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 risks, uncertainties and assumptions described or referred to in Item 1A - Risk Factors in Part I of ALC's Annual Report on Form 10-K for the year ended December 31, 2008, and in

The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes to the condensed consolidated financial statements in Part I, Item 1 of this report.

Executive Overview

Average private pay occupancy in the first quarter of 2009 declined by 196 units from the first quarter of 2008 and by 64 units from the fourth quarter of 2008. We believe that this reduction resulted primarily from factors relating to the general economy, including:

• residents' inability to obtain necessary funds from the sale of their homes or other investments; and

• the increased ability and willingness of other family members to provide care at home.

We refer to this as the "Economic Impact".

From time to time, we may increase or reduce the number of units we actively operate, which may affect reported occupancy and occupancy percentages. In the fourth quarter of 2008 and the first quarter of 2009 we opened 77 units and 134 units, respectively, as part of our expansion program to add 400 units to existing residences. These openings added 90 units to the average unit count in the first quarter of 2009 as compared to both the first and fourth quarters of 2008. Also, during the first quarter of 2009 we temporarily closed 159 units for refurbishment, reducing the average unit count by 72 units from both the first and fourth quarters of 2008. The reduction in average occupied units from the refurbishment programs reduced private pay occupancy by 45 and 11 units from the first and fourth quarters of 2008, respectively. The additional average occupied units from the expansion units increased private pay occupancy during the first quarter of 2009 by 17 units from both the first and fourth quarters of 2008.

Average Medicaid occupancy in the first quarter of 2009 decreased by 341 and 70 units as compared to the first and fourth quarters of 2008, respectively. Included in the reductions from the first and fourth quarters of 2008 were 35 and 13 units, respectively, from the refurbishment programs discussed above. Our Medicaid census continues to decline overall because we no longer accept new Medicaid residents and only allow private pay residents to roll over into Medicaid programs at a very limited number of residences. This is referred to in this report as the "Medicaid Impact". We believe the Medicaid Impact is a necessary part of our long-term operating strategy to improve our overall revenue base.

We review our rates on an annual basis or as market conditions dictate. As in past years, we implemented rate increases on January 1, 2009. Although prevailing market conditions did not allow us to raise rates as much as in prior years, our overall private pay rate increased by 3.7% and 4.2%, respectively, in the first quarter of 2009 as compared to the first and fourth quarters of 2008. These rate increases, combined with our improved mix of private pay occupancy, resulted in an overall average rate increase in the first quarter of 2009 of 5.4% and 4.6%, respectively, as compared to the first and fourth quarters of 2008.

In the first quarters of 2009 and 2008, the average occupancy rate for all of our residences was 65.7% and 71.7%, respectively, and private pay revenues as a percent of total revenues was 93.7% and 90.6%, respectively.

In the first quarter of 2009, we experienced a continued 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. As a result, our market capitalization declined in the first quarter of 2009 as compared to previous periods and was below book value at March 31, 2009. In accordance with the requirements of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), we performed an

impairment test of goodwill and intangibles as of the end of the first quarter. As a result of the impairment test, we recorded a non-cash goodwill impairment charge of $16.3 million for the quarter ended March 31, 2009. The impairment charge was primarily driven by the adverse equity market conditions intensifying in the first quarter of 2009 that caused a decrease in current market multiples and our stock price at March 31, 2009. The non-cash impairment charge does not impact our ongoing business operations, liquidity, cash flows from operating activities, or financial covenants and will not result in any future cash expenditures.

Business Strategies

We plan to grow our revenue and operating income by:

• increasing the overall size and attractiveness of our portfolio by building additional capacity, refurbishing existing residences, and making acquisitions;

• increasing our occupancy rate and the percentage of revenue derived from private pay sources; and

• applying operating efficiencies achievable from owning a large number of assisted living residences.

Increasing the overall size and attractiveness of our portfolio by building additional capacity, refurbishing existing residences, and making acquisitions

In February 2007, we announced plans to add a total of 400 units to our existing owned buildings. By the end of the first quarter of 2009, we had completed, licensed, and begun accepting new residents in 211 of these units. Construction continues on the remaining expansion units. As of the date of this report, we are targeting completion of 109 units during the remainder of 2009 and the remaining units in the first quarter of 2010. We spent $30 million through March 31, 2009, and expect to spend an additional $12 million in 2009 and $8 million in 2010 related to this expansion program. To date, actual cost remains consistent with our original estimates of $125,000 per unit. 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 but have no immediate plans to add additional units to existing buildings beyond the 400 units in our current expansion program.

In April 2008 we temporarily closed a 50 unit residence in Texas and in the first quarter of 2009 we temporarily closed three residences consisting of 109 units in Oregon. We intend to refurbish these residences and reopen them as private pay residences with the Oregon residences expected to reopen within three to six months of their respective closing dates. We expect these projects will take approximately twelve additional months to stabilize occupancy. We believe refurbishment projects are necessary where markets have strong growth potential and our existing residences need to be upgraded and repositioned in the market. We expect to spend approximately $200,000 to $400,000 on each of these four projects. We may temporarily close and refurbish other residences from time to time.

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.

Increasing our occupancy rate and the percentage of revenue derived from private pay sources

One of our strategies is to increase the number of residents in our communities who are private pay, both by filling existing vacancies with private pay residents and by gradually decreasing the number of units that are

available for residents who rely on Medicaid. 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.

We plan to continue to improve our payer mix by increasing the size of our private pay population. Specifically, from November 2006 through March 31, 2009, we increased the number of units available to private pay residents by exiting Medicaid contracts at 53 of our residences and reaching an agreement with the state of Oregon to gradually reduce the number of units available to Medicaid residents through attrition. In limited circumstances we may be required to allow residents who are private pay to remain in the residence if they later convert to Medicaid. We plan to continue to focus on moving private pay residents into our residences.

Since November 2006, we have acquired two assisted living residences (225 units) and the operations of eight leased assisted living residences (541 units). We continue to review acquisition opportunities and weigh their merits against alternate uses of capital such as expansions and the repurchase of our common stock.

We consider improvement in payer mix an important part of our long-term strategy to improve our overall revenue base. To the extent we have not been able to immediately fill vacancies created by the exit of Medicaid residents with private pay residents, the reduction in the number of units occupied by Medicaid residents has significantly contributed to overall occupancy and revenue reductions. If general economic conditions fail to improve, our ability to fill vacant units with private pay residents may continue to be difficult and the negative occupancy and revenue trends may continue. However, as the proportion of population in our residences who pay through Medicaid programs trends closer to zero, the impact on our revenues and operating income from additional attrition in the number of our Medicaid residents will diminish.

Applying operating efficiencies achievable from owning a large number of assisted living residences

The senior living industry, and specifically the independent living and assisted living segments, are 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.

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 quarter ended March 31, 2009 compared to the quarter ended March 31, 2008.

• Liquidity and Capital Resources. This section provides a discussion of our liquidity and capital resources as of March 31, 2009, 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 in Pearson Indemnity Company Ltd. ("Pearson"), our wholly-owned Bermuda based captive insurance company formed primarily to provide self insured general and professional liability coverage.

Business Overview

Revenues

We generate revenue from private pay and Medicaid sources. For the three month periods ended March 31, 2009 and 2008, 93.7% and 90.6%, 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 assisted 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 assisted living residents who require less or more frequent and intensive care or supervision. For the three months ended March 31, 2009 and 2008, approximately 77% and 79%, 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 with month-to-month terms.

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 March 31, 2009, we provided assisted living services to Medicaid funded residents at 66 of the 216 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 and in certain states is subject to negotiation.

Residence Operations Expenses

For all continuing residences, as defined below, residence operations expense
percentages consisted of the following at March 31:


                                                2009      2008

                       Wage and benefit costs      61 %      61 %
                       Property related costs      24        22
                       Other operating costs       15        17

                       Total                      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 (i.e. food) costs.

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 Percentage or Occupancy Rate

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 mix is the measure of the percentage of private or non-Medicaid census. We focus on increasing the level of private pay funded units.

Average Revenue Rate by Payer Source

The average revenue rate by each payer source represents the average daily revenues earned from accommodation and service fees provided to private pay and Medicaid residents. The daily revenue rate by each payer source is calculated by dividing aggregate revenues earned by payer type by the total ADC for its payer source 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, equity based compensation expense, transaction costs and non-cash, non-recurring gains and losses, including disposal of assets and impairment of goodwill and other long-lived assets. 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 facility contains 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. In addition, we assess the key performance indicators for residences that we operated in all reported periods, or "same residence" operations.

ADC

All Continuing Residences

The following table sets forth our average daily census ("ADC") for the three month periods ended March 31, 2009 and 2008 for both private pay and Medicaid residents for all of the continuing residences whose results are reflected in our condensed consolidated financial statements.

                              Average Daily Census


                                                    2009        2008

                Private pay                          5,435       5,631
                Medicaid                               532         873

                Total ADC                            5,967       6,504

                Private pay occupancy percentage      91.1 %      86.6 %

                Private pay revenue percentage        93.7 %      90.6 %

During the first quarter of 2009, total ADC decreased 8.3% from the first quarter of 2008. Private pay ADC decreased 3.5% from the prior year because of the Economic Impact. Medicaid ADC decreased 39.1% from the similar period due to the Medicaid Impact. As a result of the Medicaid Impact, partially offset by the Economic Impact, the private pay occupancy mix increased in percentage from 86.6% to 91.1% and the private pay revenue mix increased from 90.6% to 93.7%.

Same Residence Basis

The following table is presented on a same residence basis, and therefore removes the impact of the expansion units and residences temporarily closed for refurbishment. The table sets forth our ADC for the three month periods ended March 31, 2009 and 2008 for both private and Medicaid payers for all residences on a same residence basis.

                              Average Daily Census


                                                    2009        2008

                Private pay                          5,408       5,576
                Medicaid                               524         838

                Total ADC                            5,932       6,414

                Private pay occupancy percentage      91.2 %      86.9 %

                Private pay revenue percentage        93.8 %      90.9 %

During the first quarter of 2009, total ADC on a same residence basis decreased 7.5% from the first quarter of 2008. Private pay ADC decreased 3.0% primarily from the Economic Impact and Medicaid ADC decreased 37.5% due to the Medicaid Impact. As a result of the Medicaid Impact, partially offset by the Economic Impact, private pay occupancy mix increased from 86.9% to 91.2% and the private pay revenue mix increased from 90.9% to 93.8%.

Occupancy Percentage

Occupancy percentages are affected by the completion and opening of new residences and additions to existing residences as well as the temporary closure of residences for refurbishment. As total capacity of a newly completed addition or a new residence increases, occupancy percentages are negatively impacted 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%). The temporary closure of residences for refurbishment generally has a positive impact on occupancy percentages.

Because of the impact that developmental units have on occupancy rates, 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 twelve months after completion of construction. The 211 expansion units that have opened under our current expansion program constitute the developmental units at March 31, 2009. Developmental units for the quarter ended March 31, 2008, included 185 acquired units in Dubuque, Iowa, 22 expansion units in Ohio and 24 expansion units in Wisconsin. All units that are not developmental are considered mature units.

All Continuing Residences

The following table sets forth our occupancy percentages for the three month periods ended March 31, 2009 and 2008 for all mature and developmental continuing residences whose results are reflected in our condensed consolidated financial statements:

                              Occupancy Percentage


                                      2009                             2008
                           # of Units       Occupancy       # of Units       Occupancy

       Mature                    8,917            66.2 %          8,845            72.4 %

       Developmental               211            19.3 %            231            43.0 %

       Total residences          9,128            65.7 %          9,076            71.7 %

For the three months ended March 31, 2009, we saw a decline in mature residences' occupancy percentage from 72.4% to 66.2% and a decrease in occupancy in our developmental units from 43.0% to 19.3%.

Occupancy percentages for all residences decreased from 71.7% in the 2008 period to 65.7% in the 2009 period.

The declines in our occupancy percentages for the three months ended March 31, 2009 were primarily due to our continuing focused effort to reduce the number of units available for Medicaid residents and the Economic Impact. Changes in the developmental category are a function of the small number of units, the amount of time they have been open and specific residences classified in this category.

Same Residence Basis

The following table sets forth the occupancy percentages outlined above on a same residence basis for the three month periods ended March 31 2009 and 2008, and therefore removes the impact of the expansion units and residences temporarily closed for refurbishment.

                              Occupancy Percentage


                                      2009                             2008
                           # of Units       Occupancy       # of Units       Occupancy

       Mature                    8,917            66.5 %          8,845            72.4 %

       Developmental                 0               0 %            231            43.0 %

       Total residences          8,917            66.5 %          9,076            71.7 %

For the three months ended March 31, 2009, we saw a decline in mature residences' occupancy percentage from 72.4% to 66.5%. There were no residences classified as developmental on a same residence basis as of March 31, 2009.

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