7. LONG-TERM EQUITY-BASED COMPENSATION PROGRAM

Effective October 31, 2006, the Board of Directors approved and adopted and our sole stockholder approved the Assisted Living Concepts, Inc. 2006 Omnibus Incentive Compensation Plan (the "2006 Omnibus Plan"). On May 5, 2008, the 2006 Omnibus Plan was again approved by ALC stockholders. On April 30, 2009, the Board of Directors of ALC approved the amendment and restatement of the 2006 Omnibus Incentive Compensation Plan to reflect the March 16, 2009, one-for-five reverse stock split. On August 4, 2011, the Board of Directors of ALC approved the amendment and restatement of the 2006 Omnibus Incentive Compensation Plan to reflect the May 20, 2011 two-for-one stock split.

The 2006 Omnibus Plan is administered by the Compensation/Nomination/Governance Committee of the Board of Directors (the "Committee") and provides for grants of a variety of incentive compensation awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock units, cash incentive awards and other equity-based or equity-related awards (performance awards).

A total of 1,600,000 shares of our Class A Common Stock are reserved for issuance under the 2006 Omnibus Plan. Awards with respect to a maximum of 80,000 shares may be granted to any one participant in any fiscal year (subject to adjustment for stock distributions or stock splits). The maximum aggregate amount of cash and other property other than shares that may be paid or delivered pursuant to awards to any one participant in any fiscal year is $2.0 million.

The terms applicable to all Options/SARs that have been granted under the 2006 Omnibus Plan to date, as described below, provide that, once the options/SARs become vested, they become exercisable in one-third increments on the first,

second and third anniversaries of the approval date and they expire five years from the approval date. Once exercisable, awards may be exercised either by purchasing shares of Class A Common Stock at the exercise price or exercising the related stock appreciation right. The Committee has sole discretion to determine whether stock appreciation rights are settled in shares of Class A Common Stock, cash or a combination of shares of Class A Common Stock and cash.

On March 2, 2011, the Committee approved the 2011 Long-Term Equity-Based Compensation Program and granted awards of Options/SARs to certain key employees (including executive officers). The aggregate maximum number of Options/SARs granted to all participants was 170,500 and the exercise price is $18.69 per share. The Options/SARs have both time vesting and performance vesting features. One-fifth (1/5) of each grant becomes exercisable in one-third increments on the first, second and third anniversaries of the approval date. On March 7, 2012, the Committee determined that all of the grants vested and became exercisable in one-third increments beginning March 3, 2012.

On May 2, 2011, the Committee recommended and the Board of Directors approved grants of 10,000 Options/SARs to each of the seven non-management directors. The aggregate number of Options/SARs granted was 70,000 and the exercise price is $17.49 per share.

On March 15, 2012, the Committee approved the 2012 Long-Term Equity-Based Compensation Program and granted awards of Options/SARs to certain key employees (including executive officers). The aggregate maximum number of Options/SARs granted to all participants was 198,000 and the exercise price is $17.01 per share. The Options/SARs have both time vesting and performance vesting features. One-fifth (1/5) of each grant becomes exercisable in one-third increments on the first, second and third anniversaries of the approval date. If the established performance goals (related to increases in private pay resident occupancy) are achieved in fiscal 2012, some or all of the remaining four fifths (4/5) of each grant becomes exercisable in one-third increments on the first, second and third anniversaries of March 15, 2012.

A summary of Options/SARs activity for the nine month periods ended September 30, 2012 and 2011 is presented below:

	2012					2011
	# Options/ SARs			Weighted Average Exercise Price		# Options / SARs			Weighted Average Exercise Price
Outstanding at beginning of period		564,666		$	14.91		531,168		$	13.06
Granted		198,000		$	17.01		240,500		$	18.34
Exercised		—			—		(35,670	)		8.22
Expired		—			—		(122,500	)	$	15.86
Forfeited		(121,000	)	$	16.16		(37,332	)	$	14.09
Outstanding at end of period		641,666		$	15.33		576,166		$	14.90
Options exercisable at September 30		321,020		$	13.24		189,032		$	12.15
Weighted average fair value of options	$	7.55				$	7.78
Aggregate intrinsic value of all options	-					—
Weighted average contractual term	2.9 years					3.5 years

The following table summarizes nonvested options outstanding and the related weighted average grant date fair value at September 30, 2012:

	# Options/ SARs			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2011		377,648		$	8.56
Granted		198,000		$	7.08
Vested		(176,337	)	$	7.69
Expired or cancelled		—			—
Forfeited		(78,665	)	$	8.17
Nonvested at September 30, 2012		320,646		$	8.22

ALC uses the Black-Scholes option value model to estimate the fair value of stock options and similar instruments. Stock option valuation models require various assumptions, including the expected stock price volatility, risk-free interest rate, dividend yield, and forfeiture rate. In estimating the fair value of the Options/SARs approved on March 15, 2012, the Company used a risk free rate equal to the five year U.S. Treasury yield in effect on the first business date after the grant date. The expected life of the Options/SARs (five years) was estimated using expected exercise behavior of option holders. Expected volatility was based on ALC's Class A Common Stock volatility since it began trading on November 10, 2006, and ending on the date of grant. Because the Class A Common Stock has traded for less than the expected contractual term, an average of a peer group's historical volatility for a period equal to the Options/SARs' expected life, ending on the date of grant, was compared to the historical ALC volatility with no material difference. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. Because of a lack of history, the forfeiture rate was estimated at zero percent of the Options/SARs awarded and may be adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate. The Options/SARs have characteristics that are significantly different from those of traded options and changes in the various input assumptions can materially affect the fair value estimates. The fair value of the Options/SARs was estimated at the date of grant using the following weighted average assumptions.

	March 15,			May 2,			March 2,			May 3 ,			Mar 3,
	2012			2011			2011			2010			2010
Expected life from grant date (in years)		5			5			5			5			5
Risk-free interest rate		1.11	%		1.88	%		2.21	%		2.13	%		2.33	%
Volatility		55.52	%		57.68	%		58.63	%		62.6	%		63.7	%
Dividend yield		2.4	%		—			—			—			—
Weighted average fair value (per share)	$	7.08		$	8.87		$	9.69		$	8.99		$	8.74

Compensation expense is recognized based on the fair value of the options granted and the probability of meeting the performance targets and is allocated over the vesting period of the award. Compensation expense related to the Options/SARs for the three month periods ended September 30, 2012 and 2011 was $182,045 and $393,050, respectively. Compensation expense related to the Options/SARs for the nine month periods ended September 30, 2012 and 2011 was $541,491 and $672,870, respectively. Unrecognized compensation cost at September 30, 2012 and 2011 is approximately $2.0 million and $2.9 million, respectively, and the weighted average period over which it is expected to be recognized is three years.