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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1999
OR
[ ] 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: 0-26470
AMERICAN RETIREMENT VILLAS
PROPERTIES III, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-365417
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 [ ]
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
American Retirement Villas Properties III, L.P.
(a California limited partnership)
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Properties, at cost:
Land $ 2,224 $ 4,674
Buildings and improvements, less accumulated
depreciation of $2,651 and $5,177 at September 30,
1999 and December 31, 1998, respectively 12,901 23,669
Furniture, fixtures and equipment, less accumulated
depreciation of $495 and $395 at September 30, 1999
and December 31, 1998, respectively 776 874
-------- --------
Net properties 15,901 29,217
Cash 2,361 1,900
Restricted cash 166 162
Other assets 758 400
-------- --------
$ 19,186 $ 31,679
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable to banks $ 15,684 $ 23,072
Accounts payable 121 677
Accrued expenses 560 441
Amounts payable to affiliate 217 122
Distributions payable to Partners 208 399
-------- --------
Total liabilities 16,790 24,711
-------- --------
Commitments and contingencies
Minority interest 108 95
-------- --------
Partners' capital (deficit):
General partners' deficit (136) (90)
Limited partners' capital, 18,666 units outstanding 2,424 6,963
-------- --------
Total partners' capital 2,288 6,873
-------- --------
$ 19,186 $ 31,679
======== ========
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties III, L.P.
(a California limited partnership)
Condensed Consolidated Statements of Operations
(unaudited)
(In thousands, except unit data)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- ------ ------- ------
REVENUES:
Rent ............................................ $ 1,704 $2,112 $ 5,313 $6,007
Assisted living ................................. 234 257 753 705
Interest and other .............................. 89 131 399 337
------- ------ ------- ------
Total revenues ......................... 2,027 2,500 6,465 7,049
------- ------ ------- ------
COSTS AND EXPENSES:
Rental property operations ...................... 1,090 1,176 3,242 3,198
Assisted living ................................. 132 94 380 270
Depreciation and amortization ................... 279 359 798 1,074
Interest ........................................ 384 501 1,119 1,469
General and administrative ...................... 101 135 332 415
Property taxes .................................. 57 84 195 224
Advertising ..................................... 21 34 64 84
Minority interest ............................... 43 46 130 118
------- ------ ------- ------
Total costs and expenses ............... 2,107 2,429 6,260 6,852
------- ------ ------- ------
Operating income (loss) ......................... (80) 71 205 197
Gain on sale of properties ...................... -- -- 4,562 --
------- ------ ------- ------
Net income (loss) before cumulative effect of
change in accounting principle ................ (80) 71 4,767 197
------- ------ ------- ------
Cumulative effect of change in accounting
principle ..................................... -- -- (96) --
------- ------ ------- ------
Net income (loss) ............................... $ (80) $ 71 $ 4,671 $ 197
======= ====== ======= ======
Net income (loss) per limited partner unit ...... $ (4.29) $ 3.78 $250.24 $10.47
======= ====== ======= ======
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties III, L.P.
(a California limited partnership)
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1999 1998
-------- -------
Cash flows from operating activities:
Net income ............................................................ $ 4,671 $ 197
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization ..................................... 798 1,074
Gain on sale of properties ........................................ (4,562)
Cumulative effect of change in accounting principle ............... 96
Interest expense on notes payable to bank added to principal ...... -- 74
Change in assets and liabilities:
Increase in restricted cash ..................................... (4) (7)
Increase in other assets ........................................ (660) (325)
Decrease in accounts payable and accrued expenses ............... (436) (239)
Increase in amounts payable to affiliates, net .................. 95 564
Increase in minority interest ................................... 13 17
-------- -------
Net cash provided by operating activities ................... 11 1,355
-------- -------
Cash flows used in investing activities:
Improvements and building construction ................................ -- (841)
Proceeds from sale of properties ...................................... 3,962 --
Additions to furniture, fixtures and equipment, net ................... (47) (350)
-------- -------
Net cash provided by (used in) investing activities ......... 3,915 (1,191)
-------- -------
Cash flows from financing activities:
Proceeds from notes payable ........................................... 13,361 2,429
Principal repayments on notes payable to banks and others ............. (10,144) (242)
Interest rate lock fees paid in connection with refinancing ........... -- (706)
Proceeds from note receivable ......................................... 2,765 --
Distributions paid .................................................... (9,447) (587)
-------- -------
Net cash provided by (used in) financing activities ......... (3,465) 894
-------- -------
Net increase in cash .................................................... 461 1,058
Cash at beginning of period ............................................. 1,900 1,086
-------- -------
Cash at end of period ................................................... $ 2,361 $ 2,144
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest .............................. $ 1,090 $ 1,463
======== =======
Supplemental schedule of non-cash investing and financing activities:
Notes payable assumed by the buyer of the senior apartments ........... $ 10,605 $ --
======== =======
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties III, L.P.
(a California limited partnership)
Notes to Financial Statements
(Unaudited)
September 30, 1999
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
We prepared the accompanying condensed financial statements of American
Retirement Villas Properties III, L.P. 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 generally accepted accounting principles ("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, one should also read the financial
statements and notes in our Form 10-K for 1998, which is on file with the SEC.
The results of operation 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 subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
In preparing the financial statements conforming with GAAP, we have made
estimates and assumptions that affect the following:
- Reported amount 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENT ACCOUNTING DEVELOPMENTS
In April 1998, the Accounting Standard Executive Committee issued State of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities,"
which is effective for fiscal years beginning after December 15, 1998. The SOP
provides guidance on the financial reporting of start-up activities and
organizational costs. It requires costs of start-up activities and
organizational costs to be expensed when incurred and, upon adoption, the
write-off as a cumulative effect of a change in accounting principle of any
previously capitalized start-up or organizational costs. We adopted the
provision of SOP 98-5 on January 1, 1999 and reported a charge of approximately
$96,000 for the cumulative effect of this change in accounting principle.
(2) TRANSACTIONS WITH AFFILIATES
The Partnership has an agreement with ARV Assisted Living, Inc., the
Partnership's Managing General Partner, providing for a property management fee
of five percent of gross revenues amounting to $ 123,000 and $ 315,000, for the
three-month and the nine-month periods ended September 30, 1999, respectively.
Additionally, a partnership management fee of 10 percent of cash flow before
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distributions, as defined in the Partnership Agreement, amounted to $ 49,000 and
$ 116,000 for the three-month and the nine-month periods ended September 30,
1999, respectively.
(3) SALE OF SENIOR APARTMENT PROJECTS
On February 19, 1999 we sold the three senior apartment projects for
approximately $17.4 million, net of costs. In connection with the sale, we
received cash of approximately $4.0 million, $2.8 million in notes receivable
paid in June, and assumption of mortgage balances of approximately $10.6 million
by the buyer.
(4) NOTES PAYABLE
On June 28, 1999, we obtained financing from Banc One for $13.2 million on two
owned communities. As part of the loan requirements, we created a wholly owned
subsidiary Retirement Inns III, LLC. The loan is for 24 months and is secured by
the various properties; in addition, ARV Assisted Living, Inc our managing
General Partner is a guarantor on the loan for fraud, material misrepresentation
and certain covenants. The loan term is for 24 months with a lender option to
extend for 10 years. The interest rate is 9.15% and the payments are based upon
a 25 year principal and interest amortization schedule.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For the Nine Months
Ended September 30,
(DOLLARS IN MILLIONS) Increase/
1999 1998 (decrease)
---------------------------------
Revenue:
Rent ................................................ $ 5.3 $ 6.0 (11.6)%
Assisted living ..................................... 0.8 0.7 6.8%
Interest and other revenue .......................... 0.4 0.3 18.6%
------ ------ ------
Total revenue ............................... 6.5 7.0 (8.3)%
------ ------ ------
Costs and expenses:
Rental property operations .......................... 3.3 3.2 1.4%
Assisted living ..................................... 0.4 0.3 40.8%
General and administrative .......................... 0.3 0.4 (20.0)%
Depreciation and amortization ....................... 0.8 1.1 (25.7)%
Property taxes ...................................... 0.2 0.2 (13.3)%
Advertising ......................................... 0.1 0.0 (23.5)%
Interest ............................................ 1.1 1.5 (23.8)%
Minority interest in operations ..................... 0.1 0.1 9.4%
------ ------ ------
Total costs and expenses .................... 6.3 6.8 (8.6)%
------ ------ ------
Operating income ............................ 0.2 0.2 4.2%
Net profit on sale of property ........................ 4.6 -- 100.0%
------ ------ ------
Net income before cumulative effect of change in
accounting principle ................................ 4.8 0.2 2314%
Cumulative effect of change in accounting principle ... (0.1) -- (100.0)%
------ ------ ------
Net income ................................. $ 4.7 $ 0.2 2265%
====== ====== ======
The decrease in rental revenue is attributable to:
- only one and a half months of rent from the senior apartments in 1999
which were sold on February 19, 1999; offset by
- average occupancy for our assisted living communities increased to 93.6%
for the nine month period ended September 30, 1999 compared to 91.4% for
the nine month period ended September 30, 1998; and
- an increase in average rental rate per occupied unit to $1,567 for the
nine month period ended September 30, 1999 compared to $1,367 the nine
month period ended September 30, 1998;
The increase in assisted living revenue is attributable to an increase in
assisted living average rates from $652 for the nine month period ended
September 30, 1998 compared with $684 for the nine month period ended September
30, 1999.
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The increase in interest and other revenue is attributable to:
- investments of excess cash during 1999; and
- an increase in processing and other resident fees for the nine month
period ended September 30, 1999 resulting from increasing occupancy.
The increase in rental property operations expenses are attributed to:
- increased occupancy of Villa Las Posas as the community was in the
lease-up phase during 1998;
- staffing requirements related to increased assisted living services
provided;
- increased wages of staff to remain market competitive; and
- increased advertising to increase occupancy; offset by
- only one and a half months of rent expense from senior apartments in
1999 which were sold February 19, 1999.
The decrease in depreciation and amortization expense is related to sale of the
three senior apartments and the elimination of amortization of start-up costs
due to the adoption of SOP 98-5 which required us to write-off all capitalized
start-up costs in the first quarter 1999.
The decrease in interest expense is related to the buyer's assumption of the
notes payable for the three senior apartments sold on February 19, 1999.
The decrease in general and administrative expense is due to a cost cutting
measures.
Minority interest and property taxes remained constant between periods.
Cumulative effect of change in accounting principle is a result of the adoption
of SOP 98-5 which requires that costs of start-up activities and organizational
costs be expensed as incurred.
For the Three Months
Ended September 30,
(DOLLARS IN MILLIONS) Increase/
1999 1998 (decrease)
-------------------------------
Revenue:
Rent ............................... $ 1.7 $ 2.1 (19.3)%
Assisted living .................... 0.2 0.3 (8.6)%
Interest and other revenue ......... 0.1 0.1 (32.3)%
----- ----- ------
Total revenue .............. 2.0 2.5 (18.9)%
----- ----- ------
Costs and expenses:
Rental property operations ......... 1.1 1.2 (7.3)%
Assisted living .................... 0.1 0.1 39.9%
General and administrative ......... 0.1 0.1 (25.1)%
Depreciation and amortization ...... 0.3 0.4 (22.3)%
Property taxes ..................... 0.1 0.1 (31.8)%
Interest ........................... 0.4 0.5 (23.4)%
Minority interest in operations .... 0.0 0.0 (7.4)%
----- ----- ------
Total costs and expenses ... 2.1 2.4 (13.2)%
----- ----- ------
Net income ................ $(0.1) $ 0.1 (212.4)%
===== ===== ======
The decrease in rental revenue is attributable to:
- no rental income for the third quarter of 1999 from the senior
apartments due to the sale of the three apartment projects on February
19, 1999;
- average occupancy for our assisted living communities decreased to 94.1%
for the three month period ended September 30, 1999 compared to 97.4%
for the three month period ended September 30, 1998; offset by
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- an increase in average rental rate per occupied unit to $1,612 for the
three month period ended September 30, 1999 compared to $1,391 the three
month period ended September 30, 1998.
The decrease in assisted living revenue is attributable to occupancy decreases
noted earlier offset somewhat by assisted living average rents from $650 for the
three month period ended September 30, 1998 compared with $651 for the three
month period ended September 30, 1999.
The increase in interest and other revenue is attributable to:
- investments of excess cash during 1999; and
- an increase in processing and other resident fees for the three month
period ended September 30, 1999 resulting from increasing resident
applications.
The decrease in rental property operations and assisted living operating
expenses is attributable to:
- only one and a half months of rent from senior apartments in 1999 which
were sold February 19, 1999; offset by
- increased occupancy of Villa Las Posas as the community was in the
lease-up phase during 1998;
- staffing requirements related to increased assisted living services
provided; and
- increased salaries of staff.
Minority interest and property taxes remained relatively constant between
periods.
The decrease in interest expense is related to the buyer's assumption of the
notes payable for the three senior apartments sold on February 19, 1999.
The decrease in depreciation and amortization expense is related to sale of the
three senior apartments and the elimination of amortization of start-up costs
due to the adoption of SOP 98-5 which required us to write-off all capitalized
start-up costs in the first quarter 1999.
LIQUIDITY AND CAPITAL RESOURCES
We expect that the cash to be generated from operations of all our properties
will be adequate to pay operating expenses, fund necessary capital improvements,
meet required principal payments of debt and pay quarterly distributions. On a
long-term basis, our liquidity is sustained primarily from cash flow provided by
operating activities.
During the nine month period ended September 30, 1999, cash provided by
operating activities at approximately breakeven compared to cash provided by
operating activities of $1.4 million for the corresponding period in 1998.
During the nine month period ended September 30, 1999, our net cash provided by
investing activities was $3.9 million compared to cash used in investing
activities of $1.2 million for the corresponding period in 1998. The increase
was primarily a result of proceeds from the sale of the three senior apartment
projects.
During the nine month period ended September 30, 1999, our net cash used in
financing activities was $3.4 million compared to $0.9 cash provided by
financing activities for the corresponding period in 1998 which is attributable
to:
- distributions to partners of $9.4 million primarily from sale proceeds
from the senior apartment sale; and
- repayment on notes of $10.1 million; offset by
- cash provided by proceeds from refinancing of two properties in
September 1999; and
- collection of $2.8 million receivable from the sale of apartments in the
first quarter 1999.
We anticipate spending approximately $400,000 for capital expenditures during
1999 for physical improvements at our communities. Funds for these improvements
are expected to be available from operations.
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We are not aware of any trends, other than national economic conditions which
have had, or which may be reasonably expected to have, a material favorable or
unfavorable impact on the revenues or income from the operations or sale of
properties. We believe that if the inflation rate increases they will be able to
pass the subsequent increase in operating expenses onto the residents of the
communities by way of higher rental and assisted living rates. The
implementation of price increases is intended to lead to an increase in revenue
however, those increases may result in an initial decline in occupancy and/or a
delay in increasing occupancy. If this occurs, revenues may remain constant or
even decline.
YEAR 2000 ISSUE
We use certain computer programs that were written using two digits rather than
four to define the year. As a result, those programs may recognize a date using
"00" as the year 1900 rather than the year 2000. In the event this occurs with
any of the Company's computer programs, a system failure or miscalculation
causing disruptions of operations could occur. Such a failure could cause the
temporary inability to process transactions, send invoices or engage in similar
normal business activities. We have developed a comprehensive program to test
and modify our information technology to address the Year 2000 issue. We believe
that our program is on schedule for completion by the end of 1999, and that
there will be no material impact on our business, results of operations,
financial position or liquidity as a result of Year 2000 issues.
Our program is focused on the following three main projects:
- Information technology infrastructure; all hardware and software systems
- Community maintenance; community specific systems, including alarms
(security, fire and emergency call), elevator, phone, HVAC, and other
systems; and
- Third-party supplier/vendors.
For each of the above components, we have addressed or are addressing the Year
2000 issues in the following six phases:
- Conducted inventory of systems with potential Year 2000 issues;
- Assigned priorities to systems identified with Year 2000 issues;
- Assessed items which may have a material effect on our operations;
- Testing items assessed as material;
- Replacing or repairing material non-compliant items, and;
- Designing and implementing business continuation plans.
We have received communications from third-party providers of our administrative
services, as well as our significant suppliers of services and products to
determine the extent to which we are vulnerable to those parties' failures to
remediate their own Year 2000 issues. We do not presently believe that
third-party Year 2000 issues will have a material adverse effect on us. However,
there can be no guarantee that the systems of other companies on which our
operations or systems rely will be remedied on a timely basis or that a failure
by another company to remediate its systems in a timely manner would not have a
material adverse effect on us.
We have completed our conversion to an accounting system that is Year 2000
compliant. In addition, we have completed an assessment of our computer systems
and software and have substantially completed necessary modifications or
replacements to existing hardware and software and believe Year 2000 issues
should not have a material adverse effect on our operations. Testing and live
use has taken place and will continue throughout the remainder of 1999. Any
additional modifications found necessary will be made during the fourth quarter
of 1999.
We have developed the following contingency plans to cover potential business
disruptions:
- check processing - manual processing procedures have been set up and
manual checks are on hand at our offices.
- food supplies for communities - in addition to the normal food supplies
typically at the communities we will have an additional week of
non-perishable food at the communities.
- water supplies - supplies will be increased to include an extra 72 hours
of water over and above the state licensing requirements.
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- medication supplies - for those clients whose medications are managed by
the Company, we will attempt to have a 30-day supply of prescriptions at
the communities. In addition, we will also have a second pharmacy
available as a backup.
- cold weather contingency - in the event of a heat outage, supplies of
blankets have been increased.
- waste disposal - alternate means of disposal have been arranged.
In addition to the above contingency plans we have completed Year 2000 awareness
classes at all communities for both the residents and employees. Emergency plans
have been updated to include Year 2000 issues and we are holding drills and
training for all employees. The total cost our Year 2000 plan is difficult to
estimate due to the use of employees to perform additional tasks but we estimate
the cost to be in the $0.1-$0.2 million range. Many of the costs are in
replacement of computer systems that have been capitalized in fixed assets.
Facilities, including fire and life safety, phone systems, air conditioning and
heating, elevators and other building systems are in the process of being tested
per the manufacturers' instructions. If the manufacturer is unable to provide
testing instructions, we are in the process of seeking a letter of Year 2000
compliance from the manufacturer.
We expect to successfully implement any other additional changes necessary to
address our Year 2000 issues, and do not believe that the cost of such actions
will have a material adverse effect on our financial position, results of
operations or liquidity.
We believe that our Year 2000 program has been substantially completed. Our
program is based on a number of factors and assumptions including the accuracy
and completeness of responses to our inquiries. Our Year 2000 plan could be
adversely impacted if any of the factors and assumptions are incorrect. The
failure to correct a material Year 2000 issue could result in an interruption in
our normal business operations.
IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from ALCs and management fees from apartment communities we
operated are the primary sources of our revenue. These properties financial
performance are affected by rental rates, which are highly dependent upon market
conditions and the competitive environment where the facilities are located.
Employee compensation is the principal cost element of property operations.
Historically, we have offset the effects of inflation on salaries and other
operating expenses by increasing rental and assisted living rates, although
there can be no assurance that this trend will continue. The implementation of
price increases is intended to lead to an increase in revenue; however, rental
rate increases may result in an initial decline in occupancy and/or a delay in
increasing occupancy. If this occurs, revenues may remain constant or even
decline.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None
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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.
AMERICAN RETIREMENT VILLAS PROPERTIES III,
A CALIFORNIA LIMITED PARTNERSHIP
By: ARV Assisted Living, Inc.,
a Delaware Corporation
(Managing General Partner)
By: /s/ Douglas M. Pasquale
------------------------------------------
Douglas M. Pasquale
President, Chief Executive Officer and
Director of ARV Assisted Living, Inc.
(duly authorized officer)
Date: November 12, 1999
By: /s/ Abdo H. Khoury
------------------------------------------
Abdo H. Khoury
Senior Vice President, Chief Financial
Officer of ARV Assisted Living, Inc.
(principle financial officer)
Date: November 12, 1999
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule