the sum of occupied units for each day over a period of time, divided by the number of days in that period.

Occupancy

Occupancy is measured as the percentage of average daily census relative to the total number of units available for occupancy in the period.

Private Pay Mix

Private pay occupancy mix is the measure of the percentage of private or non-Medicaid census. Private pay revenue mix is the measure of the percentage of private or non-Medicaid revenues. We focus on increasing private pay mix.

Average Revenue Rate

The average revenue rate represents the average daily revenues earned from accommodation and service fees provided to private pay and Medicaid residents. The daily revenue rate is calculated by dividing aggregate revenues earned by the ADC in the corresponding period.

Adjusted EBITDA and Adjusted EBITDAR

Adjusted EBITDA is defined as net income from continuing operations before income taxes, interest expense net of interest income, depreciation and amortization, non-cash equity based compensation expense, transaction costs and non-cash, non-recurring gains and losses, including disposal of assets, impairment of goodwill and other long-lived assets and impairment of investments. Adjusted EBITDAR is defined as Adjusted EBITDA before rent expenses incurred for leased assisted living properties. Adjusted EBITDA and Adjusted EBITDAR are not measures of performance under accounting principles generally accepted in the United States of America, or GAAP. We use Adjusted EBITDA and Adjusted EBITDAR as key performance indicators and Adjusted EBITDA and Adjusted EBITDAR expressed as a percentage of total revenues as a measurement of margin.

We understand that EBITDA and EBITDAR, or derivatives of these terms, are customarily used by lenders, financial and credit analysts, and many investors as a performance measure in evaluating a company’s ability to service debt and meet other payment obligations or as a common valuation measurement in the long-term care industry. Moreover, our revolving credit facilities contain covenants in which a form of EBITDA is used as a measure of compliance, and we anticipate a form of EBITDA will be used in covenants in any new financing arrangements that we may establish. We believe Adjusted EBITDA and Adjusted EBITDAR provide meaningful supplemental information regarding our core results because these measures exclude the effects of non-operating factors related to our capital assets, such as the historical cost of the assets.

We report specific line items separately and exclude them from Adjusted EBITDA and Adjusted EBITDAR because such items are transitional in nature and would otherwise distort historical trends. In addition, we use Adjusted EBITDA and Adjusted EBITDAR to assess our operating performance and in making financing decisions. In particular, we use Adjusted EBITDA and Adjusted EBITDAR in analyzing potential acquisitions and internal expansion possibilities. Adjusted EBITDAR performance is also used in determining compensation levels for our senior executives. Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as substitutes for net income, cash flows from operating activities, and other income or cash flow statement data prepared in accordance with GAAP, or as measures of profitability or liquidity. In this report, we present Adjusted EBITDA and Adjusted EBITDAR on a consistent basis from period to period, thereby allowing for comparability of operating performance.

Review of Key Performance Indicators

In order to compare our performance between periods, we assess the key performance indicators for all of our continuing residences. All “continuing residences” are defined as all residences excluding four assisted living residences in Oregon that ALC discontinued operating as of December 31, 2009. From time to time, we may temporarily close residences and subsequently reopen them after refurbishment which will increase or decrease the number of units we actively operate. These residences are included in continuing operations as long as they are available for occupancy.

In addition, we assess key performance indicators for residences that we operate in all reported periods, or “same residence” operations. Same residence operations includes those residences that have been available for occupancy for the entire reporting period. The same residence tables below exclude the 17 additions consisting of 347 units which were added to existing properties since December 31, 2008, and the eight residences that were temporarily closed at any point in time since December 31, 2007.

ADC

All Continuing Residences

The following table sets forth our average daily census for the years ended December 31, 2010, 2009 and 2008 for both private pay and Medicaid residents for all of the continuing residences whose results are reflected in our consolidated financial statements:

Average Daily Census

		2010				2009				2008
Private pay			5,483				5,393				5,482
Medicaid			151				408				708
Total ADC			5,634				5,801				6,190
Private pay occupancy mix			97.3	%			93	%			88.6	%
Private pay revenue mix			98.3	%			95.3	%			91.9	%

During 2010, total ADC decreased 2.9% from the prior year. Private pay ADC increased 1.7% from the prior year primarily due to increases in occupancy in the new additions and existing units, partially offset by the Recession Impact. Medicaid ADC decreased 63.0% from the prior year due to the Medicaid Impact. As a result of the Medicaid Impact, and the increase in private pay residents, the private pay occupancy mix increased in percentage from 93.0% to 97.3% and the private pay revenue mix increased from 95.3% to 98.3%. During 2009, total ADC decreased 6.3% from the prior year. Private pay ADC decreased 1.6% from the prior year primarily due to the Recession Impact, partially offset by increases in occupancy in the new additions. Medicaid ADC decreased 42.4% from the prior year due to the Medicaid Impact. As a result of the Medicaid Impact, partially offset by the Recession Impact, the private pay occupancy mix increased in percentage from 88.6% to 93.0% and the private pay revenue mix increased from 91.9% to 95.3%.

Same Residence Basis

The following table sets forth our average daily census for the years ended December 31, 2010, 2009 and 2008 for both private and Medicaid payers for all residences on a same residence basis.

Average Daily Census

		2010				2009				2008
Private pay			5,360				5,317				5,416
Medicaid			150				357				607
Total ADC			5,510				5,674				6,023
Private pay occupancy mix			97.3	%			93.7	%			89.9	%
Private pay revenue mix			98.2	%			95.7	%			92.8	%

During 2010, total ADC on a same-residence basis decreased 2.9% from the prior year. Private pay ADC increased 0.8% primarily from increased occupancy from sales and marketing efforts. Medicaid ADC decreased 58.0% from the prior year due to the Medicaid Impact. As a result of the Medicaid Impact and the increase in private pay occupancy, the private pay occupancy mix increased in percentage from 93.7% to 97.3% and the private pay revenue mix increased from 95.7% to 98.2%. During 2009, total ADC on a same-residence basis decreased 6.6% from the prior year. Private pay ADC decreased 2.2% primarily from the Recession Impact. Medicaid ADC decreased 40.9% from the prior year due to the Medicaid Impact. As a result of the Medicaid Impact, partially offset by the Recession Impact, the private pay occupancy mix increased in percentage from 88.7% to 92.8% and the private pay revenue mix increased from 91.9% to 95.1%.

Occupancy Percentage

Occupancy percentages are affected by our acquisition of residences in lease-up mode and additions to existing residences as the residence is filling the additional units. After the completion of construction, we generally plan for additional units to take anywhere from one to one and a half years to reach optimum occupancy levels (defined by us as at least 90%). Recently the fill up rate has been slower than expected primarily due to the Recession Impact.

Due to the impact on occupancy rates that developmental units have on historical results, we split occupancy information between mature and developmental units. In general, developmental units are defined as the additional units in a residence that has undergone an expansion or in a new residence that has opened. New units identified as developmental are classified as such for a period of no longer than 12 months after completion of construction. Between January 1, 2008 and December 31, 2010, we completed the following projects that increased our operational capacity: (1) 2008— the CaraVita Acquisition (eight residences comprising 541 units) and four additions (78 units), (2) 2009 — twelve additions (244 units), and (3) 2010 one addition (25 units). The CaraVita Acquisition is classified as mature as these residences were approximately 90% occupied upon purchase. All units that are not developmental are considered mature units.

All Continuing Residences

The following table sets forth our occupancy percentages for the years ended December 31, 2010, 2009 and 2008 for all mature and developmental continuing residences whose results are reflected in our consolidated financial statements:

Occupancy Percentage

		2010				2009				2008
Mature			63.5	%			65.4	%			69.8	%
Developmental			28.1	%			20.1	%			44.3	%
Total residences			62.5	%			64.2	%			69.1	%

For 2010, we saw a decline in mature residences occupancy percentage from 65.4% to 63.5% and an increase in occupancy in our developmental residences from 20.1% to 28.1%. The reduction in mature occupancy is primarily a result of the Medicaid Impact and to a lesser extent, the Recession Impact. The increase in developmental occupancy is primarily a result of the 347 expansion units that were brought on line since December 31, 2008. For 2009, we saw a decline in mature residences occupancy percentage from 69.8% to 65.4% and a decrease in occupancy in our developmental residences from 44.3% to 20.1%. The reduction in mature occupancy is primarily a result of the Medicaid Impact and to a lesser extent, the Recession Impact. The reduction in developmental occupancy is primarily a result of the 322 expansion units that were brought on line in 2008 and 2009.

Occupancy percentages for all residences decreased from 69.1% in 2008 to 64.2% and to 62.5% in 2010.

Same Residence Basis

The following table sets forth the occupancy percentages outlined above on a same residence basis:

Occupancy Percentage

		2010				2009				2008
Mature			64.1	%			66.0	%			70.2	%
Developmental			—				—				44.3	%
Total residences			64.1	%			66.0	%			69.5	%

For 2010, we saw a decline in mature residences occupancy percentage from 66.0% to 64.1%.

For 2009, we saw a decline in mature residences occupancy percentage from 70.2% to 66.0%.

Occupancy percentages on a same residence basis decreased from 69.5% in 2008 to 66.0% in 2009 and to 64.1% in 2010.

The declines in our mature and total occupancy percentage for 2010 through 2008 were due primarily to the Medicaid Impact and the Recession Impact.

Average Revenue Rate

All continuing residences

The following table sets forth our average daily revenue rates for the years ended December 31, 2010, 2009 and 2008 for all continuing residences whose results are reflected in our historical consolidated financial statements:

		2010				2009				2008
Average daily revenue rate		$	113.37			$	108.02			$	102.22

The average daily revenue rate increased 5.0% and 5.7% in 2010 and 2009, respectively. In 2010, the average daily revenue rate increased primarily as a result of annual rate increases for both room and board and an improvement in the private pay revenue mix. In 2009, the average daily revenue rate increased primarily as a result of annual rate increases for both room and board and services and an improvement in private pay revenue mix.

Number of Residences Under Operations

The following table sets forth the number of residences under operations as of December 31:

		2010				2009(1)				2008
Owned(2)			161				152				153
Under capital lease			—				—				5
Under operating leases			50				63				58
Total under operation			211				215				216
Percent of residences:
Owned			76.3	%			70.7	%			70.8	%
Under capital leases			—				—				2.3
Under operating leases			23.7				29.3				26.9
			100.0	%			100.0	%			100.0	%

ADJUSTED EBITDA and ADJUSTED EBITDAR

The following table sets forth a reconciliation of net income to Adjusted EBITDA and Adjusted EBITDAR for the years ended December 31:

		2010				2009				2008
		(In thousands)
Net income (loss)		$	16,484			$	(155	)		$	14,323
Loss from discontinued operations, net of taxes			—				957				389
Provision for income taxes			9,449				7,343				8,652
Income from continuing operations before income taxes			25,933				8,145				23,364
Add:
Depreciation and amortization			22,806				21,219				18,333
Write-down of equity investments			2,026				—				—
Gain on sale of securities			(23	)			—				—
Interest income			(11	)			(54	)			(614	)
Interest expense			7,782				7,343				7,149
Goodwill impairment			—				16,315				—
Loss on impairment of long-lived assets			—				148				—
Non-cash equity based compensation			659				406				99
Transaction fees			128				—				—
Loss on sale or disposal of fixed assets			224				54				382
Adjusted EBITDA			59,524				53,576				48,713
Add: Lease expense			19,846				20,044				19,910
Adjusted EBITDAR		$	79,370			$	73,620			$	68,623

The following table sets forth the calculations of Adjusted EBITDA and Adjusted EBITDAR percentages for the years ended December 31:

		2010				2009				2008
		(Dollars in thousands)
Revenues		$	233,128			$	228,723			$	231,576
Adjusted EBITDA		$	59,524			$	53,576			$	48,713
Adjusted EBITDAR		$	79,370			$	73,620			$	68,623
Adjusted EBITDA as percent of total revenue			25.5	%			23.4	%			21.0	%
Adjusted EBITDAR as percent of total revenue			34.0	%			32.2	%			29.6	%

For 2010, Adjusted EBITDA increased by $5.9 million, or 11.1%, over 2009 and Adjusted EBITDAR increased by $5.6 million, or 7.6%, over 2009.

For 2009, Adjusted EBITDA increased by $4.9 million, or 10.0%, over 2008 and Adjusted EBITDAR increased by $5.0 million, or 7.3%, over 2008.

Adjusted EBITDAR increased in the year ended December 31, 2010 primarily from the increase in revenues discussed below ($4.4 million), and a decrease in residence operations expenses ($2.4 million) (this excludes the loss on disposal of fixed assets of $0.2 million), partially offset by an increase in general and administrative expenses ($1.1 million) (this excludes non-cash equity based compensation of $0.7 million and transaction fees of $0.1 million). Adjusted EBITDA increased in the year ended December 31, 2010 for the same reasons as Adjusted EBITDAR and from a decrease in residence lease expense ($0.2 million).

Please see the review of consolidated results of operations below for a discussion of the fluctuations in the components of Adjusted EBITDA and Adjusted EBITDAR.

Please see “— Business Overview — Key Performance Indicators — Adjusted EBITDA and Adjusted EBITDAR” above for a discussion of our use of Adjusted EBITDA and Adjusted EBITDAR and a description of the limitations of such use.

Consolidated Results of Operations

Three Year Financial Comparative Analysis

The following table sets forth details of our revenues and income as a percentage of total revenues for the years ended December 31:

		2010				2009				2008
Revenues			100.0	%			100.0	%			100.0	%
Residence operations (exclusive of depreciation and amortization and residence lease expense shown below)			59.9				62.1				65.1
General and administrative			6.5				5.9				5.5
Residence lease expense			8.5				8.8				8.6
Depreciation and amortization			9.8				9.3				7.9
Goodwill impairment			—				7.1				—
Impairment of long-lived asset			—				0.1				—
Total operating expenses			84.7				93.3				87.1
Income from operations			15.3				6.7				12.9
Other-than-temporary investment impairments			(0.9	)			—				—
Other			—				—				—
Interest income			—				—				0.3
Interest expense			(3.3	)			(3.2	)			(3.1	)
Income from continuing operations before income taxes			11.1				3.5				10.1
Income tax expense			(4.0	)			(3.2	)			(3.7	)
Loss from discontinued operations, net of taxes			—				(0.4	)			(0.2	)
Net income (loss)			7.1	%			(0.1	)%			6.2	%

Year Ended December 31, 2010 Compared with the Year Ended December 31, 2009

Revenues

Revenues in the year ended December 31, 2010 increased $4.4 million from the year ended December 31, 2009 primarily due to higher average daily revenue from rate increases ($7.5 million) and an increase in private pay occupancy ($3.7 million), partially offset by the planned reduction in the number of units occupied by Medicaid residents ($6.8 million). The average number of units occupied by private pay residents increased by 90 units and the average number of units occupied by Medicaid residents declined by 257 units. Average private pay rates increased in the year ended December 31, 2010 by 3.4% over average private pay rates for the year ended December 31, 2009. Average overall rates, including the impact of improved payer mix, increased in the year ended December 31, 2010 by 5.0% over the comparable rates for the year ended December 31, 2009.

Residence Operations (exclusive of depreciation and amortization and residence lease expense shown below)

Residence operating costs decreased $2.4 million, or 1.7%, in the year ended December 31, 2010 compared to the year ended December 31, 2009. Residence operations expenses decreased $3.3 million primarily from lower payroll and benefits expense, $0.5 million from lower insurance costs and, $0.3 million from lower property taxes, partially offset by $0.6 million of higher utility costs, $0.6 million of higher bad debt expense and a $0.5 million increase in maintenance and repairs. Staffing needs in the year ended December 31, 2010 as compared to the year ended December 31, 2009, decreased primarily because of a decline in the number of units occupied by Medicaid residents who tend to have higher care needs than private pay residents. In addition, general economic conditions enabled us to hire new employees at lower wage rates.

General and Administrative

General and administrative costs increased $1.6 million, or 11.6%, in the year ended December 31, 2010 compared to December 31, 2009. General and administrative expense increased $1.4 million from salaries and benefits expense, $0.3 million of which was non-cash equity based compensation expense, $0.3 million from our annual conference and, $0.2 million from a non-recurring favorable legal settlement received in the third quarter of 2009, partially offset by a $0.3 million decrease in other administrative expenses.

Residence Lease Expense

Residence lease expense for the year ended December 31, 2010 decreased $0.2 million, or 1.0% from the year ended December 31, 2009. The acquisition of nine formerly leased properties on November 1, 2010 reduced lease expense by $0.4 million and resulted in the reversal of a purchase accounting reserve of $0.2 million. Effective December 31, 2009, one property which was previously treated as a capital lease, converted to an operating lease which resulted in an additional $0.3 million of lease expense in the year ended December 31, 2010 when compared to the year ended December 31, 2009. Other annual rent increases accounted for an additional increase in lease expense of $0.1 million.

Depreciation and Amortization

Depreciation and amortization increased $1.6 million to $22.8 million in the year ended December 31, 2010 compared to the year ended December 31, 2009. The $1.6 million increase in depreciation expense resulted from the impact of accelerating depreciation on nine residences whose leases were not renewed and were later purchased by ALC, the additions at residences that opened during 2009 that now have a full year of depreciation reflected in our financial statements, and from general capital expenditures across our portfolio. Amortization expense for 2010 was unchanged when compared to 2009.

Impairment of Goodwill

No impairment charge was recorded in 2010. The goodwill impairment charge for the first quarter of 2009 of $16.3 million resulted from a decline in our market capitalization. In accordance with accounting guidance, we performed an impairment test on goodwill and intangibles as of the end of the first quarter of 2009. As a result, we recorded a non-cash goodwill impairment charge of $16.3 million ($14.7 million net of related tax benefits) for 2009. The impairment charge was required as a result of the decline in the market value of our common stock primarily due to the depressed macroeconomic environment, constraints in the capital markets, and volatility in the equity markets.

Income from Operations

Income from operations for the year ended December 31, 2010 was $35.7 million compared to income from operations of $15.4 million for the year ended December 31, 2009 due to the reasons described above.

Other-Than-Temporary Investments Impairment

Other-than-temporary investments impairment was $2.0 million in the year ended December 31, 2010. In the second quarter of 2010, the Company performed its quarterly review of investment securities and determined impairment of certain investments were other-than-temporary. No such impairment was identified in the comparable period of 2009.

Other

Other represents the gain on sale of securities. There were no sales of investment securities in the year ended December 31, 2009.

Interest Income

Interest income was relatively unchanged in the year ended December 31, 2010 compared to the year ended December 31, 2009.

Interest Expense

Interest expense increased $0.4 million to $7.8 million in the year ended December 31, 2010 compared to the year ended December 31, 2009. The increase in interest expense was due to $0.5 million of additional interest expense on new mortgages, partially offset by a decrease of $0.1 million in credit facility interest expense due to lower outstanding balances on our $120 million revolving credit facility.

Income from Continuing Operations before Income Taxes

Income from continuing operations before income taxes for the year ended December 31, 2010 was $25.9 million compared to income from continuing operations before income taxes of $8.1 million for the year ended December 31, 2009 due to the reasons described above.

Income Tax Expense

Income tax expense for the year ended December 31, 2010 was $9.4 million compared to $7.3 million for the year ended December 31, 2009. Our effective tax rates for the year ended December 31, 2009 and 2010 are not directly comparable because of the non-tax deductible portion of our goodwill write-off in the year ended December 31, 2009. Excluding the goodwill impairment charge, our effective tax rates were 36.5% and 37.0% for the years ended December 31, 2010 and 2009, respectively.

Net Income from Continuing Operations

Net income from continuing operations for the year ended December 31, 2010 was $16.5 million compared to net income from continuing operations of $0.8 million for the year ended December 31, 2009 due to the reasons described above.

Loss from Discontinued Operations, Net of Tax

There was no loss from discontinued operations, net of tax, for the year ended December 31, 2010, compared to a net loss from discontinued operations, net of tax, of $1.0 million for the year ended December 31, 2009.

Net Income (Loss)

Net income for the year ended December 31, 2010 was $16.5 million compared to a net loss of $0.2 million for the year ended December 31, 2009 due to the reasons described above.

Year Ended December 31, 2009 Compared with the Year Ended December 31, 2008

Revenues

Revenues in the year ended December 31, 2009 decreased $2.9 million, or 1.2% from the year ended December 31, 2008, primarily due to the planned reduction in the number of units occupied by Medicaid residents ($8.0 million), a reduction in the number of units occupied by private pay residents ($3.4 million) and, as a result of 2008 being a leap year, one less day in the year ended December 31, 2009 ($0.6 million), partially offset by higher average daily revenue as a result of rate increases ($9.1 million).

Residence Operations (exclusive of depreciation and amortization and residence lease expense shown below)

Residence operating costs decreased $8.6 million, or 5.7%, in 2009 compared to 2008. Residence operating costs decreased $4.7 million due to reductions in labor, $2.7 million due to kitchen and housekeeping costs, $0.9 million due to reductions in administrative expenses, $0.6 million due to lower utility costs, and $0.4 million due to the absence of hurricane costs in the 2009 year, partially offset by $0.7 million in higher property taxes and insurance costs. Staffing needs in 2009 as compared to 2008, decreased primarily because of a decline in the number of units occupied by Medicaid residents who tend to have higher care needs than private pay residents, and general economic conditions which enabled us to hire new employees at lower wage rates. Decreased overall occupancy and new group purchasing plans lowered purchasing costs related to kitchen and housekeeping expenses.

General and Administrative

General and administrative costs increased $0.7 million, or 5.7%, in 2009 compared 2008. Salaries and benefits increased $1.3 million, $0.3 million of which was related to non-cash equity-based compensation expense, partially offset by a $0.2 million reduction in travel and meetings expense due to the absence of our annual conference in 2009, a $0.2 million favorable legal decision, a $0.1 million reduction in consulting fees, and $0.1 million reduction in administrative expenses related to other cost control measures.

Residence Lease Expense

Residence lease expense for 2009 increased $0.1 million, or 0.7% compared to 2008.

Depreciation and Amortization

Depreciation and amortization expense increased $2.9 million to $21.2 million in 2009 compared to 2008. During 2009, depreciation expense increased $3.1 million from the prior year, which resulted from the impact of the additions at sixteen residences that opened from the fourth quarter of 2008 through the end of 2009 and from general capital expenditures across our portfolio. Intangible amortization expense decreased by $0.2 million as a result of resident relationship intangibles becoming fully amortized in January of 2008.

Impairment of Goodwill

Goodwill impairment charges for 2009 of $16.3 million resulted from a decline in our market capitalization in the first quarter of 2009. In accordance with accounting guidance, we performed an impairment test on goodwill and intangibles as of the end of the first quarter of 2009. As a result, we recorded a non-cash goodwill impairment charge of $16.3 million ($14.7 million net of related tax benefits) for 2009. The impairment charge was required as a result of the decline in the market value of our common stock primarily due to the depressed macroeconomic environment, constraints in the capital markets, and volatility in the equity markets.

Impairment of Long-Lived Assets

The loss due to the impairment of long-lived assets in 2009 was the result of our decision not to exercise a purchase option on a capital lease. The capital lease asset and obligation were written off resulting in a loss of $0.1 million primarily relating to assets retained by the lessor.

Income from Operations

Income from operations for 2009 was $15.4 million compared to income from operations of $29.9 million for 2008 due to the reasons described above.

Interest Income

Interest income decreased $0.6 million in 2009 compared to 2008. The decrease was due to lower interest rates on invested cash and decreased cash available for investment.

Interest Expense

Interest expense increased $0.2 million in 2009 compared to 2008.

Income from Continuing Operations before Income Taxes

Income from continuing operations before income taxes for 2009 was $8.1 million compared to income from continuing operations before income taxes of $23.4 million for 2008 due to the reasons described above.

Income Tax Expense

Income tax expense for 2009 was $7.3 million compared to $8.7 million for 2008. Due to our first quarter 2009 write-off of goodwill, of which $11.9 million was not tax deductible, our effective tax rates between 2008 and 2009 are not directly comparable. Excluding the goodwill impairment charge, our effective rate was 37.0% for both 2009 and 2008.

Net Income from Continuing Operations

Net income from continuing operations for 2009 was $0.8 million compared to net income from continuing operations of $14.7 million for 2008, due to the reasons described above.

Loss from Discontinued Operations, net of Taxes

Loss from discontinued operations, net of taxes, for 2009 was $1.0 million compared to loss from discontinued operations, net of taxes of $0.4 million for 2008. The loss from discontinued operations, net of taxes, for 2009, includes a $1.2 million loss on impairment of fixed assets recorded as a result of ALC’s election not to exercise a purchase option on four residences it operated under a master lease agreement.

Net (Loss) Income

Net loss for 2009 was $0.2 million compared to net income of $14.3 million for 2008 due to the reasons described above.

Liquidity and Capital Resources

Three Year Financial Comparative Analysis

Sources and Uses of Cash

We had cash and cash equivalents of $13.4 million at December 31, 2010 compared to $4.4 million at December 31, 2009 and $19.9 million as of December 31, 2008. The table below sets forth a summary of the significant sources and uses of cash for the years ended December 31:

		2010				2009				2008
		(In thousands)
Cash provided by operating activities		$	46,172			$	44,032			$	45,176
Cash used in investing activities			(44,422	)			(28,117	)			(38,779	)
Cash provided by (used in) financing activities			7,254				(31,460	)			(558	)
Increase (decrease) in cash and cash equivalents		$	9,004			$	(15,545	)		$	5,839

Cash provided by operating activities:

Cash flow from operating activities was $46.2 million in 2010 compared to $44.0 million in 2009 and $45.2 million in 2008.

2010 vs. 2009 cash provided by operating activities:

Increased cash flow from operations in 2010 was primarily due to:

•

$6.8 million from an increase in net income adjusted for non-cash charges;

•

$1.4 million from decreases in other non-current assets;

•

$0.9 million from increases in accounts payable;

•

$0.7 million from decreases in prepaids, supplies and other receivables; and

•

$0.2 million of other changes,

partially offset by:

•

$2.0 million from increases in income tax receivable;

•

$1.3 million from decreases in accrued liabilities;

•

$1.3 million from decreases in deferred revenue;

•

$1.2 million from increases in accounts receivable;

•

$1.0 million from decreases in other long-term liabilities;

•

$0.7 million from increases in deposits in escrow; and

•

$0.3 million for increases in current assets of discontinued operations.

2009 vs. 2008 cash provided by operating activities:

Decreased cash flow from operations in 2009 was primarily due to:

•

$5.4 million from decreases in other non-current assets primarily related to the 2008 modification of restricted cash requirements associated with a portion of our general liability and professional liability insurance;

•

$2.3 million from decreases in accounts payable;

•

$1.8 million from increases in prepaids and other assets;

•

$0.7 million from a decrease in deferred revenue;

•

$0.6 million from decreases in other long term liabilities;

•

$0.6 million in from an increase in accounts receivable; and

•

$0.4 million for increases in payments for self-insured liabilities;

partially offset by:

•

$5.0 million from increases in income taxes payable;

•

$3.4 million from an increase in net income adjusted for non-cash charges;

•

$1.3 million from increases in accrued liabilities;

•

$0.5 million from increases in long-term liabilities of discontinued operations; and

•

$0.3 million of other changes.

Working capital:

2010 vs. 2009 working capital changes:

In 2010 our working capital increased by $12.4 million from 2009 while in 2009 our working capital increased by $4.0 million from 2008. The increase in working capital in 2010 as compared to 2009 was primarily due to increased cash and cash equivalents of $9.0 million, decreased accounts payable of $1.9 million, decreased deferred revenue of $1.6 million, an increase in investments of $1.2 million, an increase in accounts receivable of $0.5 million and an increase in deposits in escrow of $0.4 million, partially offset by an increase in accrued liabilities of $0.9 million, an increase in current maturities of long-term debt of $0.6 million, a decrease in prepaid expenses of $0.5 million and a decrease in income taxes receivable of $0.4 million.

It is not unusual for us to operate in the position of a working capital deficit because our revenues are collected more quickly, often in advance, than our obligations are required to be paid. This can result in a low level of current assets to the extent cash has been deployed in business development opportunities or used to pay off longer term liabilities.

2009 vs. 2008 working capital changes:

The increase in working capital in 2009 as compared to 2008 was primarily due to decreased current maturities of long-term debt of $9.0 million, decreased liabilities for discontinued operations of $8.5 million, a decrease in accounts payable of $5.5 million and a decrease in deferred revenue of $0.3 million, partially offset by a decrease in cash of $15.5 million, a decrease in income taxes receivable of $2.4 million and a decrease in accrued liabilities of $1.3 million.

Cash used in investing activities:

Cash used in investing activities was $44.4 million, $28.1 million and $38.8 million for 2010, 2009 and 2008, respectively.

2010 vs. 2009 cash used in investing activities:

The increase of $16.3 million in cash used for investing activities between 2010 and 2009 was due to:

•

$27.5 million from an increase in cash used for an acquisition;

•

$0.6 million from an increase in cash used in purchase of securities;

partially offset by:

•

$7.7 million from a reduction in cash flow used for new construction projects;

•

$3.6 million from a decrease in cash used for purchases of property and equipment; and

•

$0.5 million from an increase in cash provided by the sale of securities.

2009 vs. 2008 cash used in investing activities:

The decrease of $10.7 million in cash used for investing activities between 2009 and 2008 was due to:

•

$8.0 million in reduced cash used for new construction projects; and

•

$3.2 million in reduced cash used for purchases of property and equipment;

partially offset by:

•

$0.5 million in reduced cash designated for acquisitions.

2010 vs. 2009 property and equipment

Property and equipment increased by $21.8 million in 2010. Property and equipment increased by:

•

$27.5 million from the acquisition of previously leased properties;

•

$10.3 million from capital expenditures (excluding new construction projects); and

•

$5.6 million from new construction projects;

partially offset by:

•

$21.2 million from depreciation expense; and

•

$0.4 million due to disposals of fixed assets.

2009 vs. 2008 property and equipment

Property and equipment decreased by $2.3 million in 2009. Property and equipment decreased by:

•

$19.6 million from depreciation expense; and

•

$2.5 million due to termination of a capital lease;

partially offset by:

•

$14.5 million from capital expenditures (excluding new construction projects); and

•

$9.9 million from new construction projects.

Cash provided by (used in) financing activities:

Cash provided by / (used in) financing activities was $7.3 million and $(31.5) million for 2010 and 2009, respectively. Cash used in financing activities was $0.6 million for 2008.

For 2010, cash provided by financing activities included:

•

$12.3 million from proceeds on new mortgage debt;

partially offset by:

•

$2.8 million of repurchases of Class A Common Stock; and

•

$1.9 million of scheduled principal payments.

For 2009, cash used in financing activities included:

•

$7.0 million of repurchases of Class A Common Stock;

•

$29.0 million from repayment on borrowings from our revolving credit facility; and

•

$9.1 million of scheduled principal payments;

partially offset by:

•

$14.0 million from proceeds on new mortgage debt.

2010 vs. 2009 Long-term debt

Total long-term debt, including current and long-term maturities, increased by $10.4 million during 2010 primarily from:

•

$44.1 million of capital expenditures;

•

$9.0 million from an increase in cash balances;

•

$2.8 million from repurchases of Class A Common Stock;

partially offset by:

•

$45.9 million of cash from operating activities.

2009 vs. 2008 Long-term debt

Total long-term debt, including current and long-term maturities, decreased by $26.0 million during 2009 primarily from:

•

$43.7 million of cash from operating activities (excluding amortization of debt purchase accounting market value adjustment of $0.2 million);

•

$15.5 million from a decrease in cash balances; and

•

$2.3 million from the termination of a capital lease;

partially offset by:

•

$7.0 million from repurchases of Class A Common Stock; and

•

$27.8 million of capital expenditures.

Discontinued Operations

Cash flows from discontinued operations for the year ended December 31, 2009 are detailed in the table below:

		2009
		(In thousands)
Net loss		$	(957	)
Adjustments to net loss
Depreciation			300
Loss on impairment of long-lived assets			1,235
Changes in assets and liabilities			629
Cash flows from operating activities			1,207
Cash used in investing activities			(64	)
Cash used in financing activities			(335	)
Net change in cash		$	808

Cash generated by discontinued operations was $0.8 million, $0.4 million of which was generated by tax benefits of the loss on impairment of long-lived assets. While cash flows were positive, we determined they were not significant enough to warrant an investment of $10.3 million. The loss of cash flows from discontinued operations will not have a significant impact on our future operations.

Debt Instruments

Summary of Long-Term Debt

		December 31,
		2010				2009
		(In thousands)
$120 million credit facility bearing interest at floating rates, due November 2011(1)		$	50,000			$	50,000
Mortgage note, bearing interest at 6.24%, due 2014			32,644				33,526
Mortgage note, bearing interest at 6.50%, due 2015			25,663				13,829
Mortgage note, bearing interest at 7.07%, due 2018			8,703				8,844
Oregon Trust Deed Notes, weighted average interest rate of 7.38%, maturing from 2021 through 2026			8,130				8,438
HUD Insured Mortgages, interest rates ranging from 5.66% to 5.85%, due 2032			4,033				4,123
HUD Insured Mortgage, bearing interest at 7.55%, due 2036			2,937				2,977
Total debt			132,110				121,737
Less current maturities			(2,449	)			(1,823	)
Total long-term debt		$	129,661			$	119,914