Edgar Filing: ARV ASSISTED LIVING INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ___________ TO ___________

COMMISSION FILE NUMBER: 0-26980

ARV ASSISTED LIVING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 33-0160968
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

245 FISCHER AVENUE, D-1
COSTA MESA, CA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400

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 [X] No [ ]

The number of outstanding shares of the Registrant's Common Stock, no par value,
as of November 1, 2001 was 17,459,689.

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.

ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)

ASSETS

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------

Current assets:
Cash and cash equivalents.................. $15,773 $16,817
Accounts receivable and amounts due from
affiliates............................... 693 829
Prepaids and other current assets.......... 5,620 5,547
Properties held for sale, net.............. 1,306 3,545
-------- --------
Total current assets............... 23,392 26,738
Property, furniture and equipment, net....... 101,153 100,461
Goodwill, net................................ 18,500 18,939
Operating lease security deposits............ 9,329 9,778
Other non-current assets..................... 10,688 10,024
-------- --------
$163,062 $165,940
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable........................... $813 $2,645
Accrued liabilities........................ 10,580 11,956
Notes payable, current portion............. 12,344 1,071
Accrued interest payable................... 907 599
-------- --------
Total current liabilities.......... 24,644 16,271
Notes payable, less current portion.......... 87,071 99,130
Lease liabilities............................ 1,934 1,752
Other non-current liabilities................ 678 789
-------- --------
114,327 117,942
-------- --------

Minority interest in majority owned entities. 144 1,130

Shareholders' equity:
Series A Preferred stock, convertible and
redeemable; 2,000 shares authorized, none
issued or outstanding at September 30, 2001
and December 31, 2000..................... -- --
Preferred stock, no par value. 8,000 shares
authorized, none issued and outstanding... -- --
Common stock, $0.01 par value. Authorized
100,000 shares; 17,460 shares issued and
outstanding at September 30, 2001 and
December 31, 2000......................... 175 175
Additional paid in capital................. 145,337 145,337
Accumulated deficit........................ (96,921) (98,644)
-------- --------
Total shareholders' equity......... 48,591 46,868
-------- --------

Commitments and contingent liabilities
$163,062 $165,940
======== ========

See accompanying notes to unaudited condensed consolidated financial statements.

ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------

Revenue:
Assisted living community revenue:
Rental revenue $ 29,689 $ 27,658 $ 87,246 $ 83,954
Assisted living and other services 6,240 5,878 18,224 18,467
Skilled nursing facility revenue 508 692 1,703 1,287
Management fee income 248 207 807 600
--------- --------- --------- ---------
Total revenue 36,685 34,435 107,980 104,308
--------- --------- --------- ---------
Operating expenses:
Assisted living community
Operating expense 22,245 21,210 65,333 65,808
Skilled nursing facility 667 601 1,851 1,341
Community lease expense 7,784 7,642 23,163 23,909
General and administrative 2,376 2,638 7,637 8,375
Depreciation and amortization 1,889 2,144 5,877 6,398
--------- --------- --------- ---------
Total operating expenses 34,961 34,235 103,861 105,831
--------- --------- --------- ---------
Income (loss) from operations 1,724 200 4,119 (1,523)
Other income (expense):
Interest income 199 373 951 1,131
Other income (expense), net (83) 69 (148) (116)
Gain on sale of assets -- -- 2,887 --
Interest expense (2,236) (2,157) (6,853) (6,037)
--------- --------- --------- ---------
Total other expense (2,120) (1,715) (3,163) (5,022)
--------- --------- --------- ---------
Income (loss) before income tax
expense, minority interest in
income of majority owned entities
and extraordinary item (396) (1,515) 956 (6,545)
Income tax benefit (expense) 28 (3) (10) (28)
Minority interest in income of
majority owned entities (371) (44) (773) (131)
--------- --------- --------- ---------
Income (loss) before extraordinary
item (739) (1,562) 173 (6,704)
Extraordinary gain from early
extinguishment of debt, net of income tax -- 9 1,550 20,391
--------- --------- --------- ---------
Net income (loss) $ (739) $ (1,553) $ 1,723 $ 13,687
========= ========= ========= =========

Basic and diluted income (loss)
per common share:
Income (loss) before extraordinary item $ (0.04) $ (0.09) $ 0.01 $ (0.39)
Extraordinary gain from early
extinguishment of debt, net of
income tax -- -- 0.09 1.18
--------- --------- --------- ---------
Net income (loss) $ (0.04) $ (0.09) $ 0.10 $ 0.79
========= ========= ========= =========
Weighted average common shares
outstanding 17,460 17,460 17,460 17,323
========= ========= ========= =========

See accompanying notes to unaudited condensed consolidated financial statements.

ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)

NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2001 2000
------- --------

Net cash provided by (used in) operating activities: $ 4,358 $ (1,273)
Cash flows used in investing activities:
Proceeds from the sale of partnerships, net of
selling cost .................................... 2,887 --
Additions to property, furniture and equipment .... (4,523) (3,634)
Proceeds from the sale of properties, net of
selling cost..................................... 730 455
Decrease in property held for sale ................ 59 --
Decrease in operating lease security deposits ..... 449 613
-------- --------
Net cash provided by (used in) investing
activities ................................... (398) (2,566)
-------- --------
Cash flows provided by financing activities:

Borrowing under refinancing for owned communities.. 16,427 11,209
Borrowing under non-secured credit line ........... -- 7,000
Payments of partnership obligations ............... (2,887) --
Repayments of notes payable ....................... (10,334) (5,797)
Repayments of subordinated debt ................... (5,250) (9,013)
Distributions to minority partners ................ (2,345) (204)
Mortgage insurance ................................ (200) (701)
Loan fees ......................................... (415) (176)
-------- --------
Net cash provided by (used in) financing
activities ................................... (5,004) 2,318
-------- --------
Net decrease in cash and cash equivalents .... (1,044) (1,521)

Cash and cash equivalents at beginning of period .... 16,817 14,570
-------- --------
Cash and cash equivalents at end of period .......... $ 15,773 $ 13,049
======== ========

Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest .......................................... $ 6,545 $ 6,227
======== ========
Supplemental schedule of non-cash investing
activities:

Conversion of subordinated notes to common stock .. $ -- $ 1,232
======== ========

See accompanying notes to unaudited condensed consolidated financial statements.

ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

We prepared the accompanying condensed consolidated financial statements of ARV
Assisted Living, Inc. and subsidiaries ("the Company" or "ARV") following the
requirements of the Securities and Exchange Commission ("SEC") for interim
reporting. As permitted under those rules, certain footnotes or other financial
information that are normally required by accounting principles generally
accepted in the United States of America ("GAAP") can be condensed or omitted.

The financial statements include all normal and recurring adjustments that we
consider necessary for the fair presentation of our financial position and
operating results. These are condensed financial statements. To obtain a more
detailed understanding of our results, you should also read the financial
statements and notes in our Form 10-K for fiscal year ended December 31, 2000,
which is on file with the SEC.

The results of operations can vary during each quarter of the year. Therefore,
the results and trends in these interim financial statements may not be the same
as those for the full year.

PRINCIPLES OF CONSOLIDATION

The condensed consolidated financial statements include the accounts of the
Company and our subsidiaries. Subsidiaries, which include limited partnerships
in which we have controlling interests, have been consolidated into the
financial statements. All significant intercompany balances and transactions
have been eliminated in consolidation.

CARRYING VALUE OF REAL ESTATE

Property, furniture and equipment are stated at cost less accumulated
depreciation which is charged to expense on a straight-line basis over the
estimated useful lives of the assets as follows:

Buildings and improvements............. 27.5 to 35 years
Leasehold property and improvements.... Lease term
Furniture, fixtures and equipment...... 3 to 7 years

USE OF ESTIMATES

In preparing the financial statements conforming with GAAP, we have made
estimates and assumptions that affect the following:

- reported amounts of assets and liabilities at the date of the
financial statements;

- disclosure of contingent assets and liabilities at the date of the
financial statements; and

- reported amounts of revenue and expenses during the reporting period.

Actual results could differ from those estimates.

CASH AND EQUIVALENTS

For purposes of reporting cash flows, we consider all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.

EARNINGS (LOSS) PER SHARE

Basic earnings per share ("EPS") excludes all dilution and is based upon the
weighted average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised, or converted into common stock.
The effect of fully dilutive securities was 381,613 shares for the nine months
ended September 30, 2001 but, is not considered material. Potentially dilutive
securities include convertible notes and stock options and warrants, which
convert to 2,322,726 and 3,990,300 shares of common stock for the three-month,
and nine-month periods ended September 30, 2001, and 2000, respectively.

ACCOUNTING FOR LONG-LIVED ASSETS

We review our long-lived assets, including goodwill, for impairment when events
or changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. In reviewing recoverability, we estimate the future cash
flows expected to result from using the assets and eventually disposing of them.
Cash flows are reviewed at the community level which is the lowest level of
identifiable cash flows. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized based upon the asset's fair value.
For long-lived assets held for sale fair value is reduced for costs to sell.

REVENUE RECOGNITION

We recognize rental, assisted living services and skilled nursing facility
revenue from owned and leased communities on a monthly basis as earned. We
receive fees for property management and partnership administration services
from managed communities and recognize such fees as earned.

ASSISTED LIVING COMMUNITY SALE-LEASEBACK TRANSACTIONS

Certain communities were sold subject to leaseback provisions under operating
leases. Gains where recorded were deferred and amortized into income over the
lives of the leases.

RESTATEMENT

In the fourth quarter 2000 we determined that costs related to the early
extinguishment of debt in prior quarters had not been written off. Accordingly,
the extraordinary gain and net income previously reported for the nine months
ended September 30, 2000, was decreased by $777,000. In addition, we
reclassified the skilled nursing facility operations as a separate line item in
the revenue and expenses of our normal operations, as compared to presenting the
operations as a net amount in other income and expense. The September 30, 2000,
information has been restated for the aforementioned items.

RECLASSIFICATIONS

We have reclassified certain prior period amounts to conform to the September
30, 2001, presentation.

ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS
No. 143 "Accounting for Asset Retirement Obligations". SFAS 141 requires all
business combinations initiated after June 30, 2001, to be accounted for using
the purchase method. SFAS 141 did not have an impact on the Company's financial
position, results of operations, or cash flows. The provisions of SFAS 142
eliminate the amortization of goodwill and identifiable intangible assets with
indefinite lives and require an impairment assessment at least annually by
applying a fair-value-based test. The Company is required to adopt SFAS 142 on
January 1, 2002. Management has not determined the impact the elimination of
goodwill amortization or the other provisions of the

statement will have on the Company's financial position, results of operations,
or cash flows. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The Company is required to adopt
SFAS 143 on January 1, 2002. Management believes the adoption of SFAS 143 will
not have a material effect on the Company's financial position, results of
operations, or cash flows. On October 3, 2001 the FASB issued SFAS 144
"Accounting for the Impairment and Disposal of Long Lived Assets". SFAS 144
supercedes SFAS 121, "Accounting for the Impairment of Long-lived Assets and
Long-lived Assets to be Disposed Of". However, SFAS 144 retains the fundamental
provisions of SFAS 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale. The Company is required to adopt SFAS 144 on January
1, 2002. Management has not determined the impact SFAS 144 will have on the
Company's financial position, results of operations, or cash flows.

(2) NOTES PAYABLE

Notes payable consist of the following at September 30, 2001, and December
31, 2000 (in thousands except per share data):

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------

Convertible subordinated notes due April 1, 2006 with interest
at 6.75%. The notes require semi-annual payments of interest and are
convertible to common stock at $18.57 per share. The notes may be called by us
at declining premiums starting at 110% of the principal amount................ $ 8,253 $ 15,253

Notes payable, bearing interest at a fixed rate of 9.15%, payable in
monthly installments of principal and interest totaling $34.1 collateralized
by property, maturing in January 2002......................................... 3,922 13,752

Notes payable, bearing interest at floating rates of 30 day LIBOR (2.6%
at September 30, 2001) plus points between 2.25 and 3.60 payable in monthly
installments of principal and interest averaging $168.8 collateralized by
Owned ALCs, maturities ranging from August 2002 through September 2004........ 23,904 18,972

Notes payable, bearing interest at rates of 8.00% and 8.53%, payable in monthly
installments of principal and interest totaling $373.4 collateralized by
property, maturities ranging from July 2010 to March 2036..................... 50,923 40,932

Notes payable to shareholder bearing interest beginning April 2001 at
30-day Treasury rate (2.63% at September 30, 2001) with principal due and
payable April 2002............................................................ 1,413 1,292

Note payable bearing interest at a fixed rate of 7.00% interest only until
December 2006 principal and interest thereafter with a maturity date of
December 2010................................................................. 1,000 --

Notes payable to shareholder bearing interest at 30 day LIBOR (2.6% at
September 30, 2001) plus 10% payable in monthly installments of interest only,
maturing April 2003........................................................... 10,000 10,000
------- --------
99,415 100,201
Less amounts payable in the next year........................................... 12,344 1,071
------- --------
$87,071 $ 99,130
======= ========

The future annual principal payments of the notes payable at September 30, 2001,
are as follows (in thousands):

Twelve month period ending September 30, 2002...................... $12,344
Twelve month period ending September 30, 2003...................... 22,623
Twelve month period ending September 30, 2004...................... 5,511
Twelve month period ending September 30, 2005...................... 485
Twelve month period ending September 30, 2006...................... 9,779
Thereafter......................................................... 48,673
-------
$99,415
=======

In the quarter ended March 31, 2001, certain notes payable were refinanced and
the prior debt extinguished, resulting in an extraordinary loss due to the
remaining deferred financing costs that were written off at the time of the
refinancing. In the quarter ended June, 30 2001, $7.0 million of convertible
subordinated notes were repurchased resulting in an extraordinary gain of $1.6

million offset in part by the write-off of loan issuance costs related to the
$7.0 million convertible subordinated note. In the quarter ended September 30,
2001 the $2.3 million promissory note from the repurchase of the subordinated
debt was repaid. In addition, during the quarter ended September 30, 2001 we
completed a $5.2 million refinancing for LIBOR plus 3.6% due September 2004 with
principal and interest payable monthly.

(3) LIQUIDITY

We believe that our existing liquidity, our ability to sell ALCs and land sites
which do not meet our financial objectives or geographic clustering strategy and
our ability to refinance certain owned ALCs and investments will provide us with
adequate resources to meet our current operating and investing needs. We do not
currently generate sufficient cash from operations to fund recurring working
capital and capital expenditure requirements. We will be required from time to
time to incur additional indebtedness or issue additional debt or equity
securities to finance our strategy, including the rehabilitation of ALCs as well
as other capital expenditures. We anticipate that we will be able to obtain the
additional financing; however, we cannot assure you that we will be able to
obtain financing on favorable terms.

(4) COMMITMENTS AND CONTINGENT LIABILITIES

COMMITMENTS

We have guaranteed the indebtedness at September 30, 2001, of certain
unconsolidated affiliated partnerships for $15.3 million. With respect to loans
totaling $15.3 million, we are the general partner of certain limited
partnerships that serve as the sole members of the three borrowing entities
formed as limited liability companies. Although a member of a limited liability
company is not personally liable for any contract or other obligation of that
entity, we delivered limited guaranties in connection with the loans. Due to the
limited guaranties, we assumed liability for repayment of the loan indebtedness
as a result of fraudulent or intentional misconduct regarding the mortgaged
properties, an unconsented transfer of a mortgaged property, a change of control
by borrower, or violation of hazardous materials covenants. Also, we guaranteed
the borrower's obligation to rebalance the loans upon breach of debt service
coverage obligations.

The Company has guaranteed to fund any operating deficits incurred in connection
with the operation of five joint venture projects, operating as Limited
Liability Companies ("LLC"), up to a maximum amount of $9.0 million. The
advances, which are considered capital contributions, are non-interest bearing
and will be repaid in accordance with the terms of the operating agreement.
These agreements will remain in effect from the commencement of operations of
the project until the earlier to occur of 18 months after the project has
achieved stabilization, the sale of the project to a third-party or the purchase
by the Company of the membership interests of the project owner. As of September
30, 2001 operating deficit advances of $1.2 million had been funded since
inception in 1998. The Company has declined to purchase two of the joint venture
properties therefore, as pursuant to the operating agreements the Company is no
longer a manager of the LLCs and our obligation to fund operating deficits for
said LLCs will expire in January 2002.

In our opinion, no claims may be currently asserted under any of the
aforementioned guarantees based on the terms of the respective agreements, other
than those already accrued.

CONTINGENCIES

We have entered into four long-term leases of assisted living communities
("ALCs"), the acquisition and construction of which have been or are being
financed by tax exempt multi-unit housing revenue bonds. In order to meet the
lease obligations and to allow the landlord to continue to qualify for favorable
tax treatment of the interest payable on the bonds, the ALCs must comply with
certain federal income tax requirements. These requirements principally pertain
to the maximum income level of a specified portion of the residents. Should we
elect to execute additional leases for ALCs to be constructed with bond
financing, we anticipate that the same and possibly additional restrictions will
be imposed. Failure to satisfy these requirements will constitute an event of
default under the leases, thereby permitting the landlord to accelerate their
termination. Failure to obtain low-income residents in the sequence and time
required could materially affect the lease-up schedule and, therefore, cash flow
from such ALCs.

LITIGATION

We are from time to time subject to lawsuits and other matters in the normal
course of business. While we cannot predict the results with certainty, we do
not believe that any liability from any such lawsuits or other matters will have
a material effect on our financial position, results of operations, or
liquidity.

(5) RELATED PARTY TRANSACTIONS

On April 24, 2000, the Company entered into a Term Loan Agreement with LFSRI II
Assisted Living LLC ("LFSRI"), an affiliate of Prometheus, Assisted Living, LLC
("Prometheus"). As of July 26, 2001, Prometheus beneficially owned approximately
47.8% of the Company's outstanding Common Stock. Pursuant to the Term Loan
Agreement, the company may borrow up to $10,000,000 from LFSRI with a maturity
date of April 24, 2003. The outstanding amount under the loan bears interest at
the annual rate equal to the LIBOR rate for each interest period

plus a 10% margin. At September 30, 2001, there was $10,000,000 outstanding. In
connection with the Term Loan Agreement, the company issued to LFSRI a warrant
to purchase up to 750,000 shares of the Company's Common Stock at a price of
$3.00 per share, subject to various adjustments exercisable until April 24,
2005. The Company also amended its stockholder rights agreement to prevent
shares that Prometheus may be deemed to beneficially own by reason of LFSRI's
rights under the warrant from causing Prometheus to become an "Acquiring Person"
and thus causing a triggering event under the rights agreement.

(6) SALE OF ASSETS

In January 2001, the Company sold its partnership interest in five tax credit
apartment partnerships to an unrelated third party. The Company previously
signed guarantees requiring the Company to meet certain federal income tax
requirements. These requirements principally pertain to the maximum income level
of all its residents. Consequently, the Company is still liable for compliance
of the community with these requirements for the period of time we operated the
facilities.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS

This 10-Q report contains forward-looking statements, including statements
regarding, among other items:

- our business strategy;

- our liquidity requirements and ability to obtain financing;

- the impact of future acquisitions and developments;

- the level of future capital expenditures;

- the impact of inflation and changing prices; and

- the outcome of certain litigation matters.

These forward-looking statements are based on our expectations and are subject
to a number of risks and uncertainties, some of which are beyond our control.
These risks and uncertainties include, but are not limited to:

- access to capital necessary for acquisitions and development;

- our ability to manage growth;

- the successful integration of ALCs into our portfolio;

- governmental regulations;

- competition; and

- other risks associated with the assisted living industry.

Although we believe we have the resources required to achieve our objectives,
actual results could differ materially from those anticipated by these
forward-looking statements. There can be no assurances that events anticipated
by these forward-looking statements will in fact transpire as expected.

OVERVIEW

ARV Assisted Living, Inc. ("ARV" or the "Company"), a Delaware corporation,
originally formed in 1980 as California Retirement Villas and is currently one
of the largest operators of licensed assisted living communities ("ALCs") in the
United States. We are a fully integrated provider of assisted living
accommodations and services that operates, acquires and develops ALCs. We have
been involved in the senior housing business for more than 20 years. Our
operating objective is to provide high quality, personalized assisted living
services to senior residents in a cost-effective manner, while maintaining
residents' independence, dignity and quality of life. Our ALCs offer a
combination of housing and personalized support services in a non-institutional
setting. Our ALCs are designed to respond to the individual needs of elderly
residents who require assistance with certain activities of daily living, but
who do not require the intensive nursing care provided in a skilled nursing
facility.

As of September 30, 2001, we operated a total of 54 ALCs containing 6,542 units,
15 of which are owned by us, 33 that are leased by us and 6 that are managed by
us. Owned ALCs ("Owned ALCs") are owned by us directly, or by affiliated limited
partnerships or limited liability companies for which we serve as managing
general partner or member and community manager and in which we have a majority
ownership interest ("Affiliated Partnerships"). Leased ALCs ("Leased ALCs") are
operated by us under long-term

operating leases for our own account or for Affiliated Partnerships in which we
have a majority ownership interest. Managed ALCs are operated by us on behalf of
an affiliated partnership (in which we do not have a majority ownership), a
joint venture or an unrelated third-party. We believe that this blend of
ownership, leasehold and management interest in our ALCs allows us to fund our
operations in a balanced, efficient manner.

The Company is the managing general partner of American Retirement Villas
Properties III, L.P. ("ARVP III"). On October 4, 2001, C3 Capital, LLC., a
California limited liability company ("C3 Capital"), commenced a hostile tender
offer, which was later withdrawn, to purchase up to 10,000 limited partnership
units of the Partnership at a net cash purchase price of $300 per unit (the
"Hostile Offer"), and also filed with the SEC a preliminary consent solicitation
pursuant to which C3 Capital seeks to remove the Company as the managing general
partner, and elect C3 Capital as the general partner of ARVP III. No definitive
consent solicitation has been filed or mailed to ARVP III unit-holders at this
time.

In response to the Hostile Offer and the consent solicitation, we, through ARVP
Acquisition, L.P., a California limited partnership wholly-owned by us,
commenced a tender offer on October 18, 2001 for 10,000 outstanding partnership
units of ARVP III for $360 per unit. We amended the tender offer on October 31,
2001 and increased the offer price to $400 per unit from $360 per unit,
increased the number of Units we are seeking to purchase from 10,000 units to
all outstanding Units, and reduced the minimum number of Units that must be
tendered before we are required to purchase any units to 30% of the outstanding
Units (the "Amended Offer"). The amendment to our original offer was in
response to C3 Capital's withdrawal of its tender offer, and receipt of a
highly conditional offer from Vintage Senior Housing, LLC ("Vintage"), an
affiliate of C3 Capital, to purchase all of ARVP III's non-cash assets for
$19.5 million. Vintage's offer is subject to, among other things, significant
due diligence and financing contingencies. In addition, on November 9, 2001 we
received a revised offer from Vintage increasing the purchase price for the
assets of ARVP III to $20 million. The Company responded to Vintage's offer and
its revised offer by asking Vintage to provide specific evidence as to its
ability to finance and close the proposed transaction.

Subsequent to September 30, 2001 we were awarded four management contracts, two
in Texas totaling 143 units and two in New Mexico totaling 92 units.

Since commencing operation of ALCs for our own account in April 1994, we have
focused our growth efforts on the acquisition and development of additional ALCs
and expansion of services to our residents while they reside in our communities.
As of September 30, 2001, a substantial portion of our business and operations
were conducted in California, where 37 of the 54 ALCs we operate are located. We
intend to continue to make California the primary focus of our geographic
clustering strategy. We are focusing greater attention on enhancing the
profitability of our existing core operations and on leasing up new developments
at an increased rate. In addition, we plan to divest ALCs that do not expand or
enhance one of our geographic clusters or do not meet our financial objectives.

Newly opened ALCs are expected to incur operating losses until sufficient
occupancy levels and operating efficiencies are achieved. Based upon historical
experience, we believe that a typical community will achieve its targeted
occupancy levels 18 - 24 months from the commencement of operations.
Accordingly, we require substantial amounts of liquidity to maintain the
operations of newly opened ALCs. If sufficient occupancy levels are not achieved
within reasonable periods, our results of operations, financial position and
liquidity could be materially and adversely impacted.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2000

The following table sets forth a comparison of the three months ended September
30, 2001, and the three months ended September 30, 2000.

Operating Results Before Extraordinary Item and Income Tax
For the Three Months Ended September 30, 2001 and 2000
(Unaudited)
(In millions)

FOR THE THREE MONTHS
(DOLLARS IN MILLIONS) ENDED SEPTEMBER 30, INCREASE/
2001 2000 (DECREASE)
------ ------ ---------

Revenue:
Assisted living community revenue ........ $ 35.9 $ 33.5 7.1%
Skilled nursing facility revenue ......... 0.5 0.7 (26.6)%
Management fees from affiliates and others 0.3 0.2 19.8%
------- ------- -----
Total revenue .................... 36.7 34.4 6.5%
------- ------- -----
Operating expenses:
Assisted living community operating
expense ................................ 22.2 21.2 4.9%
Skilled nursing facility expenses ........ 0.7 0.6 11.0%
Community lease expense .................. 7.8 7.6 1.9%
General and administrative ............... 2.4 2.7 (9.9)%
Depreciation and amortization ............ 1.9 2.1 (11.9)%
------- ------- -----
Total operating expenses ......... 35.0 34.2 2.1%
------- ------- -----
Income (loss) from operations .............. 1.7 0.2 762.0%

Other income (expense):
Interest income .......................... 0.2 0.4 (46.7)%
Other income (expense) ................... (0.1) 0.1 (220.3)%
Interest expense ......................... (2.2) (2.2) 3.7%
------- ------- -----
Total other income (expense) ..... (2.1) (1.7) (23.6)%
------- ------- -----
Loss before minority interest in income of
majority owned entities, and extraordinary
item....................................... (0.4) (1.5) (73.9)%
Minority interest in income of majority
owned entities ............................. (0.3) (0.1) 743.2%
------- ------- -----
Loss before extraordinary item ... $ (0.7) $ (1.6) (52.4)%
======= ======= =====

Total revenue for the three months ended September 30, 2001, increased $2.3
million to $36.7 million from $34.4 million for the three months ended September
30, 2000. This increase was primarily due to an increase in assisted living
community revenue as described below.

Assisted living community revenue increased $2.4 million to $35.9 million for
the three months ended September 30, 2001, from $33.5 million for the three
months ended September 30, 2000.

The increase in assisted living community revenue is attributable to the
following:

- An increase in average rate per occupied unit for ALCs, which we owned
and leased in both periods to $2,306 for the 2001 quarter as compared
to $2,183 for the 2000 quarter;

- Higher occupancy rates for the quarters ended September 30, of 87.8%
for 2001 compared to 86.7% for 2000; and

- An increase in assisted living penetration rate for the quarters ended
September 30, to 47.0% in 2001 from 46.3% in 2000.

Management fees from affiliates remained relatively constant.

Assisted living community operating expenses increased $1.0 million to $22.2
million for the three months ended September 30, 2001, from $21.2 million for
the three months ended September 30, 2000. These increases were due to the
following:

- increased utility costs;

- Increase in overtime due to labor shortages and additional personnel
needed to support the assisted living operations;

- Increase in California's minimum wage and cost of living increases in
wages and food;

- Increase in worker's compensation insurance expense, and

- Increase in general liability insurance.

Assisted living community lease expenses increased $0.2 million to $7.8 million
for the three months ended September 30, 2001, from $7.6 million for the three
months ended September 30, 2000, due to contracted rate increases.

General and administrative expenses decreased $0.3 million to $2.4 million for
the three months ended September 30, 2001, from $2.7 million for the three
months ended September 30, 2000, primarily as a result of decreased legal and
consulting expenses.

Depreciation and amortization expenses decreased $0.2 million to $1.9 million
for the three months ended September 30, 2001, from $2.1 million for the three
months ended September 30, 2000. The decrease was primarily due to reduced
amortization from syndication cost related to the retirement of public debt.

Interest income decreased $0.2 million to $0.2 million at September 30, 2001,
from $0.4 million at September 30, 2000, due to the lower interest rates during
the three months ended September 30, 2001 offset in part by higher cash and cash
equivalent balances.

Interest expense remained relatively constant at $2.2 million for the three
months ended September 30, 2001, compared with $2.2 million for the three months
ended September 30, 2000.

Other income and expense increased $0.2 million primarily due to the write off
of operating deficit loans.

NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2000

The following information concerning the operating results of the Company for
the nine-month periods ended September 30, 2001, and 2000 is presented in order
to provide the reader with additional information concerning the Company's
operations.

Operating Results before Extraordinary Item and Income Taxes
For the Nine Months Ended September 30, 2001 and 2000
(Unaudited)
(In millions)

FOR THE THREE MONTHS
(DOLLARS IN MILLIONS) ENDED SEPTEMBER 30, INCREASE/
2001 2000 (DECREASE)
------ ------ ---------

Revenue:
Assisted living community revenue.......... $105.5 $102.4 3.0%
Skilled nursing facility revenue........... 1.7 1.3 32.3%
Management fees from affiliates and others. 0.8 0.6 34.5%
------ ------ ----
Total revenue...................... 108.0 104.3 3.5%
------ ------ ----
Operating expenses:
Assisted living community operating
expense.................................. 65.3 65.8 (0.7)%
Skilled nursing facility expenses.......... 1.9 1.3 38.0%
Community lease expense.................... 23.2 23.9 (3.1)%
General and administrative................. 7.6 8.4 (8.8)%
Depreciation and amortization.............. 5.9 6.4 (8.1)%
------ ------ ----
Total operating expenses........... 103.9 105.8 (1.9)%
------ ------ ----
Income (loss) from operations................ 4.1 (1.5) 370.5%
Other income (expense):
Interest income............................ 1.0 1.1 (15.9)%
Other income (expense)..................... (0.2) (0.1) 27.6%
Gain on sale of assets..................... 2.9 -- 100.0%
Interest expense........................... (6.9) (6.0) 13.5%
------ ------ ----
Total other income (expense)....... (3.2) (5.0) (37.0)%
------ ------ ----
Income (loss) before minority interest in
income of majority owned entities, and
extraordinary item.......................... 0.9 (6.5) 114.6%
Minority interest in income of majority
owned entities............................. (0.7) (0.1) (490.1)%
------ ------ -----
Income (loss) before extraordinary
item............................. $ 0.2 $(6.6) 102.6%
====== ====== =====

Total revenue for the nine months ended September 30, 2001, increased $3.7
million to $108.0 million from $104.3 million for the nine months ended
September 30, 2000.

Assisted living community revenue increased $3.1 million to $105.5 million for
the nine months ended September 30, 2001, from $102.4 million for the three
months ended September 30, 2000.

The increase in assisted living community revenue is attributable to the
following:

- Increases in the average rate per occupied unit to $2,249 for the nine
months ended September 30, 2001, from $2,149 for the nine months ended
September 30, 2000;

- Higher occupancy rates of 88.1% for 2001 compared to 85.7% for 2000;
and

- An increase in assisted living penetration rate to 47.0% in 2001 from
46.3% in 2000, offset by;

- The sales of three ALCs in April 2000 which were determined to be
non-strategic.

Community expenses decreased $0.6 million to $90.4 million for the nine months
ended September 30, 2001, from $91.0 million for the nine months ended September
30, 2000. Of these decreases, $0.5 million related to ALC operating expense,
$0.7 million lease expense partially offset by an increase of $0.6 million for
the skilled nursing facility. The various categories of expense decreases are as
follows:

- The sale of three non-strategic communities in April 2000, offset by;

- Increase in California's minimum wage and cost of living increases in
wages and food;

- Increases in utilities and general liability insurance; and

- The increase in skilled nursing facility expense is primarily due to
the increase in payroll due to required staffing levels.

General and administrative expenses decreased $0.8 million due to:

- Continuing efforts to reduce staff at our corporate office; and

- Reduction in legal expenses, recruiting, severance and consulting
costs.

Depreciation and amortization expenses decreased $0.5 million due to the sale of
three ALCs in April 2000 and reduced amortization of syndication costs due to
the retirement of public debt.

Interest income decreased $0.1 million to $1.0 million for the nine months ended
September 30, 2001, from $1.1 million for the nine months ended September 30,
2000. The decrease was due to the lower interest rates during the nine months
ended September 30, 2001 compared to the nine months ended September 30, 2000
offset in part by higher cash and cash equivalent balances.

Gain on sale of assets of $2.9 million was the result of the sale of our
interest in five tax credit apartment partnerships that we had previously
anticipated selling at a loss.

Interest expense increased $0.9 million to $6.9 million for the nine months
ended September 30, 2001, compared with $6.0 million for the nine months ended
September 30, 2000, due to refinancing of owned communities offset somewhat by
the retirement of a portion of the 6-3/4%, convertible subordinated notes.
Interest expense consisted primarily of interest incurred on our remaining
6-3/4%, convertible subordinated notes due 2006, the loans from Lazard Freres as
well as mortgage interest on owned ALCs.

LIQUIDITY AND CAPITAL RESOURCES

Our unrestricted cash balances were $15.8 million and $16.8 million at September
30, 2001, and December 31, 2000, respectively. The decrease was due primarily to
cash used to retire our 6-3/4%, convertible subordinated notes due 2006 during
the second quarter of 2001 partially off-set by net cash provided by operating
activities.

Working capital at September 30, 2001, was a negative $1.3 million due to the
reclassification to current liabilities of three mortgage loans on owned ALCs.
Two of the loans for $3.9 million are due January 2002 for which we have
received loan commitments for 35-year loans which we anticipate closing prior to
December 31, 2001. The third mortgage loan is due in August 2002 and is also in
the process of being refinanced.

Cash provided by operating activities was $4.4 million for the nine months ended
September 30, 2001, compared to $1.3 million used for the nine-month period
ended September 30, 2000. The primary components of cash provided by operating
activities for the nine months ended September 30, 2001, were:

- Income before extraordinary items for the nine months ended September
30, 2001, of $0.2 million;

- Non-cash charges of $5.9 million for depreciation and amortization;

- Minority interest in income of majority owned entities, of $0.8
million;

- Net change in assets and liabilities of $0.3 million, offset by;

- Gain on sale of assets of $2.9 million for the sale of the tax credit
apartments,

Cash used in investing activities was $0.4 million for the nine months ended
September 30, 2001, compared to net cash used in investing activities of $2.6
million for the nine months ended September 30, 2000. The primary components of
cash used in investing activities for the nine months ended September 30, 2001,
were:

- $0.7 million for the sale of property deemed non-strategic; and

- $2.9 million for the proceeds from the sale of our partnership
interest in five senior apartments;

- $0.5 million decrease in security deposits, offset by;

- $4.5 million used for purchases of property, furniture and equipment.

Net cash used by financing activities was $5.0 million for the nine months ended
September 30, 2001, compared to net cash provided in financing activities of
$2.3 million for the nine months ended September 30, 2000. The primary
components of cash provided by financing activities for the nine months ended
September 30, 2001, were:

- $10.3 million for repayments of notes payable;

- $5.3 million for repayment of subordinated debt;

- $2.9 million for repayment of partnership obligations;

- $2.3 million for distributions to minority partners;

- $0.2 for expenses associated with loans; and

- $0.4 million for payment of loan fees on refinancings and new debt,
offset by;

- Debt proceeds of $16.4 million for the refinancing of owned ALCs.

The various debt and lease agreements contain restrictive covenants requiring us
to maintain certain financial ratios, including current ratio, working capital,
minimum net worth, and debt service coverage, among others. At September 30,
2001, we were in compliance with all covenants.

In our fiscal year ended December 31, 1999, we began retiring portions of our
6-3/4% convertible subordinated debt from time to time. During 1999, we issued a
total of 799,566 shares of our common stock and paid a total of $1.0 million to
some of our bondholders in exchange for a total of $9.2 million principal amount
of the subordinated notes due 2006 that were held by those bondholders. These
transactions resulted in an extraordinary gain of $6.8 million net of tax for
the fiscal year ended December 31, 1999. During 2000, we issued a total of
781,025 shares of our common stock and paid a total of $9.6 million to
additional bondholders in exchange for a total of $33.0 million in principal
amount of the subordinated notes held by those bondholders. These transactions
resulted in an extraordinary gain of $20.6 million net of tax and costs for the
year ended December 31, 2000. In the nine months ended September 30, 2001, we
retired an additional $7.0 million of the subordinated notes held by
bondholders. This generated an extraordinary gain of $1.6 million net of tax and
costs. Through these transactions, we have retired a total of $49.2 million of
our public debt resulting in extraordinary gains of $29.0 million to date.

In 2000 we obtained a $10.0 million unsecured revolving line of credit with our
major shareholder Lazard Freres to be used for retirement of the subordinated
6-3/4% public debt. At September 30, 2001, we had $10.0 million outstanding on
the line of credit at LIBOR plus 10% interest payable monthly.

We believe that our existing liquidity, our ability to sell ALCs and land sites
which do not meet our financial objectives or geographic clustering strategy and
our ability to refinance certain owned ALCs and investments will provide us with
adequate resources to meet our current operating and investing needs. We do not
currently generate sufficient cash from operations to fund recurring working
capital and capital expenditure requirements. We may be required from time to
time to incur additional indebtedness or issue additional debt or equity
securities to finance our strategy, including the rehabilitation of ALCs as well
as other capital expenditures. We anticipate that we will be able to obtain the
additional financing; however, we cannot assure you that we will be able to
obtain financing on favorable terms.

IMPACT OF INFLATION AND CHANGING PRICES

Operating revenue from ALCs we operate is the primary source of our revenue.
These ALCs are affected by rental rates which are highly dependent upon market
conditions and the competitive environments where the communities are located.
Employee compensation is the principal cost element of property operations.
Although there can be no assurance that we will be able to continue to do so, we
have historically been able to offset the effects of inflation on salaries and
other operating expenses by increasing rental and assisted living rates.

ACCOUNTING PRONOUNCEMENTS

a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
Company is required to adopt SFAS 143 on January 1, 2002. Management believes
the adoption of SFAS 143 will not have a material effect on the Company's
financial position, results of operations, or cash flows. On October 3, 2001 the
FASB issued SFAS 144 "Accounting for the Impairment and Disposal of Long Lived
Assets". SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of
Long-lived Assets and Long-lived Assets to be Disposed of". However SFAS 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
management of long-lived assets to be disposed of by sale. The Company is
required to adopt SFAS 144 on January 1, 2002. Management has not determined the
impact SFAS 144 will have on the Company's financial position, results of
operations, or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to fluctuations in interest rates on our
notes payable. Currently, we do not utilize interest rate swaps. The purpose of
the following analysis is to provide a framework to understand our sensitivity
to hypothetical changes in interest rates as of September 30, 2001. You should
be aware that many of the statements contained in this section are forward
looking and should be read in conjunction with our disclosures herein.

For fixed-rate debt, changes in interest rates generally affect the fair market
value of the debt instrument, but not our earnings or cash flows. Conversely,
for variable rate debt, changes in interest rates generally do not impact the
fair market value of the debt instrument, but do affect our future earnings and
cash flows. We do not have an obligation to prepay fixed-rate debt prior to
maturity, and as a result, interest rate risk and changes in fair market value
should not have a significant impact on the fixed-rate debt until we would be
required to refinance such debt. Holding the variable rate debt balance
constant, each one percentage point increase in interest rates would result in
an increase in variable rate interest incurred for the coming year of
approximately $350,000.

The table below details the principal amount and the average interest rates of
notes payable in each category based upon the maturity dates. The fair value
estimates for notes payable are based upon future discounted cash flows of
similar type notes or quoted market prices for similar loans. The carrying value
of our variable rate debt approximates fair value due to the frequency of
re-pricing of this debt. Our fixed-rate debt consists of convertible
subordinated notes payable and mortgage payables. The fixed rate-debt bears
interest at rates that approximate current market rates.

EXPECTED MATURITY DATE -- SEPTEMBER 30,
FAIR
2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE
------ ------- ------ ---- ------ ---------- ------- -------
(DOLLARS IN THOUSANDS)

Fixed rate debt $4,302 $412 $447 $485 $9,779 $48,673 $64,098 $64,098
Average interest rate 8.04% 8.01% 7.94% 7.87% 7.97% 7.97%

Variable rate debt $8,042 $22,211 $5,064 $-- $-- $-- $35,317 $35,317
Average interest rate 7.59% 7.71% 6.24%

We do not believe that the future market rate risks related to the above
securities will have a material adverse impact on our financial position,
results of operations or liquidity.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) EXHIBITS

2.2 Schedule 14D-9 filed on October 18, 2001 by American Retirement
Villas Properties III, L.P.

2.3 Schedule 14D-9 amendment number one filed on October 31, 2001 by
American Retirement Villas Properties III, L.P.

2.4 ARVP Acquisition, L.P. filed Schedule TO on October 18, 2001 an offer
to purchase for cash up to 10,000 of the outstanding limited
partnership units.

3.3 ARVP Acquisition, L.P.'s certificate of limited partnership.

(b) REPORTS ON FORM 8-K

No Form 8-Ks were filed during the quarter ended September 30, 2001.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

ARV ASSISTED LIVING, INC.

By: /s/ Douglas M. Pasquale
------------------------------------
Douglas M. Pasquale
Chief Executive Officer
(Duly authorized officer)

Date: November 14, 2001

By: /s/ Abdo H. Khoury
------------------------------------
Abdo H. Khoury
President and Chief Financial Officer
(Duly authorized officer)
Date: November 14, 2001

EXHIBIT INDEX

Exhibit
Number Description
------- -----------

2.2 Schedule 14D-9 filed on October 18, 2001 by American Retirement
Villas Properties III, L.P.

2.3 Schedule 14D-9 amendment number one filed on October 31, 2001 by
American Retirement Villas Properties III, L.P.

2.4 ARVP Acquisition, L.P. filed Schedule TO on October 18, 2001 an
offer to purchase for cash up to 10,000 of the outstanding limited
partnership units.

3.3 ARVP Acquisition, L.P.'s certificate of limited partnership.