6. DEBT

Long-term debt consisted of the following:

	September 30,			December 31,
	2012			2011
	(In thousands)
$125 million credit facility bearing interest at floating rates, due February 2016(1)	$	105,900		$	12,000
Mortgage note, bearing interest at 6.24%, due 2014		30,956			31,703
Mortgage note, bearing interest at 6.50%, due 2015		24,078			24,775
Mortgage note, bearing interest at 7.07%, due 2018		8,433			8,552
Oregon Trust Deed Notes, weighted average interest rate of 7.33%, maturing from 2021 through 2026		7,030			7,274
HUD Insured Mortgages, interest rates ranging from 5.66% to 5.85%, due 2032		3,862			3,937
Total debt		180,259			88,241
Less current maturities		(6,401	)		(2,538	)
Total long-term debt	$	173,858		$	85,703

(1) Borrowings under this facility bear interest at a floating rate at ALC's option equal to LIBOR or prime plus a margin. The margin is determined by ALC's consolidated leverage ratio (as defined in the U.S. Bank Credit Facility) and ranges from 137.5 to 250 basis points over prime or 225 to 350 basis points over LIBOR. From February 18, 2011 through May 6, 2011, ALC's prime and LIBOR margins were 175 and 275 basis points, respectively. On May 7, 2011, the prime and LIBOR margins were reduced to 150 and 250 basis points, respectively. On June 15, 2012, the prime and LIBOR margins were increased to 200 and 300 basis points, respectively. Based upon ALC's consolidated leverage ratios at September 30, 2012, prime and LIBOR margins will increase to the maximum levels of 250 and 350 basis points, respectively. At September 30, 2012, prime was 3.25% and one month LIBOR was 0.25%.

$125 Million Credit Facility

On February 18, 2011, ALC entered into a five year, $125 million revolving credit facility with U.S. Bank National Association as administrative agent, and certain other lenders (the "U. S. Bank Credit Facility"). ALC's obligations under the U.S. Bank Credit Facility are guaranteed by three ALC subsidiaries that own 31 residences with a combined net book value of $66.6 million and are secured by mortgage liens against such residences and by a lien against substantially all of the assets of ALC and those subsidiaries.

On May 18, 2012, in anticipation of the Purchase Agreement, ALC entered into the first amendment to the U.S. Bank Credit Facility (the "First Amendment"). The First Amendment allowed ALC to exceed the limitation of $35,000,000 of consolidated growth capital expenditure per year. The First Amendment also limits ALC's consolidated growth capital expenditures to $15,000,000 for the period from May 18, 2012 through December 31, 2012. The annual limitation is restored to $35,000,000 for the year ended December 31, 2013 and each year thereafter. ALC paid a fee of $0.4 million for the First Amendment which is being amortized over the remaining term of the U.S. Bank Credit Facility.

On August 1, 2012 ALC entered into waiver and amendment No. 2 to the U.S. Bank Credit Facility which provided for the definition of Consolidated EBITDA (as defined in the U.S. Bank Credit Facility) to be amended to i) allow the addition of the lease termination and settlement fee to net income to arrive at Consolidated EBITDA, ii) require ALC to remove from the collateral pool any residence with an occupancy percentage of less than 62% for two consecutive months and replace it with a residence with an occupancy greater than 62% and iii) require 70% of the aggregate value of the collateral pool to exceed the borrowing base.

As of a result of this amendment, ALC is in the process of removing three properties comprising of 127 units and adding four properties comprising 160 units to the collateral pool.

Interest rates applicable to funds borrowed under the facility are based, at ALC's option, on either a base rate essentially equal to the prime rate plus a margin or LIBOR plus a margin that varies according to a pricing grid based on a consolidated leverage test. Effective June 15, 2012 the margins on base rate and LIBOR loans were increased to 2.00% and 3.00%, respectively, and the quarterly commitment fee on the unused portion of the facility was increased to 0.5%. Based upon ALC's consolidated leverage ratios at September 30, 2012, prime and LIBOR margins will increase to the maximum levels of 250 and 350 basis points, respectively.

In general, borrowings under the facility are limited to three and three quarters times ALC's consolidated net income during the prior four fiscal quarters plus, in each case to the extent included in the calculation of consolidated net income, customary add-backs in respect of provisions for taxes, consolidated interest expense, amortization and depreciation, losses from extraordinary items, loss on the sale of property outside the ordinary course of business, and other non-cash expenditures (including the amount of any compensation deduction as the result of any grant of stock or stock equivalents to employees, officers, directors or consultants), non-recurring expenses incurred by ALC in connection with transaction fees and expenses for acquisitions minus, in each case to the extent included in the calculation of consolidated net income, customary deductions related to credits for taxes, interest income, gains from extraordinary items, gains from the sale of property outside the ordinary course of business and other non-recurring gains.

ALC is subject to certain restrictions and financial covenants under the facility including maintenance of less than a maximum consolidated leverage ratio and greater than a minimum consolidated fixed charge coverage ratio, and restrictions on payments for capital expenditures, expansions and acquisitions. Payments for dividends and stock repurchases may be restricted if ALC fails to maintain consolidated leverage ratio levels specified in the facility. In addition, upon the occurrence of certain transactions, including but not limited to property loss events, ALC may be required to make mandatory prepayments. ALC is also subject to other customary covenants and conditions.

Outstanding borrowings under the facility at September 30, 2012, and December 31, 2011 were $105.9 million and $12.0 million, respectively. In addition, the facility provided collateral for $5.8 million and $5.6 million in outstanding letters of credit at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 and December 31, 2011, ALC was in compliance with all applicable covenants and available borrowings under the facility were $13.3 million and $107.4 million, respectively. ALC incurred $1.9 million of initial closing costs and an additional $0.4 million on the First Amendment which is being amortized over the remaining life of the U.S. Bank Credit Facility.

ALC anticipates that, without the sale of certain of its properties, alternative sources of financing, and/or significant improvement in its cash generated from operations, it is unlikely that ALC will meet its covenant with respect to its maximum leverage ratio set forth in the U.S. Bank Credit Facility at December 31, 2012. The failure to satisfy this covenant would constitute a breach of, and potentially a default under, the U.S. Bank Credit Facility and other borrowings subject to cross-default provisions ($135.8 million in total as of September 30, 2012). If the lenders were to declare a default under the U.S. Bank Credit Facility and ALC's other borrowings subject to cross-default provisions, they could, among other remedies, accelerate the repayment of all existing borrowings, terminate ALC's ability to make new borrowings and foreclose on their liens described above. There is no assurance that ALC would be able to obtain financing to pay amounts owed under such circumstances. ALC is pursuing measures to avoid a default under the U.S. Bank Credit Facility. These measures include pursuing sales of certain of its properties, negotiating waivers or amendments with our existing lenders, and exploring alternative sources of financing. On November 2, 2012, ALC announced that a Special Committee of the Board would continue its strategic review process to explore corporate alternatives with a view to enhancing shareholder value. No assurance can be given that the process will result in a transaction or, if a transaction is undertaken, the timing or the terms of any such transaction. ALC believes it will avoid a default under the U.S. Bank Credit Facility but can provide no assurances.

Mortgage Note due 2014

The mortgage note due in 2014 (the "6.24% 2014 Note") has a fixed interest rate of 6.24% with a 25-year principal amortization and is secured by 24 assisted living residences with a carrying value of $55.5 million. Monthly principal and interest payments amount to approximately $0.3 million. A balloon payment of $29.6 million is due in January 2014. The 6.24% 2014 Note was entered into by subsidiaries of ALC and is subject to a limited guaranty by ALC.

On January 17, 2012, ALC received a reservation of rights letter from the lender regarding one residence and the requirement to comply with all laws, ordinances, regulations and requirements of any governmental authority. On June 12, 2012, ALC received a second reservation of rights letter from the lender regarding a different residence and the requirement to comply with all laws, ordinances, regulations and requirements of any governmental authority. On August 13, 2012, ALC received a letter from the lender alleging certain events of default by ALC regarding these two residences. While ALC disputes the lender's allegations that certain events of default exist, ALC proposed, and the lender agreed, to prepay the proportionate share of the mortgage balances for these two residences in the amount of $3.2 million along with a third residence whose proportionate share of the mortgage balance is $0.7 million. The combined prepayment by ALC of $3.9 million along with lender expenses and reasonable attorney fees must be made by December 31, 2012. The $3.9 million is classified as a current liability in the accompanying condensed consolidated balance sheet.

6.5% Mortgage Note due 2015

On June 12, 2009, ALC entered into a loan agreement by and between ALC Three, LLC, a wholly-owned subsidiary of ALC ("Borrower"), ALC as guarantor, and TCF National Bank ("TCF") pursuant to which TCF lent $14 million to Borrower. On September 29, 2010, ALC and Borrower entered into an amended and restated loan agreement with TCF, effective September 30, 2010, which increased the original principal amount of the loan to $26.3 million and extended the term of the loan to September 30, 2015.

The amended and restated loan bears interest at a fixed rate of 6.5% per annum and is secured by a mortgage and assignment of leases with respect to two senior living residences in Iowa, three in Indiana and one in Wisconsin consisting of a combined total of 314 units with a carrying value of $19.7 million. The original $14.0 million portion of the loan is amortized over a twenty year period from June 12, 2009 and the additional $12.25 million portion of the loan is amortized

over a fifteen year period from September 30, 2010. Prepayment of the loan in excess of 10% of the principal balance in any anniversary year will require a prepayment fee of 3% in the first or second year, 2% in the third or fourth year, and 1% thereafter. Performance and payment of obligations under the loan agreement and related note are guaranteed by ALC pursuant to the terms of a guaranty agreement. ALC incurred $0.4 million of closing costs which are being amortized over the five year life of the loan.

In addition to customary representations, covenants and default provisions, the loan requires that the senior living residences securing the loan maintain minimum annual levels of EBITDA (earnings before interest, taxes, depreciation and amortization) and rental income. In addition, the loan requires that ALC maintain less than a maximum consolidated leverage ratio and greater than a minimum consolidated fixed charge coverage ratio. As of September 30, 2012 and December 31, 2011, ALC was in compliance with all applicable financial covenants. ALC has determined that it is probable that the minimum annual level of EBITDA with respect to one property consisting of 60 units in the collateral pool is unlikely to meet the minimum threshold required at December 31, 2012. Because ALC and TCF have agreed to remove the property from the collateral pool in exchange for different unencumbered properties consisting of 79 units owned by ALC, ALC does not believe default is likely.

Mortgage Note due 2018

The mortgage note due in 2018 ("2018 Note") has a fixed interest rate of 7.07%, an original principal amount of $9.0 million, and a 25-year principal amortization. It is secured by a deed of trust, assignment of rents and security agreement and fixture filing on three assisted living residences in Texas with a carrying value of $10.4 million. Monthly principal and interest payments amount to approximately $64,200. The 2018 Note, which has a balloon payment of $7.2 million due in July 2018 and was entered into by a wholly-owned subsidiary of ALC, is subject to a limited guaranty by ALC.

Oregon Trust Deed Notes

The Oregon trust deed notes ("Oregon Trust Deed Notes") are secured by buildings, land, furniture and fixtures of nine Oregon assisted living residences with a combined carrying value of $9.5 million. The notes are payable in monthly installments including interest at rates ranging from 0% to 9.00%. The effective rate on the remaining term of the Oregon Trust Deed Notes is 6.84%.

Under debt agreements relating to the Oregon Trust Deed Notes, ALC is required to comply with the terms of certain regulatory agreements until their scheduled maturity dates which range from June 2021 to March 2026.

HUD Insured Mortgages

The HUD insured mortgages (the "HUD Loans") included three separate loan agreements entered into in 2001 between subsidiaries of ALC and the lenders. One of the HUD loans with a principal balance of $2.8 million was repaid in the third quarter of 2011. The two remaining HUD loans were refinanced in the third quarter of 2007 and bear interest of 5.66% and 5.85% and average 5.74%. The two remaining mortgages are each secured by a separate assisted living residence located in Texas with a combined carrying value of $4.3 million. Prepayments may be made any time after the first two years. The two remaining HUD Loans mature in September 2032.

Unfavorable Market Value of DebtAdjustment

ALC debt in existence at the date of the ALC Purchase was evaluated and determined, based upon prevailing market interest rates, to be undervalued. The unfavorable market value adjustment upon acquisition was $3.2 million. The market value adjustment is amortized on an effective interest basis, as an offset to interest expense, over the term of the debt agreements. Amortization of the unfavorable market value adjustment was $13,236 and $(156,000) for the three month periods ended September 30, 2012 and 2011, and $39,360 and $(196,200) for the nine month periods ended September 30, 2012 and 2011, respectively. In the first quarter of 2011, ALC repaid a $0.5 million mortgage which resulted in the write-off of $62,000 of the unfavorable market value debt adjustment.

Letters of credit

As of September 30, 2012, ALC had $5.8 million in outstanding letters of credit, all of which are collateralized under the $125 million U. S. Bank Credit Facility. The letters of credit provide security for worker's compensation insurance and the have maturity dates ranging from October 2012 to March 2013. On October 1, 2012, $0.8 million of the letters of credit were released.

As of December 31, 2011, ALC had $5.6 million in outstanding letters of credit, the majority of which are collateralized under the $125 million U. S,. Bank Credit Facility. Approximately $5.1 million of the letters of credit provide security for worker's compensation insurance and the remaining $0.5 million of letters of credit are security for landlords of leased property.