10-Q

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 JUNE 30, 2002

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: 0-26980

ARV ASSISTED LIVING, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 245 FISCHER AVENUE, D-1 COSTA MESA, CA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) 33-0160968 (I.R.S. EMPLOYER
IDENTIFICATION NO.) 92626 (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 issuer’s Common Stock, no par value, as of July 20, 2002 was 17,459,689.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

ARV ASSISTED LIVING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(IN THOUSANDS)

ASSETS

	JUNE 30, 2002			DECEMBER 31, 2001
Current assets:
Cash and cash equivalents	$	13,688		$	13,234
Accounts receivable and amounts due from affiliates, net		1,182			744
Prepaids and other current assets		4,545			3,701
Impounds		3,451			3,779
Property held for sale, net		—			763
Total current assets		22,866			22,221
Property, furniture and equipment, net		115,544			116,929
Goodwill, net		18,354			18,354
Operating lease security deposits		9,244			9,414
Other non-current assets, net		15,033			10,259
	$	181,041		$	177,177
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,998		$	2,212
Accrued payroll costs		4,567			4,055
Other accrued liabilities		5,900			6,659
Notes payable, current portion		3,704			7,269
Accrued interest payable		843			823
Total current liabilities		17,012			21,018
Notes payable, less current portion		113,410			105,062
Lease liabilities		2,052			1,995
Other non-current liabilities		568			641
		133,042			128,716
Minority interest in majority owned entities		134			621
Shareholders’ equity:
Series A Preferred stock, $0.01 par value, convertible and redeemable; 2,000 shares authorized, none issued or outstanding at June 30, 2002 and December 31, 2001		—			—
Preferred stock, no par value; 8,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.01 par value; 100,000 shares authorized, 17,460 shares issued and outstanding at June 30, 2002 and December 31, 2001		175			175
Additional paid in capital		145,337			145,337
Accumulated deficit		(97,647	)		(97,672	)
Total shareholders’ equity		47,865			47,840
Commitments and contingencies	$	181,041		$	177,177

See accompanying notes to unaudited condensed consolidated financial statements.

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ARV ASSISTED LIVING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2002			2001			2002			2001
Revenue:
Assisted living community revenue:
Rental revenue	$	31,569		$	28,889		$	63,573		$	57,557
Assisted living and other services		7,084			6,079			13,825			11,984
Skilled nursing facility revenue		831			644			1,594			1,195
Management fees		259			240			529			559
Total revenue		39,743			35,852			79,521			71,295
Operating expenses:
Assisted living community operating expense		23,732			21,441			47,356			43,088
Skilled nursing facility expenses		743			613			1,499			1,184
Community lease expense		8,003			7,671			16,025			15,379
General and administrative		2,610			2,592			5,291			5,261
Depreciation and amortization		1,929			1,976			3,828			3,988
Total operating expenses		37,017			34,293			73,999			68,900
Income from operations		2,726			1,559			5,522			2,395
Other income (expense):
Interest income		109			318			160			752
Other income (expense), net		43			(100	)		2			(65	)
Equity in loss of partnerships		(255	)		—			(626	)		—
Gain on sale of properties and partnership interests		54			—			54			2,887
Interest expense		(2,345	)		(2,299	)		(4,654	)		(4,617	)
Total other expense		(2,394	)		(2,081	)		(5,064	)		(1,043	)
Income (loss) before income tax expense, minority interest in income of majority owned entities and extraordinary item		332			(522	)		458			1,352
Income tax expense		(17	)		(15	)		(20	)		(38	)
Minority interest in income of majority owned entities		(145	)		(272	)		(413	)		(402	)
Income (loss) before extraordinary item		170			(809	)		25			912
Extraordinary gain from early extinguishment of debt, net of income tax		—			1,606			—			1,550
Net income	$	170		$	797		$	25		$	2,462
Basic and diluted income (loss) per common share:
Income (loss) before extraordinary item	$	0.01		$	(0.05	)	$	0.00		$	0.05
Extraordinary gain from early extinguishment of debt, net of income tax		—			0.10			—			0.09
Net income	$	0.01		$	0.05		$	0.00		$	0.14
Weighted average common shares outstanding		17,460			17,460			17,460			17,460

See accompanying notes to unaudited condensed consolidated financial statements.

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ARV ASSISTED LIVING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(UNAUDITED)

(IN THOUSANDS)

	SIX MONTHS ENDED JUNE 30,
	2002			2001
Net cash provided by (used in) operating activities:	$	3,400		$	(1,425	)
Cash flows provided by (used in) investing activities:
Proceeds from sale of partnership, net of selling cost		—			2,887
Additional investment in unconsolidated limited liability companies		(551	)		—
Additions to property, furniture and equipment		(2,212	)		(3,078	)
Proceeds from the sale of properties, net of selling cost		817			668
(Increase) decrease in operating lease security deposits		170			(2	)
Net cash provided by (used in) investing activities		(1,776	)		475
Cash flows provided by (used in) financing activities:
Borrowings under refinancing for owned communities		7,386			10,778
Repayments of notes payable		(2,647	)		(9,926	)
Repayments of subordinated debt		—			(3,000	)
Collateral deposit under refinancing		(2,000	)		—
Distributions to minority partners		(3,382	)		(147	)
Loan fees		(527	)		(449	)
Net cash used in financing activities		(1,170	)		(2,744	)
Net increase (decrease) in cash and cash equivalents		454			(3,694	)
Cash and cash equivalents at beginning of period		13,234			16,817
Cash and cash equivalents at end of period	$	13,688		$	13,123
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest	$	4,634		$	2,233
Income taxes	$	20		$	38
Supplemental schedule of non-cash investing activities:
Non-cash refinancing of debt	$	—		$	2,250
Accrual for operating deficit obligations to unconsolidated partnerships	$	49		$	—

See accompanying notes to unaudited condensed consolidated financial statements.

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ARV ASSISTED LIVING, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2002 and 2001

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of ARV Assisted Living, Inc. and subsidiaries (“the Company” or “ARV”) pursuant to the rules and regulations 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 Company has reclassified certain prior year data to conform to the 2002 presentation.

The consolidated financial statements include all normal and recurring adjustments that the Company considers necessary for the fair presentation of its financial position and operating results for the periods presented. These are condensed consolidated financial statements. To obtain a more detailed understanding of the Company’s results, you should also read the consolidated financial statements and notes in the Company’s Form 10-K for our fiscal year ended December 31, 2001, 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 are not necessarily indicative of the results for the full year.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries, which include limited partnerships and limited liability companies in which the Company has controlling interests, have been consolidated into the financial statements. In December 2001, the Company acquired approximately 9,667 limited partnership units in American Retirement Villas Properties III, L.P. (“ARVP III”) resulting in a total ownership interest of approximately 52%. The balance sheets at December 31, 2001 and June 20, 2002 include the accounts of ARVP III while the statement of operations includes the operations of ARVP III for the three and six month periods ended June 30, 2002 only. All significant intercompany balances and transactions have been eliminated in consolidation.

CONSOLIDATED PARTNERSHIPS

Included in the consolidated financial statements are partnerships in which the Company owns less than 80% but more than 50%. The following is a recap of the assets and liabilities of those partnerships as of June 30, 2002 and December 31, 2001:

	2002		2001
Cash	$	3,032	$	7,668
Other current assets		4,375		3,954
Total assets		71,810		72,399
Current liabilities		3,684		4,194
Long term debt		64,200		60,675
Net equity		3,925		7,221

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USE OF ESTIMATES

In the preparation of the Company’s condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States, the Company has made estimates and judgments that affect:

• 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 revenues and expenses during the reporting period.

Actual results may differ from these estimates under different assumptions or conditions.

CASH AND EQUIVALENTS

For purposes of reporting cash balances, the Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents.

IMPOUNDS

Impounds consist of cash deposits for property taxes, insurance and replacement reserves made by the Company to certain lenders in accordance with the loan agreements governing the loans encumbering the Company’s assisted living communities.

ADVERTISING

Advertising costs are expensed as incurred.

PROPERTY, FURNITURE AND EQUIPMENT

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
Furniture, fixtures and equipment	3 to 7 years

GOODWILL

Effective, January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” which requires that the Company prospectively cease amortization of goodwill and instead conduct periodic tests of goodwill for impairment. The Company has completed a transitional test for goodwill impairment and has determined that no goodwill impairment was indicated as of January 1, 2002.

The following table shows, on a pro-forma basis, what earnings and earnings per share would have been if the new accounting standards had been applied for the period indicated:

	Three Months Ended June 30, 2001		Six Months Ended June 30, 2001
Reported net income	$	797	$	2,462
Add back: goodwill amortization		146		292
Adjusted net income	$	943	$	2,754
Per share information:
Reported net income	$	0.05	$	0.14
Goodwill amortization		0.01		0.02
Adjusted net income	$	0.06	$	0.16

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SFAS No. 141 “Business Combinations” and SFAS No.142 also require that the Company disclose the following information related to the Company’s intangible assets still subject to amortization. The following table details the balances of the amortizable intangible assets as of June 30, 2002:

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Leasehold interest	$	10,319	$	3,016	$	7,303
Loan fees		2,784		762		2,022
Deferred lease costs		558		212		346

ACCOUNTING FOR LONG-LIVED ASSETS

The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In reviewing recoverability, the Company estimates 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 of sale.

One land site that was previously held in property held for sale was sold during the quarter ended June 30, 2002.

INVESTMENTS IN REAL ESTATE ENTITIES

The Company serves as the general partner of five limited partnerships that operate assisted living communities (“ALCs”), four of which were consolidated for the entire 2001 year. The Company acquired a controlling interest in the fifth partnership in December 2001. The Company is also the general partner in two tax credit partnerships (ownership is less than 1%). The Company accounts for the its investment in partnerships where it can exercise significant influence using the equity method because it has less than a controlling interest. Under the terms of the subject partnership agreements, profits and losses are allocated to the general and limited partners in specified ratios. With the exception of non-recourse mortgage debt, the Company, in its capacity as general partner, is liable for all obligations of the limited partnerships. Liabilities under these obligations have generally not been significant. The Company is subject to liability under separate loan guarantees related to two of the partnership loans. Under Statement of Position No. 78-9, “Accounting for Investments in Real Estate Ventures,” the company records its obligations under these agreements as a component of the Company’s equity in the income or losses of these partnerships.

In 1998, the Company pursued an additional development strategy by entering into joint ventures (“LLCs”) designed to help us finance development and renovation projects and to mitigate the impact of start-up losses associated with the opening of newly constructed ALCs. The joint ventures were formed to finance and manage the substantial renovation of existing ALCs acquired in 1998 in the Hillsdale transaction and to construct three new communities on land sites the Company owned. Participants in the joint ventures with us are a third-party investor and a third-party developer. The LLCs contracted with the developer to provide development services to perform the renovation and construction. The Company manages four of the properties operated by the joint ventures for a management fee equal to three percent of gross revenues. One property is managed by an unrelated third party. The Company accounts for its investment in the joint ventures using the equity method and losses incurred by the LLCs are allocated disproportionately to the LLC members based upon their assumption of risk. In 2000 and 2001, certain LLC members’ capital was reduced to zero, consequently, the losses from the joint venture were allocated to us based upon the Company’s capital or percentage interest. The Company has agreed to fund any operating deficits incurred in connection with the operation of the five joint venture projects up to an aggregate amount of $6.0 million for all of the development properties and $6.0 million for all of the renovation properties, subject to a $9.0 million cap. The advances, which are considered capital contributions to the LLCs, are non-interest bearing and will be repaid only if sufficient funds are available in accordance with the terms of the operating agreements of the respective LLCs. The operating deficit payment agreement will remain in effect from the commencement of operations of a 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. The Company’s current funding of operating deficits since inception in 1998 is $2.0 million. The LLC operating agreements grant the Company options to purchase the other members’ interest in the LLCs when the ALCs reach stabilization, at a purchase price that is the greater of fair market value or an amount that generates a guaranteed internal

7

rate of return on the members capital contribution. In 2001, the Company declined to exercise the option to purchase two of the LLCs that had reached stabilization and in accordance with the LLCs’ operating agreement, the Company no longer serves as a manager of the two LLCs. In 2000 the Company determined that the value of certain of the LLCs was impaired based upon the Company’s review of the projected cash flows, accordingly, the Company wrote down the its investment by $5.7 million, to reflect the fair value.

GENERAL INSURANCE LIABILITY

The Company utilizes third-party insurance for losses and liabilities associated with general and professional liability claims subject to established deductible levels on a per occurrence basis. Losses up to these deductible levels are accrued based upon the Company’s estimates of the aggregate liability for claims incurred based on Company experience.

REVENUE RECOGNITION

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

ASSISTED LIVING COMMUNITY SALE-LEASEBACK TRANSACTIONS

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

EARNINGS (LOSS) PER SHARE

Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed similar to basic earnings per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of securities or other contracts to issue common stock, if dilutive. The basic weighted average number of shares outstanding were 17,459,689 for the quarters and six months ended June 30, 2002 and 2001. The number of incremental diluted shares were 733,889 and 363,171 for the quarters ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 the number of incremental diluted shares were 592,407 and 304,173. The number of anti-dilutive shares for the quarters and six months ended June 30, 2002 and 2001 were 1,140,576 and 1,194,426, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

The Company adopted SFAS No. 141 “Business Combinations”, SFAS No. 143 “Accounting for Asset Retirement Obligations”, and SFAS No. 144 “Accounting for the Impairment and Disposal of Long Lived Assets” on January 1, 2002. The adoption of SFAS Nos. 141, 143, and 144 did not have a material effect on the Company’s financial position, results of operations, or cash flows.

In addition, in April 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds the automatic treatment of gains or losses from extinguishment of debt as extraordinary unless they meet the criteria for extraordinary items as outlined in Accounting Principles Board Opinion No. 30, Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and makes various technical corrections to existing pronouncements. The provisions of SFAS No. 45 related to the rescission of FASB Statement 4 are effective for fiscal years beginning after May 15, 2002, with early adoption encouraged. All other provisions of SFAS No. 145 are effective for transactions occurring after May 15, 2002, with early adoption encouraged. The only impact the Company expects from the adoption of SFAS No. 145 is the reclassification of prior year extraordinary gains and losses to other income, interest expense and income taxes.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal

8

activity. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146 are required to be applied prospectively after the adoption date, we cannot determine the potential effects that adoption of SFAS No. 146 will have on our consolidated financial statements.

(2) ACQUISITIONS

In December 2001, the Company purchased a controlling interest in ARVP III. ARVP III owns two ALCs, one located in Arizona with 164 units and one located in California with 123 units. The Company accounted for this transaction using the purchase method and paid approximately $4.1 million in cash for the units acquired.

The following table summarizes the estimated fair or book value of the assets acquired and liabilities assumed at the date of acquisition:

Current assets	$	3,796
Property and equipment		15,230
Intangibles and other assets		289
Total assets		19,315
Current liabilities		1,057
Long-term debt		13,592
Total liabilities		14,649
Net assets acquired		4,666
Less minority interest		502
Net value to ARV	$	4,164

The purchase price paid in excess of the book value of the net assets acquired required a $3.5 million step-up in basis. This step-up in basis is being depreciated over the remaining useful life of the underlying existing assets. The pro forma effect on the statements of operations for the acquisition as if it had been acquired as of January 1, 2001 is as follows:

	Three Months Ended June 30, 2001			Six Months Ended June 30, 2001
Total revenue		37,475			74,515
Total operating expenses		(35,496	)		(71,335	)
Total other income (expense)		(2,358	)		(1,573	)
Income (loss) before income tax expense, minority interest in income of majority owned entities and extraordinary item		(379	)		1,607
Income tax expense		(20	)		(43	)
Minority interest in income of majority owned entities		(272	)		(402	)
Income (loss) before extraordinary item		(671	)		1,162
Extraordinary gain from early extinguishment of debt		1,606			1,484
Net income	$	935		$	2,646
Earnings per share basic and diluted	$	0.05		$	0.15

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(3)  NOTES PAYABLE

Notes payable consist of the following at June 30, 2002 and December 31, 2001:

	June 30, 2002		December 31, 2001
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	$	7,253	$	7,253
Note payable, bearing interest at a fixed rate of 8.50 % at June 30, 2002 and 9.15 % at December 31, 2001 payable in monthly installments at June 30, 2002 of principal and interest totaling $96 collateralized by property with a maturity of July 2003		11,919		7,979
Note payable, bearing interest at a fixed rate of 9.15 %, payable in monthly installments of principal and interest collateralized by property with a maturity of January 2002		—		2,057
Notes payable, bearing interest at floating rates of 30 day LIBOR (1.84% as of June 30, 2002) plus rates between 2.25% and 3.60% payable in monthly installments of principal and interest totaling $169 collateralized by Owned ALCs, maturities ranging from August 2002 through September 2004 (see note 8)		23,454		23,766
Note payable, bearing interest at a fixed rate of 7.0%, payable in monthly installments of interest only with principal due in 2010; $3,000 remaining drawable at $1,500 in 2003, $500 in 2004 and $1,000 in 2005		2,000		1,000
Notes payable, bearing interest at rates of 7.25% through 8.53%, payable in monthly installments of principal and interest totaling $446 collateralized by property, maturities ranging from July 2010 to February 2037		60,988		58,820
Notes payable to shareholder bearing interest beginning April 2001 at 30-day Treasury Rate with principal due and payable April 2003		—		1,456
Note payable to shareholder bearing interest at 30 day LIBOR (1.84% as of June 30, 2002) plus 9.54% payable in monthly installments of interest only, principal payments of $1.5 million payable on each July 1 until maturity, unsecured, maturing July 2004		11,500		—
Notes payable to shareholder bearing interest at 30 day LIBOR (1.84% as of June 30, 2002) plus 10% payable in monthly installments of interest only, unsecured, maturing April 2003		—		10,000
		117,114		112,331
Less amounts currently payable		3,704		7,269
	$	113,410	$	105,062

The future annual principal payments of the notes payable at June 30, 2002 are as follows:

Twelve month period ending June 30, 2003	$	3,704
Twelve month period ending June 30, 2004		14,364
Twelve month period ending June 30, 2005		31,343
Twelve month period ending June 30, 2006		7,854
Twelve month period ending June 30, 2007		898
Thereafter		58,951
	$	117,114

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 due to a cash prepayment and refinancing through a promissory note offset in part by the write-off of loan issuance costs related to the $7.0 million convertible subordinated note.

The Company’s 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 June 30, 2002, the Company was in compliance with all such covenants or had obtained waivers.

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(4)  LIQUIDITY

The Company believes that its existing liquidity, ability to sell assisted living communities and land sites which do not meet its financial objectives or geographic clustering strategy, and ability to refinance certain assisted living communities will provide adequate resources to meet current investing needs and support current growth plans for the next 12 months. The Company will be required from time to time to incur additional indebtedness or issue additional debt or equity securities to finance its growth strategy, including the acquisition of assisted living communities as well as other capital expenditures and to provide additional funds to meet increased working capital requirements.

(5)  COMMITMENTS AND CONTINGENT LIABILITIES

COMMITMENTS

The Company has guaranteed indebtedness at June 30, 2002 of certain unconsolidated affiliated partnerships for $3.5 million. Additionally the Company has guaranteed partnership indebtedness up to $3.7 million to the extent a lender suffers loss from: (i) the partnership’s failure to properly apply insurance proceeds, to deliver required books and records or to properly apply rents; (ii) fraud by the partnership; (iii) filing of bankruptcy by the partnership or the company; or (iv) environmental contamination of the secured properties.

The Company is the general partner of certain limited partnerships that in turn serve as the sole members of certain borrowing limited liability companies which had outstanding loan balances of $17.1 million at June 30, 2002. Although a member of a limited liability company is not personally liable for any contractual or other obligation of that entity, the Company delivered limited guaranties in connection with the loans. Due to the limited guaranties, the Company 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. The Company also guaranteed up to $1.0 million of mortgage debt secured by an ALC and pledged its partnership interest in two of our consolidating partnerships through July 2003.

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

CONTINGENCIES

The Company entered into four long-term leases of 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 the Company elect to execute additional leases for ALCs to be constructed with bond financing, the same and possibly additional restrictions are anticipated to 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

During 2001, four employees of an ALC owned by American Retirement Villas Properties II, a majority owned partnership filed EEOC claims against the Company. The claims have been submitted to binding arbitration.

Other than the ordinary routine litigation that is incidental to, and arises in the normal course of, the business of the Company, there are no material legal proceedings pending against the Company. While the Company cannot predict the results with certainty, it does not believe that any liability from any such lawsuits or other matters will have a material effect on its financial position, results of operations, or liquidity.

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GENERAL LIABILITY INSURANCE

In order to protect itself against lawsuits and claims relating to general and professional liability, the Company currently maintains third party insurance policies in amounts and covering risks that are consistent with industry practice. Under the terms of such insurance policies, the Company’s coverage is provided subject to varying deductible levels and liability amounts. As the result of poor industry loss experience, a number of insurance carriers have stopped providing insurance coverage to the assisted living industry, and those remaining have drastically increased premiums and deductible amounts. Consistent with this trend, the Company’s general liability coverage is subject to significant deductible levels on a per occurrence basis for all states of operation, with materially higher deductible levels assessed for Texas and Florida, for the nine months ended December 31, 2001 and the three months ended March 31, 2002. For the three months ended June 30, 2002, the Company’s general liability deductible per occurrence has again been materially increased for all states of operation. Losses up to these deductible levels are accrued based upon the Company’s estimates of the aggregate liability for claims incurred based on Company experience. As the result of these continuing increases in both deductible amounts and premiums, there can be no assurance that the Company will be able to obtain all desired insurance coverage in the future on commercially reasonable terms or at all.

(6)  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 May 7, 2001, Prometheus beneficially owned approximately 45.8% of the Company’s outstanding Common Stock. Pursuant to the Term Loan Agreement, the Company could borrow up to $10,000,000 from LFSRI, subject to certain conditions, and could be extended by one year if no default occurred. On April 24, 2002, for a fee of $250,000, the parties amended the existing $10.0 million term loan to: (i) increase the principal amount by $1.5 million to $11.5 million, (ii) decrease the interest rate to LIBOR plus 9.54% payable monthly and (iii) extend the maturity date to July, 1 2004, with principal payments of $1.5 million due on each July 1 until maturity. The proceeds of $1.5 million were used to pay off the note payable to Prometheus of $1.5 million. 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, which is exercisable until April 24, 2005. Also on April 24, 2000, the Company amended its 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.

(7)  COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

	June 30, 2002		December 31, 2001
Accrued liabilities
Property taxes	$	1,091	$	1,097
Various other accruals		4,809		5,562
	$	5,900	$	6,659

(8)  SUBSEQUENT EVENTS

On July 18, 2002, the Company completed the refinancing of two loans collateralized by two owned ALCs in an aggregate amount of $24.0 million. The loan proceeds were used to satisfy existing loans totaling $18.4 million, with maturities of $6.2 million in August 2002 and $12.2 million in March 2003. The new loan matures in August 2004 and accrues interest at a rate of 30-day LIBOR plus 3.5%, with a minimum interest rate of 7%, payable monthly. The current portion of notes payable at June 30, 2002, has been adjusted to reflect the impact of this transaction.

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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 the Company believes it has 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”), originally incorporated in California in 1980 and subsequently merged into a Delaware corporation in 1998, is one of the largest operators of licensed assisted living communities (“ALCs”) in the United States. ARV is 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, personalized support services and assistance in activities of daily living 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 June 30, 2002, we operated a total of 59 ALCs containing 6,863 units, 17 of which are owned by us, 33 that are leased by us and 9 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 under long-term operating leases for our own account or for Affiliated Partnerships in which we have a majority ownership interest. Managed ALCs (“Managed ALCs”) are operated on behalf of joint ventures 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.

Since commencing operation of ALCs we embarked upon an expansion strategy and achieved significant growth in revenue resulting primarily from the acquisition of ALCs. We focused our growth efforts on the acquisition and development of additional ALCs and expansion of services to our residents as they “age in place.” In the last three years we have focused on improving the operations of our existing ALCs. In December 2001, we acquired two ALCs through acquiring a controlling interest in ARVP III, a California partnership described below. As of June 30, 2002, a substantial portion of our business and operations are conducted in California, where 39 of the 59 ALCs we operate are located. We intend to continue to make the western United States the primary focus of our clustering strategy. Our current attention and resources are focused on enhancing the profitability of our existing core operations. 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.

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In October 2001, we entered into four management contracts providing for the Company’s management of certain ALCs, two in Texas totaling 126 units and two in New Mexico totaling 92 units. In January 2002 we entered into a fifth management contract for a newly completed ALC that is in the lease-up stage in California.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001

The following table sets forth a comparison of the three months ended June 30, 2002 (the “2002 Quarter”) and the three months ended June 30, 2001 (the “2001 Quarter”). The percentage increase (decrease) is based upon our Condensed Consolidated Statements of Operations and will not compute using the rounded amounts below.

Operating Results Before Extraordinary Item

For the Three Months Ended June 30, 2002 and 2001

(Unaudited)

(Dollars in millions)	For the three months ended June 30,						Increase/ (decrease)
	2002			2001
Revenue:
Assisted living community revenue	$	38.6		$	35.0		10.5	%
Skilled nursing facility revenue		0.8			0.7		29.0	%
Management fees		0.3			0.2		7.9	%
Total revenue		39.7			35.9		10.9	%
Operating expenses:
Assisted living community operating expense		23.7			21.4		10.7	%
Skilled nursing facility expenses		0.8			0.6		21.2	%
Community lease expense		8.0			7.7		4.3	%
General and administrative		2.6			2.6		0.7	%
Depreciation and amortization		1.9			2.0		(2.4	)%
Total operating expenses		37.0			34.3		7.9	%
Income from operations		2.7			1.6		74.9	%
Other income (expense):
Interest and other income		0.2			0.2		(30.3	)%
Equity in loss of partnerships		(0.3	)		—		100.0	%
Gain on sale of properties and partnership interests		0.1			—		100.0	%
Interest expense		(2.4	)		(2.3	)	2.0	%
Total other income (expense)		(2.4	)		(2.1	)	15.0	%
Income before minority interest in income of majority owned entities and extraordinary item		0.3			(0.5	)	163.6	%
Minority interest in income of majority owned entities		(0.1	)		(0.3	)	(46.7	)%
Income (loss) before extraordinary item	$	0.2		$	(0.8	)	121.0	%

Assisted living revenue increased $3.6 million or 10.5 % to $38.6 million for the three months ended June 30, 2002 from $35.0 million for the three months ended June 30, 2001. This increase was primarily due to:

• the increase in the number of ALCs which we own or lease from 48 during the 2001 Quarter to 50 during the 2002 Quarter due to the acquisition of ARVP III which has two ALCs; and

• an increase in average revenue per occupied unit for ALCs which we owned or leased in both periods to $2,407 for the 2002 Quarter as compared to $2,231 for the 2001 Quarter; offset by

• a decrease in average occupancy for ALCs which we own or lease to 85.8% for the 2002 Quarter from 88.3% for the 2001 Quarter.

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Skilled nursing facility revenue increased $0.1 million or 29.0 % to $0.8 million for the three months ended June 30, 2002 from $0.7 million for the three months ended June 30, 2001. This increase was primarily due to an increase in the number of residents that are billed to Medicare.

Management fees increased $0.1 million or 7.9 % to $0.3 million for the quarter ended June 30, 2002 from $0.2 million for the quarter ended June 30, 2001. The increase is due to the five new management contracts for the 2002 period versus the 2001 period, offset by the management fees from ARVP III included in the 2001 quarter and are eliminated in the 2002 quarter as ARVP III became a consolidated entity as of December 14, 2001.

Assisted living community operating expenses increased $2.3 million or 10.7% from $21.4 million for the quarter ended June 30, 2001 to $23.7 million for the quarter ended June 30, 2002. This increase was primarily due to the following:

• an increase in the number of ALCs we own or lease from 48 during the 2001 Quarter to 50 during the 2002 Quarter due to the acquisition of ARVP III which has two ALCs;

• an increase in liability and hazard insurance expenses;

• an increase in electric utilities due to the increase in electric rates;

• an increase workers compensation insurance and other payroll expenses; partially offset by

• a decrease in gas utility costs due to a milder weather in California during the 2002 Quarter compared to the 2001 Quarter.

Skilled nursing expenses increased $0.2 million or 21.2% from $0.6 million for the quarter ended June 30, 2001 to $0.8 million for the quarter ended June 30, 2002. This increase was primarily due to the following:

• an increase in liability and hazard insurance expenses;

• an increase in electric utilities due to the increase in California electric rates; and

• an increase in payroll expenses.

Community lease expenses increased $0.3 million or 4.3% to $8.0 million for the three months ended June 30, 2002 from $7.7 million for the three months ended June 30, 2001. The increase was primarily due to contracted rate increases tied to the increase in the Consumer Price Index and additional rents due to increases in revenue.

General and administrative expenses remained relatively constant at $2.6 million for the three months ended June 30, 2002 and the three months ended June 30, 2001. Decreases in payroll costs due to lower headcounts were partially offset by higher insurance expenses and legal costs.

Depreciation and amortization expenses decreased $0.1 million or 2.4% to $1.9 million for the three months ended June 30, 2002 from $2.0 million for the three months ended June 30, 2001. This decrease was primarily due to the following:

• the discontinuation of amortization of goodwill in the 2002 Quarter; and

• an increase in fully depreciated assets; partially offset by

• an increase in the number of ALCs we own or lease from 48 during the 2001 Quarter to 50 during the 2002 Quarter due to the acquisition of ARVP III which has two ALCs; and

• an increase in depreciation related to additions to property plant and equipment.

Interest and other income remained relatively constant at $0.2 million for the three months ended June 30, 2002 as compared to the three months ended June 30, 2001.

Equity in loss of partnerships was $0.3 million for the quarter ended June 30, 2002. The $0.3 million is due to our share of losses or gains in the unconsolidated joint ventures and funding of certain operating deficits.

Gain on sale of properties and partnership interests of $0.1 million in the quarter ended June 30, 2002 occurred as the result of the sale of Texas land that was previously classified in properties held for sale.

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Interest expense increased by $0.1 million or 2.0% to $2.4 million for the quarter ended June 30, 2002 compared to $2.3 million for the quarter ended June 30, 2001. Interest on increased borrowings and the acquisition of the ARVP III communities were partially offset by decreases in interest rates.

Minority interest in income of majority owned entities decreased $0.2 million or 46.7% to $0.1 million for the quarter ended June 30, 2002 compared to $0.3 million for the quarter ended June 30, 2001. The decrease was due to the lower income earned in the 2002 Quarter as compared to income earned in the 2001 Quarter by our majority owned partnerships.

SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001

The following table sets forth a comparison of the six months ended June 30, 2002 (the “2002 period”) and the six months ended June 30, 2001 (the “2001 period”). The percentage increase (decrease) is based upon our Condensed Consolidated Statements of Operations and will not compute using the rounded amounts below.

Operating Results Before Extraordinary Item

For the Six Months Ended June 30, 2002 and 2001

(Unaudited)

(Dollars in millions)	For the six months ended June 30,						Increase/ (decrease)
	2002			2001
Revenue:
Assisted living community revenue	$	77.4		$	69.5		11.3	%
Skilled nursing facility revenue		1.6			1.2		33.4	%
Management fees		0.5			0.6		(5.4	)%
Total revenue		79.5			71.3		11.5	%
Operating expenses:
Assisted living community operating expense		47.4			43.1		9.9	%
Skilled nursing facility expenses		1.5			1.2		26.6	%
Community lease expense		16.0			15.4		4.2	%
General and administrative		5.3			5.2		0.6	%
Depreciation and amortization		3.8			4.0		(4.0	)%
Total operating expenses		74.0			68.9		7.4	%
Income from operations		5.5			2.4		130.6	%
Other income (expense):
Interest and other income		0.1			0.7		(76.4	)%
Equity in loss of partnerships		(0.6	)		—		(100.0	)%
Gain on sale of properties and partnership interests		0.1			2.9		(98.1	)%
Interest expense		(4.7	)		(4.6	)	0.8	%
Total other income (expense)		(5.1	)		(1.0	)	385.5	%
Income before minority interest in income of majority owned entities and extraordinary item		0.4			1.4		(66.1	)%
Minority interest in income of majority owned entities		(0.4	)		(0.4	)	(2.7	)%
Income (loss) before extraordinary item	$	0.0		$	1.0		(97.3	)%

Assisted living revenue increased $7.9 million or 11.3 % to $77.4 million for the six months ended June 30, 2002 from $69.5 million for the six months ended June 30, 2001. This increase was primarily due to:

• the increase in the number of ALCs which we own or lease from 48 during the 2001 period to 50 during the 2002 period due to the acquisition of ARVP III which has two ALCs; and

• an increase in average revenue per occupied unit for ALCs which we owned or leased in both periods to $2,403 for the 2002 period as compared to $2,210 for the 2001 period; offset by

• a decrease in average occupancy for ALCs which we own or lease to 86.2% for the 2002 period from 88.6% for the 2001 period.

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Skilled nursing facility revenue increased $0.4 million or 33.4 % to $1.6 million for the six months ended June 30, 2002 from $1.2 million for the six months ended June 30, 2001. This increase was primarily due to an increase in the number of residents that are billed to Medicare.

Management fees decreased $0.1 million or 5.4 % to $0.5 million for the six months ended June 30, 2002 from $0.6 million for the six months ended June 30, 2001. This decrease was primarily due to:

• ARVP III’s management fees, included in the 2001 period are eliminated in the 2002 period as ARVP III became a consolidated entity as of December 14, 2001; and

• management fees from apartment partnership interests sold in the first quarter of 2001; partially offset by

• five new management contracts for the 2002 period.

Assisted living community operating expenses increased $4.3 million or 9.9% from $43.1 million for the six months ended June 30, 2001 to $47.4 million for the six months ended June 30, 2002. This increase was primarily due to the following:

• an increase in the number of ALCs we own or lease from 48 during the 2001 period to 50 during the 2002 period due to the acquisition of ARVP III which has two ALCs;

• an increase in liability and hazard insurance expenses;

• an increase in electric utilities due to the increase in electric rates;

• an increase in payroll expenses, primarily workers compensation insurance; partially offset by

• a decrease in gas utility costs due to a milder winter in California during the 2002 period compared to the 2001 period.

Skilled nursing expenses increased $0.3 million or 26.6% from $1.2 million for the six months ended June 30, 2001 to $1.5 million for the six months ended June 30, 2002. This increase was primarily due to:

• an increase in liability and hazard insurance expenses;

• an increase in professional fees, as this facility is managed by a third party;

• an increase in electric utilities due to the increase in electric rates;

• an increase in payroll expenses, primarily workers compensation insurance; partially offset by

• a decrease in gas utility costs due to a milder winter in California during the 2002 period compared to the 2001 period.

Community lease expenses increased $0.6 million or 4.2% from $15.4 million for the six months ended June 30, 2001 to $16.0 million for the six months ended June 30, 2002. The increase was primarily due to contracted rate increases tied to the increase in the Consumer Price Index and additional rents due to increases in revenue.

General and administrative expenses increased $0.1 million or 0.6% from $5.2 million for the six months ended June 30, 2001 to $5.3 million for the six months ended June 30, 2002. Higher insurance expenses and legal costs were partially offset by decreases in payroll costs due to lower headcounts.

Depreciation and amortization expenses decreased $0.2 million or 4.0% to $3.8 million for the six months ended June 30, 2002 from $4.0 million for the six months ended June 30, 2001. This decrease was primarily due to the following:

• the discontinuation of amortization of goodwill in 2002; and

• an increase in fully depreciated assets; partially offset by

• an increase in the number of ALCs we own or lease from 48 during the 2001 to 50 during 2002 due to the acquisition of ARVP III which has two ALCs; and

• an increase in depreciation related to additions to property plant and equipment.

Interest and other income decreased $0.6 million or 76.4% to $0.1 million for the six months ended June 30, 2002 from $0.7 million for the six months ended June 30, 2001. The decrease was primarily the result of lower interest rates and lower interest earning balances during 2002 as compared to 2001.

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Equity in loss of partnerships was $0.6 million for the six months ended June 30, 2002. The $0.6 million is due to our share of losses or gains in the unconsolidated joint ventures and funding of certain operating deficits.

Gain on sale of properties and partnership interest of $0.1 million in the six months ended June 30, 2002 was the result of the sale of land in Texas. The gain on sale of properties and partnership interests of $2.9 million in the six months ended June 30, 2001 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 $0.1 million or 0.8% to $4.7 million for the six months ended June 30, 2002 from $4.6 million for the six months ended June 30, 2001. Decreases in interest rates were offset by increased borrowings and the acquisition of the ARVP III communities.

Minority interest in income of majority owned entities remained relatively constant at $0.4 million for the six months ended June 30, 2002 as compared to the six months ended June 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our unrestricted cash balances were $13.7 million and $13.2 million at June 30, 2002 and December 31, 2001, respectively.

Working capital increased $4.7 million from $1.2 million at December 31, 2001 to $5.9 million at June 30, 2002. The increase was primarily due to the reclassification of the loan on one ALC for $6.2 million due in August 2002 from short-term liabilities to long term liabilities. On July 18, 2002, we completed the refinancing of two loans collateralized by two Owned ALCs in an aggregate amount of $24.0 million, paying off existing loans of $18.4 million with maturities of $6.2 million in August 2002 and $12.2 million in March 2003. The new loan matures in August 2004 and bears interest at a rate equal to the 30-day LIBOR plus 3.5% with a minimum rate of 7.0% payable monthly.

Cash provided by operating activities was $3.4 million for the six months ended June 30, 2002 compared to cash used of $1.4 million for the six months ended June 30, 2001. The primary components of cash provided by operating activities for the six months ended June 30, 2002 were:

• Net income of $0.0 million; adjusted for

• $3.8 million non-cash charge of depreciation and amortization expense;

• $0.6 million for equity in loss of partnerships; and

• $0.4 million from minority interest income; offset by

• $1.6 million net change in assets and liabilities.

Cash used in investing activities was $1.7 million for the six months ended June 30, 2002 compared to cash provided by investing activities of $0.5 million for the six months ended June 30, 2001. The primary components of cash used in investing activities for the six months ended June 30, 2002 were:

• $2.2 million used for purchases of property, furniture and equipment; and

• $0.5 million funding of partnerships; offset by

• $0.8 million proceeds from the sale of land; and

• $0.2 million decrease in operating security deposits.

Cash used in financing activities was $1.2 million for the six months ended June 30, 2002 compared to cash used in financing activities of $2.7 million for the six months ended June 30, 2001. The primary components of cash used in financing activities for the six months ended June 30, 2002 were:

• $3.4 million for distributions to minority partners;

• $2.7 million for repayments of notes payable;

• $2.0 million for collateral deposit;

• $0.5 million for loan fees paid; offset by

• $7.4 million in debt proceeds for the refinancing of owned ALCs

Various debt and lease agreements binding the company 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 June 30, 2002, we were in compliance with the covenants of the various debt and lease agreements or had obtained waivers of the covenants.

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We lease 33 ALCs that have lease termination dates from 2010 to 2021. Sixteen of the leases were re-negotiated in January 2001 to extend their lease termination through fiscal 2021. Certain of the leases require the payment of additional rent based on a percentage increase of gross revenues. Leases are subject to increase based upon changes in the consumer price index, subject to certain limits, as defined in the individual lease agreements.

We refinanced two ALCs owned by two of our majority owned partnerships during the quarter ended March 31, 2002. One refinancing increased the loan to $2.4 million for 35 years at an interest rate of 7.56%. The other refinancing amended one of the existing notes to (i) increase the principal sum of the existing loan by approximately $4.0 million, (ii) extend the maturity date of the existing loan to July 1, 2003, and (iii) change the interest rate of the existing loan to 8.5%. On April 24, 2002 for a fee of $250,000, we amended the existing $10.0 million term loan to increase the principal amount by $1.5 million to $11.5 million and the proceeds of $1.5 million were used to pay off the payable to Prometheus of $1.5. The new term loan bears interest at LIBOR plus 9.54% payable monthly and has a maturity date of July 1, 2004, with principal payments of $1.5 million due on each July 1 until maturity. On July 18, 2002, we refinanced loans collateralized by two Owned ALCs for $24.0 million, paying off existing loans in an aggregate amount of $18.4 million with maturities of $6.2 million in August 2002 and $12.2 million in March 2003. The new loan matures in August 2004 and accrues interest at a rate of 30-day LIBOR plus 3.5%, with a minimum interest of 7.0% payable monthly.

Pursuant to the terms of an Operating Deficit Payment Agreement, the Company has agreed to fund any operating deficits incurred in connection with the operation of five joint venture projects operating as limited liability companies (“LLC”) up to an aggregate amount of $6.0 million for all of the development properties and $6.0 million for all of the renovation properties, subject to a $9.0 million cap. The advances, which are considered capital contributions to the LLCs, are non-interest bearing and will be repaid only if sufficient funds are available in accordance with the terms of the operating agreements of the respective LLCs. This Agreement will remain in effect from the commencement of operations of a 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 June 30, 2002, operating deficit advances of $2.0 million had been funded since inception in 1998. We declined to purchase two of the joint venture properties and, in accordance with the operating agreement, we were terminated as the manager of those LLCs. In addition, we are no longer managing one of the properties that is outside our geographic clustering strategy.

We have Federal net operating loss carryforwards of approximately $50.0 million, which expire in 2012 to 2021.

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 and support our current growth plan for the next twelve months. 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

To date, inflation has not had a significant impact on ARV. Inflation could, however, affect our future revenues and operating income due to our dependence on the senior resident population, most of whom rely on relatively fixed incomes to pay for our services. The monthly charges for the resident’s unit and assisted living services are influenced by the location of the community and local competition. Our ability to increase revenues in proportion to increased operating expenses may be limited. We typically do not rely to a significant extent on governmental reimbursement programs. In pricing our services, we attempt to anticipate inflation levels, but there can be no assurance that we will be able to respond to inflationary pressures in the future.

FORWARD-LOOKING STATEMENTS

A number of matters and subject areas discussed in this report, that are not historical or contain current facts, deal with potential future circumstances, operations, and prospects. The discussion of these matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from our actual future experience as a result of such factors as: the effects of competition and economic conditions on the occupancy levels in our communities; our ability under current market conditions to maintain and increase our resident charge without adversely affecting the occupancy level; our ability to control community operation expenses without adversely affecting the occupancy level and the level of resident charges; the ability of our operations to generate cash flow sufficient to service our debt, capital expenditures and other fixed payment requirements; our

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ability to find sources of financing and capital on satisfactory terms to meet our cash requirements to the extent that they are not met by operations. We have attempted to identify, in context, certain of the factors that we currently believe may cause actual future results to differ from our current expectations regarding the matters or subject areas discussed in this report. These and other risks and uncertainties are detailed in our reports filed with the Securities and Exchange Commission, including our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial condition is exposed to market risks related to fluctuations in interest rates on 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 June 30, 2002. 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 under the heading “Forward-Looking Statements.”

With respect to fixed rate debt, changes in interest rates generally affect the fair 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 fair 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 value should not have a significant impact on the fixed rate debt until we are 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 expected 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 value except for the convertible subordinated debt which bears interest at 6.75%.

Expected Maturity Data – June 30,

	2003			2004			2005			2006			2007			Thereafter			Total		Fair Value
Fixed rate debt	$	1,621		$	12,281		$	554		$	7,854		$	898		$	58,951		$	82,159	$	82,159
Average interest rate		8.01	%		7.98	%		7.93	%		8.00	%		8.07	%		8.07	%
Variable rate debt	$	2,083		$	2,083		$	30,789		$	—		$	—		$	—		$	34,955	$	34,955
Average interest rate		6.78	%		6.47	%		6.37	%

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 operation or liquidity.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

During 2001, four employees of an ALC owned by American Retirement Villas Properties II, a majority owned partnership filed EEOC claims against the Company. The claims have been submitted to binding arbitration.

Other than the ordinary routine litigation that is incidental to, and arises in the normal course of, the business of the Company, there are no material legal proceedings pending against the Company. While the Company cannot predict the results with certainty, it does not believe that any liability from any such lawsuits or other matters will have a material effect on its financial position, results of operations, or liquidity.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

20

None.

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

The Company held its annual meeting of stockholders on June 11, 2002. The following is a brief description of each matter voted upon at the meeting and the number of votes cast for or against, or withheld with respect to, each matter.

(a) The stockholders reelected the Class B Directors, David P. Collins and John A. Moore to serve until 2005. 16,413,189 and 16,434,434 votes were received for and 355,036 and 333,791 votes were withheld for Mr. Collins’ and Mr. Moore’s election, respectively.

The term of office as director continued after the meeting for the following Class A and Class C directors: Douglas M. Pasquale (A), Robert C. Larson (A), and Maurice J. DeWald (C).

(b) Votes were received for the adoption of The 2002 Stock Option and Incentive Plan of ARV Assisted Living, Inc. as follows:

For:	10,736,425
Against:	339,861
Abstain:	10,107
Not voted:	5,681,832

ITEM 5.    OTHER INFORMATION

None.

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

(a)    EXHIBITS

10.104	Second Amendment to Multifamily Note between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.105	Second Amendment to Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.106	Master Modification Agreement between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.107	Guaranty Agreement between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.108	Cash Collateral Pledge Agreement between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.109	Amended Term Note between ARV Assisted Living, Inc. and LFSRI II Assisted Living, LLC
10.110	Amendment to the Term Loan Agreement between ARV Assisted Living, Inc. and LFSRI II Assisted Living, LLC

(b)    REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the quarter ended June 30, 2002.

21

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, 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

Date: August 9, 2002

Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/    DOUGLAS M. PASQUALE         Douglas M. Pasquale	Chief Executive Officer (Principal Executive Officer)	August 9, 2002
/s/    ABDO H. KHOURY         Abdo H. Khoury	President and Chief Financial Officer (Principal Financial & Accounting Officer)	August 9, 2002

22

EX-10.104

                                                                  Exhibit 10.104

                      SECOND AMENDMENT TO MULTIFAMILY NOTE

     THIS SECOND AMENDMENT TO MULTIFAMILY NOTE (this "Amendment") is made as of
this 19th day of February, 2002 and effective as between the parties hereto as
of January 1, 2002, between RETIREMENT INNS III, LLC, a Delaware limited
liability company (the "Borrower"), and RED MORTGAGE CAPITAL, INC., an Ohio
corporation, formerly known as Provident Mortgage Capital, Inc.,
successor-in-interest to Banc One Capital Funding Corporation (the "Lender").

                                    RECITALS

     WHEREAS, the Lender has previously made a loan to the Borrower in the
original principal sum of Eight Million Two Hundred Nine Thousand Nine Hundred
Dollars ($8,209,900) (the "Loan") pursuant to the terms of that certain
Multifamily Note dated as of June 27, 1999, by the Borrower to the order of the
Lender (the "Original Note"), as amended pursuant to the terms of that certain
First Amendment to Multifamily Note dated as of December 28, 2000 between
Borrower and Lender (the "First Amendment to Note" and together with the
Original Note, the "Existing Note") and is secured, in part, by a first mortgage
lien on the real property (the "Mortgaged Property") described on Exhibit A to
that certain Multifamily Deed of Trust, Assignment of Rents, Security Agreement
and Fixture Filing dated as of June 27, 1999 by the Borrower and for the benefit
of the Lender (the "Original Deed of Trust"), recorded among the Official
Records of Ventura County, California (the "Land Records") on June 28, 1999 as
Instrument No. 99-122405, as amended by that certain Amendment to Multifamily
Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated
as of August 31, 1999 between the Borrower and the Lender (the "First Amendment
to Deed of Trust"), recorded among the Land Records on September 10, 1999 as
Instrument No. 99-173435, as affected by that certain Confirmatory Assignment of
Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture
Filing dated as of December 12, 2000, effective as of October 2, 2000, by Banc
One Capital Funding Corporation, an Ohio corporation to Provident Mortgage
Capital, Inc., now known as Red Mortgage Capital, Inc. (the "Confirmatory
Assignment", and together with the Original Deed of Trust and the First
Amendment to Deed of Trust, the "Existing Deed of Trust"), recorded among the
Land Records on January 31, 2001 as Instrument No. 2001-0018605-00; and

     WHEREAS, pursuant to the terms of that certain Confirmatory Agreement dated
as of December 28, 2000 by and among the Borrower, ARV Assisted Living, Inc., a
Delaware corporation (the "Guarantor"), and the Lender (the "Confirmatory
Agreement"), and the First Amendment to Note, the Maturity Date (as such term is
defined in the Original Note) of the Loan was extended to January 1, 2002; and

     WHEREAS, the Borrower has requested and the Lender has agreed pursuant to
the terms and conditions of that certain Master Modification Agreement dated as
of the date hereof by and among Borrower, Guarantor, and Lender (the
"Modification Agreement") to (i) increase the principal sum of the Loan to
$11,980,000 (the "Increase"), (ii) extend the Maturity Date (as such term is
defined in the Existing Note) of the Loan to July 1, 2003 (the "Extension"), and
(iii) change the interest rate of the Loan to 8.50% (the "Rate Change"); and

     WHEREAS, Borrower and Lender have agreed to enter into this Amendment in
accordance with the terms and conditions of the Modification Agreement.

     NOW, THEREFORE, for and in consideration of the premises, the mutual entry
of the Modification Agreement by the parties thereto, the Extension, the
Increase, the Rate Change, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged by each party hereto, the
parties hereby agree as follows:

     Section 1. Recitals. The Recitals are hereby incorporated into this
Amendment as a substantive part hereof.

     Section 2. Modification to the Existing Note.



                (a) The first paragraph of the Existing Note is hereby deleted
in its entirety and the following is inserted in lieu thereof:

     "FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to the
     order of RED MORTGAGE CAPITAL, INC., an Ohio corporation, or any successor
     holder of this Multifamily Note, the principal sum of ELEVEN MILLION NINE
     HUNDRED EIGHTY THOUSAND and 00/100 DOLLARS (US $11,980,000.00), with
     interest on the unpaid principal balance at the annual rate of Eight and
     50/100ths percent (8.50%)."

                (b) Section 3(b) of the Existing Note is hereby deleted in its
entirety and the following is inserted in lieu thereof:

     "Consecutive monthly installments of principal and interest, each in the
     amount of Ninety-Six Thousand Three Hundred Eighty-Seven and 22/100 Dollars
     (US $96,387.22), shall be payable on the first day of each month beginning
     on March 1, 2002 until the Maturity Date or the Extended Maturity Date (as
     defined in Section 20 herein), if applicable, until the entire unpaid
     principal balance evidenced by this Note is fully paid. Any accrued
     interest remaining past due for 30 days or more shall be added to and
     become part of the unpaid principal balance and shall bear interest at the
     rate or rates specified in this Note, and any reference below to "accrued
     interest" shall refer to accrued interest which has not become part of the
     unpaid principal balance. Subject to Section 20 herein, any remaining
     principal and interest shall be due and payable on July 1, 2003 or on any
     earlier date on which the unpaid principal balance of this Note becomes due
     and payable, by acceleration or otherwise (the "Maturity Date"). The unpaid
     principal balance shall continue to bear interest after the Maturity Date
     or the Extended Maturity Date, if applicable, at the Default Rate set forth
     in this Note until and including the date on which it is paid in full."

     Section 3. Ratification. Except as may be amended or modified hereby, the
terms of the Existing Note are hereby ratified, affirmed and confirmed and shall
otherwise remain in full force and effect.

     Section 4. Amendments. This Amendment may be amended or supplemented by and
only by an instrument executed and delivered by each party hereto.

     Section 5. Waiver. The Lender shall not be deemed to have waived the
exercise of any right which it holds under the Original Loan Documents (as such
term is defined in the Modification Agreement) unless such waiver is made
expressly and in writing (and no delay or omission by the Lender in exercising
any such right shall be deemed a waiver of its future exercise). No such waiver
made as to any instance involving the exercise of any such right shall be deemed
a waiver as to any other such instance, or any other such right. Without
limiting the operation and effect of the foregoing provisions hereof, no act
done or omitted by the Lender pursuant to the powers and rights granted to it
hereunder shall be deemed a waiver by the Lender of any of its rights and
remedies under any of the provisions of the Original Loan Documents executed in
connection with the Loan, and this Assignment is made and accepted without
prejudice to any of such rights and remedies.

     Section 6. Governing Law. This Agreement shall be given effect and
construed by application of the law of the State of California.

     Section 7. Headings. The headings of the sections, subsections, paragraphs
and subparagraphs hereof are provided herein for and only for convenience of
reference, and shall not be considered in construing their contents.

                                       2



     Section 8. References. As used herein, all references made (i) in the
neuter, masculine or feminine gender shall be deemed to have been made in all
such genders and (ii) in the singular or plural number shall be deemed to have
been made, respectively, in the plural or singular number as well.

     Section 9. Severability. No determination by any court, governmental body
or otherwise that any provision of this Amendment or any amendment hereof is
invalid or unenforceable in any instance shall affect the validity or
enforceability of (i) any other such provision or (ii) such provision in any
circumstance not controlled by such determination. Each such provision shall be
valid and enforceable to the fullest extent allowed by, and shall be construed
wherever possible as being consistent with, applicable law.

     Section 10. Binding Effect. This Amendment shall be binding upon and inure
to the benefit of the Borrower and the Lender and their respective successors
and assigns, except that the Borrower shall not have the right to assign its
rights hereunder or any interest in the Original Loan Documents without the
prior written consent of the Lender.

     Section 11. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument.

     Section 12. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER EACH (i)
AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF
THIS AMENDMENT, THE NOTE, ANY OTHER ORIGINAL LOAN DOCUMENT, OR THE RELATIONSHIP
BETWEEN THE PARTIES, AS LENDER AND BORROWER, THAT IS TRIABLE OF RIGHT BY A JURY
AND (ii) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE
EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO
TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH
THE BENEFIT OF COMPETENT LEGAL COUNSEL.

     IN WITNESS WHEREOF, each of the parties hereto have executed and delivered
this Amendment under their respective seals as of the day and year first written
above.

WITNESS:                                  BORROWER:

                                          RETIREMENT INNS III, LLC,
- ----------------------------          a Delaware limited liability company


                                          By:  /s/ ABDO H. KHOURY
                                             -----------------------------------
                                          Name:    Abdo H. Khoury
                                          Title:   Manager

WITNESS:                                  LENDER:

                                          RED MORTGAGE CAPITAL, INC.,
- ----------------------------          an Ohio corporation, formerly known
                                          as Provident Mortgage Capital, Inc.,
                                          successor-in-interest to Banc One
                                          Capital Funding Corporation


                                          By:
                                             -----------------------------------
                                          Name:
                                          Title:

                                       3

EX-10.105

                                                                  Exhibit 10.105

                 SECOND AMENDMENT TO MULTIFAMILY DEED OF TRUST,
                     ASSIGNMENT OF RENTS, SECURITY AGREEMENT
                               AND FIXTURE FILING

                                  (CALIFORNIA)

     THIS SECOND AMENDMENT TO MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FILING (this "Amendment") is made as of the 19th
day of February, 2002 and effective as between the parties hereto as of January
1, 2002, by and between RETIREMENT INNS III, LLC, a Delaware limited liability
company ("Borrower"), and RED MORTGAGE CAPITAL, INC., an Ohio corporation,
formerly known as Provident Mortgage Capital, Inc., successor-in-interest to
Banc One Capital Funding Corporation ("Lender").

     WHEREAS, Lender has previously made a loan to Borrower in the original
principal sum of Eight Million Two Hundred Nine Thousand Nine Hundred Dollars
($8,209,900) pursuant to the terms of that certain Multifamily Note dated as of
June 27, 1999 by the Borrower to the order of Lender (the "Original Note"), as
amended by that certain First Amendment to Multifamily Note dated as of December
28, 2000 between Borrower and Lender (the "First Amendment to Note" together
with the Original Note, the "Existing Note"), and is secured by a first mortgage
lien on the real property described on Exhibit A attached hereto pursuant to
that certain Multifamily Deed of Trust, Assignment of Rents, Security Agreement
and Fixture Filing dated as of June 27, 1999 by Borrower for the benefit of
Lender (the "Original Deed of Trust") and recorded among the Land Records of
Ventura County on June 28, 1999 as Instrument No. 99-122405, as amended by that
certain Amendment to Multifamily Deed of Trust, Assignment of Rents, Security
Agreement and Fixture Filing dated as of August 31, 1999 between Borrower and
Lender (the "First Amendment to Deed of Trust"), recorded among the Land Records
on September 10, 1999 as Instrument No. 99-173435, as affected by that certain
Confirmatory Assignment of Multifamily Deed of Trust, Assignment of Rents,
Security Agreement and Fixture Filing dated as of December 12, 2000, effective
as of October 2, 2000, by Banc One Capital Funding Corporation, an Ohio
corporation to Provident Mortgage Capital, Inc., now known as Red Mortgage
Capital, Inc. (the "Confirmatory Assignment", and together with the Original
Deed of Trust and the First Amendment to Deed of Trust, the "Existing Deed of
Trust"), recorded among the Land Records on January 31, 2001 as Instrument No.
2001-0018605-00; and

     WHEREAS, the Borrower has requested and the Lender has agreed pursuant to
the terms and conditions of that certain Master Modification Agreement dated as
of the date hereof by and among Borrower, Lender and ARV Assisted Living, Inc.,
a Delaware corporation ("Modification Agreement"), to (i) increase the principal
sum of the Loan to $11,980,000) (the "Increase"), (ii) extend the Maturity Date
(as such term is defined in the Existing Note) of the Loan to July 1, 2003 (the
"Extension"), and (iii) change the interest rate of the Loan to 8.50% (the "Rate
Change"); and

                                       1



     WHEREAS, the Borrower and the Lender have agreed to enter into this
Amendment in accordance with the terms and conditions of the Modification
Agreement.

     NOW, THEREFORE, for and in consideration of the premises, the mutual entry
of the Modification Agreement and this Amendment, the Extension, the Increase,
the Rate Change, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged by each party hereto, the parties
hereby agree as follows::

     Section 1. Amendment to Existing Deed of Trust. Paragraph 3 of the Existing
Deed of Trust is hereby amended to change the amount of "Indebtedness" (as
defined therein) secured thereby from $8,209,900 to $11,980,000.

     Section 2. Ratification. Except as may be amended or modified hereby, the
terms of the Existing Deed of Trust are hereby ratified, affirmed and confirmed
and shall otherwise remain in full force and effect.

     Section 3. Amendments. This Amendment may be amended or supplemented by and
only by an instrument executed and delivered by each party hereto.

     Section 4. Waiver. The Lender shall not be deemed to have waived the
exercise of any right which it holds under the Original Loan Documents (as such
term is defined in the Modification Agreement) unless such waiver is made
expressly and in writing (and no delay or omission by the Lender in exercising
any such right shall be deemed a waiver of its future exercise). No such waiver
made as to any instance involving the exercise of any such right shall be deemed
a waiver as to any other such instance, or any other such right. Without
limiting the operation and effect of the foregoing provisions hereof, no act
done or omitted by the Lender pursuant to the powers and rights granted to it
hereunder shall be deemed a waiver by the Lender of any of its rights and
remedies under any of the provisions of the Original Loan Documents executed in
connection with the Loan, and this Assignment is made and accepted without
prejudice to any of such rights and remedies.

     Section 5. Governing Law. This Agreement shall be given effect and
construed by application of the law of the State of California.

     Section 6. Headings. The headings of the sections, subsections, paragraphs
and subparagraphs hereof are provided herein for and only for convenience of
reference, and shall not be considered in construing their contents.

     Section 7. References. As used herein, all references made (i) in the
neuter, masculine or feminine gender shall be deemed to have been made in all
such genders and (ii) in the singular or plural number shall be deemed to have
been made, respectively, in the plural or singular number as well.

                                       2



     Section 8. Severability. No determination by any court, governmental body
or otherwise that any provision of this Amendment or any amendment hereof is
invalid or unenforceable in any instance shall affect the validity or
enforceability of (i) any other such provision or (ii) such provision in any
circumstance not controlled by such determination. Each such provision shall be
valid and enforceable to the fullest extent allowed by, and shall be construed
wherever possible as being consistent with, applicable law.

     Section 9. Binding Effect. This Amendment shall be binding upon and inure
to the benefit of the Borrower and the Lender and their respective successors
and assigns, except that the Borrower shall not have the right to assign its
rights hereunder or any interest in the Original Loan Documents without the
prior written consent of the Lender.

     Section 10. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument.

     Section 11. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER EACH (i)
AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF
THIS AMENDMENT, THE NOTE, ANY OTHER ORIGINAL LOAN DOCUMENT, OR THE RELATIONSHIP
BETWEEN THE PARTIES, AS LENDER AND BORROWER, THAT IS TRIABLE OF RIGHT BY A JURY
AND (ii) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE
EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO
TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH
THE BENEFIT OF COMPETENT LEGAL COUNSEL.

                                       3



     IN WITNESS WHEREOF, the undersigned parties have signed and delivered this
instrument or have caused this instrument to be signed and delivered by its duly
authorized representative.

                                       BORROWER:

                                       RETIREMENT INNS III, LLC,
                                       a Delaware limited liability company


                                       By: /s/ Abdo H. Khoury
                                          --------------------------------------
                                       Name:   Abdo H. Khoury
                                       Title:  Manager


                                       LENDER:

                                       RED MORTGAGE CAPITAL, INC.,
                                       an Ohio Corporation, formerly known as
                                       Provident Mortgage Capital, Inc.,
                                       successor-in-interest to Banc One Capital
                                       Funding Corporation

                                       By:
                                          --------------------------------------
                                       Name:
                                       Title:

                                        4

EX-10.106

                                                                  Exhibit 10.106

                          MASTER MODIFICATION AGREEMENT

                  THIS MASTER MODIFICATION AGREEMENT (this "Agreement") is made
as of this 19th day of February, 2002 and effective as between the parties
hereto as of January 1, 2002, by and among RETIREMENT INNS III, LLC, a Delaware
limited liability company (the "Borrower"), ARV ASSISTED LIVING, INC., a
Delaware corporation (the "Guarantor"), and RED MORTGAGE CAPITAL, INC., an Ohio
corporation, formerly known as Provident Mortgage Capital, Inc.,
successor-in-interest to Banc One Capital Funding Corporation (the "Lender").

                                    RECITALS

                  WHEREAS, the Lender has previously made a loan to the Borrower
in the original principal sum of Eight Million Two Hundred Nine Thousand Nine
Hundred Dollars ($8,209,900) (the "Loan") pursuant to the terms of that certain
Multifamily Note dated as of June 27, 1999, by the Borrower to the order of the
Lender (the "Original Note"), as amended pursuant to the terms of that certain
First Amendment to Multifamily Note dated as of December 28, 2000 between
Borrower and Lender (the "First Amendment to Note" and together with the
Original Note, the "Existing Note"), and is secured, in part, by a first
mortgage lien on the real property (the "Mortgaged Property") described on
Exhibit A to that certain Multifamily Deed of Trust, Assignment of Rents,
Security Agreement and Fixture Filing dated as of June 27, 1999 by the Borrower
for the benefit of the Lender (the "Original Deed of Trust"), recorded among the
Official Records of Ventura County, California (the "Land Records") on June 28,
1999 as Instrument No. 99-122405, as amended by that certain Amendment to
Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture
Filing dated as of August 31, 1999 between the Borrower and the Lender (the
"First Amendment to Deed of Trust"), recorded among the Land Records on
September 10, 1999 as Instrument No. 99-173435, as affected by that certain
Confirmatory Assignment of Multifamily Deed of Trust, Assignment of Rents,
Security Agreement and Fixture Filing dated as of December 12, 2000, effective
as of October 2, 2000, by Banc One Capital Funding Corporation, an Ohio
corporation to Provident Mortgage Capital, Inc., now known as Red Mortgage
Capital, Inc. (the "Confirmatory Assignment", and together with the Original
Deed of Trust and the First Amendment to Deed of Trust, the "Existing Deed of
Trust"), recorded among the Land Records on January 31, 2001 as Instrument
No. 2001-0018605-00; and

                  WHEREAS, the Guarantor, in order to induce the Lender to make
the Loan to the Borrower, executed and delivered that certain Limited Guaranty
dated as of June 27, 1999 to and for the benefit of the Lender, thereby
guaranteeing, under certain enumerated circumstances set forth therein, the
payment and performance obligations of the Borrower to the Lender under the
Original Note (which Limited Guaranty, as the same may be from time to time
renewed, extended, amended, restated, supplemented or otherwise modified is
herein called the "Limited Guaranty"); and

                  WHEREAS, as additional security for the Borrower's obligations
under the Original Note to the Lender, the Borrower and the Lender entered into
that certain Replacement Reserve and Security Agreement dated as of June 27,
1999 (the "Replacement Reserve Agreement") whereby the Borrower agreed to make
monthly deposits into the Replacement Reserve (as such term is defined in the
Replacement Reserve Agreement) to maintain the Mortgaged Property; and

                  WHEREAS, as additional security for the Borrower's obligations
under the Original Note to the Lender, the Borrower, the Guarantor and the
Lender also entered into that certain Assignment and Subordination of Management
Agreement dated as of June 27, 1999 (the "Assignment and Subordination") whereby
the Borrower assigned all of its right, title and interest in and to the
Management Agreement (as such term is defined in the Assignment and
Subordination) and the Guarantor agreed, among other things, (i) to subordinate
its right of payment to certain fees under the Management Agreement to the Loan
and to the liens terms, covenants and conditions of the Existing Deed of Trust,
(ii)



to attorn to the Lender upon an Event of Default (as such term is defined in the
Existing Deed of Trust) under the Existing Deed of Trust and continue to manage
and operate the Mortgaged Property upon the occurrence of an Event of Default at
the request of, and in cooperation with the Lender, due to the special
regulatory requirements of the Mortgaged Property as a seniors housing facility,
until a replacement manager/operator has been obtained, and (iii) to assign to
the Lender all of its right, title and interest in and to all permits, licenses,
operating contracts, certificates and agreements of any nature relating to the
ownership, occupancy, use, operation or management of the Mortgaged Property;
and

                  WHEREAS, as additional security for the Borrower's obligations
under the Original Note to the Lender, the Borrower and Lender also entered into
that certain (i) Note and Agreement dated as of June 27, 1999 (the "Additional
Note"), (ii) Letter Agreement dated June 27, 1999 (the "Side Letter Agreement")
and (iii) Agreement to Amend or Comply dated as of June 27, 1999 (the "Agreement
to Amend or Comply"); and

                  WHEREAS, pursuant to the terms of that certain Confirmatory
Agreement dated as of December 28, 2000 by and among the Borrower, the Guarantor
and the Lender (the "Confirmatory Agreement"), and the First Amendment to Note,
the Maturity Date (as such term was defined in the Original Note) of the Loan
was extended to January 1, 2002; and

                  WHEREAS, the Original Note, the Original Deed of Trust, the
Limited Guaranty, the Replacement Reserve Agreement, the Assignment and
Subordination, the Additional Note, the Side Letter Agreement, the Agreement to
Amend or Comply and any and all other documents, instruments, agreements and
certificates (including, but not limited to, the Certificate of Borrower dated
June 27, 1999 executed by Borrower) originally executed in connection with the
Loan, as well as the First Amendment to Note, the First Amendment to Deed of
Trust, the Confirmatory Assignment and the Confirmatory Agreement may sometimes
be collectively referred to herein as the "Original Loan Documents"; and

                  WHEREAS, the Borrower has requested and the Lender has agreed,
subject to the terms and conditions of this Agreement, to (i) increase the
principal sum of the Loan to $11,980,000 ) (the "Increase"), (ii) extend the
Maturity Date (as such term is defined in the Existing Note) of the Loan to July
1, 2003 (the "Extension"), and (iii) change the interest rate of the Loan to
8.50% (the "Rate Change"); and

                  WHEREAS, as a condition to granting the Extension, the
Increase and the Rate Change, Lender has required the Borrower to make a cash
deposit to the Lender and the Guarantor to guaranty a portion of Loan, such
guaranty secured in part by a pledge of certain partnership interests owned by
the Guarantor.

                  NOW, THEREFORE, for and in consideration of the mutual entry
of this Agreement by the parties hereto, the Extension, the Increase and the
Rate Change and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged by each party hereto, the parties
hereby agree as follows:

                  Section 1.     Recitals.  The Recitals are hereby incorporated
into this Agreement as a substantive part hereof.

                  Section 2.     Loan Modifications.  The Borrower, the
Guarantor and the Lender hereby acknowledge and agree:

                           (a)   The Maturity Date of the Loan (defined in
                                 Paragraph 3(b) thereof) is hereby extended to
                                 July 1, 2003;
                           (b)   The interest rate of the Loan (referenced in
                                 the first paragraph thereof) is changed to
                                 8.50%; and
                           (c)   The principal sum of the Loan (referenced in
                                 the first paragraph thereof) is increased to
                                 $11,980,000.


                                       2



                  Section 3. Amendments to Existing Note. The Existing Note
shall be amended in accordance with the provisions of Section 2 hereof and as
further set forth in the Second Amendment to Multifamily Note dated as of the
date hereof between the Borrower and the Lender (the "Second Amendment to Note")
in the form attached hereto as Exhibit A.

                  Section 4. Amendment to Existing Deed of Trust. The Existing
Deed of Trust shall be amended as set forth in the Second Amendment to
Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture
Filing dated as of the date hereof between the Borrower and the Lender (the
"Second Amendment to Deed of Trust") in the form attached hereto as Exhibit B.

                  Section 5. Amendments to Original Loan Documents. To the
extent not amended by Sections 2, 3 and 4 hereof, all references to the
principal sum of the Loan in the Original Loan Documents (referenced therein as
$8,209,900) is hereby changed to $11,980,000. From and after the date hereof,
references to the terms "Note" and "Deed of Trust" in the Original Loan
Documents shall mean Existing Note as amended by the Second Amendment to Note on
the one hand, and the Existing Deed of Trust as amended by the Second Amendment
to Deed of Trust on the other hand.

                  Section 6. Clarification of the Agreement to Amend or Comply.
The Residual Savings (as defined in the Agreement to Amend or Comply), as
calculated in the Agreement to Amend or Comply, shall be calculated utilizing
the interest rate set forth in the Original Note (i.e., 9.15%).

                  Section 7.  Conditions and Requirements for the Extension,
the Increase and the Rate Change.

                         Section 7.1. The obligation of the Lender to enter into
this Agreement is subject to the satisfaction by Borrower and Guarantor, as
applicable, of the following requirements, each in form and content satisfactory
to the Lender in its sole discretion:

                              (a) Receipt by the Lender of the Second Amendment
to Note executed by the Borrower;

                              (b) Receipt by the Lender of the Second Amendment
to Deed of Trust executed by the Borrower;

                              (c) Receipt by the Lender of that certain Cash
Collateral Pledge Agreement executed by the Borrower for the benefit of the
Lender dated as of the date hereof (the "Cash Pledge Agreement"), pursuant to
which the Borrower will deposit the sum of Two Million Dollars ($2,000,000) (the
"Deposit") with the Lender;

                              (d) Receipt by the Lender of the Deposit pursuant
to the Cash Pledge Agreement;

                              (e) Receipt by the Lender of that certain Guaranty
Agreement executed by Guarantor for the benefit of the Lender dated as of the
date hereof (the "Guaranty");

                              (f) Receipt by the Lender of that certain San
Gabriel Retirement Villa Partnership Interest Pledge Agreement executed by
Guarantor for the benefit of the Lender dated as of the date hereof (the "SGRV
Pledge Agreement");

                              (g) Receipt by the Lender of that certain American
Retirement Villas Properties III, L.P. Partnership Interest Pledge Agreement
executed by Guarantor for the benefit of the Lender dated as of the date hereof
(the "ARV PIII Pledge Agreement");

                              (h) Receipt by the Lender of a "date-down"
endorsement to Policy Number 27-042-92-1219845 issued by Fidelity National Title
Company ("Fidelity") on June 28, 1999 (the "Title Policy") (or a new title
policy if so elected by Fidelity in lieu of a date-down endorsement) showing

                                       3



no other exceptions to title than as excepted in Schedule B-II of the Title
Policy and increasing the insured amount thereof to $11,980,000;

                         (i) Receipt by the Lender of an Extension Fee in the
amount of Fifty-Nine Thousand Eight Hundred Fifty and 00/100 Dollars
($59,850.00); and

                         (j) Receipt by the Lender of a Financing Fee of Forty
Thousand and 00/100 Dollars ($40,000.00).

                  The Second Amendment to Note, the Second Amendment to Deed of
Trust, the Guaranty, the ARV PIII Pledge Agreement (ARV), the SGRV Pledge
Agreement, the Cash Pledge Agreement and any and all other documents,
instruments, agreements and certificates executed by Borrower or Guarantor in
connection with this Agreement, the Extension, the Increase or the Rate Change
may sometimes be collectively referred to herein as the "New Loan Documents",
and together with the Original Loan Documents, the "Loan Documents".

                  Section 7.2. The obligation of the Lender to enter into this
Agreement shall be further subject to the requirement that the Borrower and the
Guarantor, as applicable, or any other party, execute and deliver to the Lender
such other documents in addition to the New Loan Documents as the Lender may
reasonably require in connection with this Agreement. In addition, the Borrower
shall also pay to the Lender on demand, all costs and expenses both now and
hereafter paid or incurred in connection with the extension and modification of
the Loan pursuant hereto, including, but not limited to, attorney's fees and
expenses, title fees and expenses, recording costs, and surveyor fees and
expenses.

                  Section 8. Representations and Warranties. The Borrower and
the Guarantor represent and warrant to the Lender as of the date hereof that:

                        (a) No Event of Default exists under any of the Loan
Documents and no event or circumstance has occurred which with the passage of
time would constitute an Event of Default under any of the Loan Documents;

                        (b) All of the representations and warranties given by
each such party in the Original Loan Documents are true and complete in all
material respects on the date hereof as if made on the date hereof;

                        (c) As of the date hereof, there are no actions, suits
or proceedings pending, or to the knowledge of the Borrower and the Guarantor,
threatened, (i) against or affecting the Mortgaged Property, or (ii) involving
the validity or enforceability of the Deed of Trust or the priority of the lien
thereof, or (iii) against the Borrower or the Guarantor, at law or in equity or
before or by any governmental authority except (a) actions, suits and
proceedings against the Borrower or the Guarantor fully covered by insurance and
as to each of which the Borrower or the Guarantor has provided information
satisfactory to the Lender, (b) actions, suits and proceedings against the
Borrower or the Guarantor which will not materially adversely affect their
respective business, financial condition or operations, or (c) otherwise
previously disclosed to the Lender in the Original Loan Documents; and to the
knowledge of the Borrower or the Guarantor, neither the Borrower nor the
Guarantor is in default with respect to any order, writ, injunction, decree or
demand of any court or any governmental authority.

                        (d) All federal, state and local tax returns and reports
of the Borrower and the Guarantor required by law to be filed have been duly
filed, and all taxes, assessments, fees and other governmental charges upon the
Borrower and the Guarantor and their respective properties, assets, income and
franchises which are due and payable have been paid in full. The Borrower and
the Guarantor maintain adequate reserves and/or accruals in respect of federal,
state and local taxes for all fiscal periods, and neither the Borrower nor the
Guarantor know of any unpaid assessments for any taxes or any basis therefor.

                  Section 9. Ratification, No Novation, Effect of Modifications.
Except as may be amended or modified by this Agreement, the Second Amendment to
Note and the Second Amendment to


                                       4



Deed of Trust, the terms of the Original Loan Documents are hereby ratified,
affirmed and confirmed and shall otherwise remain in full force and effect. To
the extent not otherwise specifically provided herein, it is the intention of
the Borrower, the Guarantor and the Lender that nothing in this Agreement shall
be construed to extinguish, release, or discharge or constitute, create or
effect a novation of, or an agreement to extinguish, release or discharge, any
of the obligations, indebtedness and liabilities of the Borrower or the
Guarantor or any other party under the provisions of the Original Loan
Documents. In the event of any conflict between the terms of the Original Loan
Documents and this Agreement, the terms of this Agreement shall control.

                  Section 10. Amendments. This Agreement may be amended or
supplemented by and only by an instrument executed and delivered by each party
hereto.

                  Section 11. Waiver. The Lender shall not be deemed to have
waived the exercise of any right which it holds under the Original Loan
Documents unless such waiver is made expressly and in writing (and no delay or
omission by the Lender in exercising any such right shall be deemed a waiver of
its future exercise). No such waiver made as to any instance involving the
exercise of any such right shall be deemed a waiver as to any other such
instance, or any other such right. Without limiting the operation and effect of
the foregoing provisions hereof, no act done or omitted by the Lender pursuant
to the powers and rights granted to it hereunder shall be deemed a waiver by the
Lender of any of its rights and remedies under any of the provisions of the
Original Loan Documents executed in connection with the Loan, and this Agreement
is made and accepted without prejudice to any of such rights and remedies.

                  Section 12. Governing Law. This Agreement shall be given
effect and construed by application of the law of the State of California.

                  Section 13. Headings. The headings of the sections,
subsections, paragraphs and subparagraphs hereof are provided herein for and
only for convenience of reference, and shall not be considered in construing
their contents.

                  Section 14. References. As used herein, all references made
(i) in the neuter, masculine or feminine gender shall be deemed to have been
made in all such genders and (ii) in the singular or plural number shall be
deemed to have been made, respectively, in the plural or singular number as
well.

                  Section 15. Severability. No determination by any court,
governmental body or otherwise that any provision of this Agreement or any
amendment hereof is invalid or unenforceable in any instance shall affect the
validity or enforceability of (i) any other such provision or (ii) such
provision in any circumstance not controlled by such determination. Each such
provision shall be valid and enforceable to the fullest extent allowed by, and
shall be construed wherever possible as being consistent with, applicable law.

                  Section 16. Binding Effect. This Agreement shall be binding
upon and inure to the benefit of the Borrower, the Guarantor, and the Lender and
their respective successors and assigns.

                  Section 17. Effectiveness. This Agreement shall become
effective on and only on its execution and delivery by each party hereto.

                  Section 18. Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original and
all of which shall constitute one and the same instrument.

                  Section 19. WAIVER OF JURY TRIAL. THE BORROWER, THE GUARANTOR,
THE ADDITIONAL GUARANTOR AND THE LENDER EACH (i) AGREES NOT TO ELECT A TRIAL BY
JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS AMENDMENT, THE NOTE, ANY
OTHER ORIGINAL LOAN DOCUMENT, OR THE RELATIONSHIP BETWEEN THE PARTIES, AS
LENDER, GUARANTOR AND BORROWER, THAT IS TRIABLE OF RIGHT BY A JURY AND (ii)
WAIVES ANY RIGHT TO TRIAL BY


                                       5



JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR
IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH
PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.


                                       6



                  IN WITNESS WHEREOF, each of the parties hereto have executed
and delivered this Agreement under their respective seals as of the day and year
first written above.

WITNESS:                                 BORROWER:

                                         RETIREMENT INNS III, LLC,
__________________                       a Delaware limited liability company


                                         By:  /s/ Abdo H. Khoury         (SEAL)
                                            -----------------------------
                                         Name:    Abdo H. Khoury
                                         Title:   Manager


WITNESS:                                 GUARANTOR:

                                         ARV ASSISTED LIVING, INC.,
__________________                       a Delaware corporation

                                         By:  /s/ Abdo H. Khoury         (SEAL)
                                            -----------------------------
                                         Name:    Abdo H. Khoury
                                         Title:   President




WITNESS:                                 LENDER:

                                         RED MORTGAGE CAPITAL, INC.,
__________________                       an Ohio corporation, formerly known as
                                         Provident Mortgage Capital, Inc.,
                                         successor-in-interest to Banc One
                                         Capital Funding Corporation


                                         By:                             (SEAL)
                                            -----------------------------
                                         Name:
                                         Title:


                                       7

EX-10.107

                                                                  Exhibit 10.107

                               GUARANTY AGREEMENT

     THIS GUARANTY AGREEMENT (this "Agreement") is made this 19th day of
February, 2002, by ARV ASSISTED LIVING, INC., a Delaware corporation
("Guarantor"), to and for the benefit of RED MORTGAGE CAPITAL, INC., an Ohio
corporation ("Lender").

                                R E C I T A L S

     WHEREAS, Lender has previously made a loan (the "Loan") to Retirement Inns
III, LLC, a Delaware limited liability company ("Borrower"), in the principal
sum of Eight Million Two Hundred Nine Thousand Nine Hundred Dollars ($8,209,900)
evidenced by that certain Multifamily Note dated June 27, 1999, issued by
Borrower to the order of Lender (the "Original Note"), as amended by that
certain First Amendment to Multifamily Note dated December 28, 2000 between
Borrower and Lender (the "First Amendment to Note" and together with the
Original Note, the "Existing Note"), as further amended by that certain Second
Amendment to Multifamily Note dated as of even date herewith between Borrower
and Lender (the "Second Amendment to Note") (the Original Note, as amended by
the First Amendment to Note and the Second Amendment to Note, is herein called
the "Note"), secured in part, by that certain Multifamily Deed of Trust,
Assignment of Rents, Security Agreement and Fixture Filing dated as of June 27,
1999 by the Borrower for the benefit of Lender (the "Original Deed of Trust"),
recorded among the Official Records of Ventura County, California (the "Land
Records") on June 28, 1999 as Instrument No. 99-122405, as amended by that
certain Amendment to Multifamily Deed of Trust, Assignment of Rents, Security
Agreement and Fixture Filing dated as of August 31, 1999 between Borrower and
Lender (the "First Amendment to Deed of Trust"), recorded among the Land Records
on September 10, 1999 as Instrument No. 99-173435, as affected by that certain
Confirmatory Assignment of Multifamily Deed of Trust, Assignment of Rents,
Security Agreement and Fixture Filing dated as of December 12, 2000, effective
as of October 2, 2000, by Banc One Capital Funding Corporation, an Ohio
corporation to Provident Mortgage Capital, Inc., now known as Red Mortgage
Capital, Inc. (the "Confirmatory Assignment", and together with the Original
Deed of Trust and the First Amendment to Deed of Trust, the "Existing Deed of
Trust"), recorded among the Land Records on January 31, 2001 as Instrument No.
2001-0018605-00, as further amended by that certain Second Amendment to
Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture
Filing dated as of even date herewith between Borrower and Lender (the "Second
Amendment to Deed of Trust"), recorded among the Land Records simultaneously
with the execution of this Agreement (the Existing Deed of Trust, as amended by
the Second Amendment to Deed of Trust, is herein called the "Deed of Trust");
and

     WHEREAS, Borrower has requested and Lender has agreed pursuant to the terms
and conditions of that certain Master Modification Agreement dated as of the
date



hereof by and among the Borrower, the Lender and the Guarantor (the
"Modification Agreement") to (i) increase the principal sum of the Loan to
$11,980,000 (the "Increase"), (ii) extend the Maturity Date (as defined in the
Existing Note) of the Loan to July 1, 2003 (the "Extension") and (iii) change
the interest rate of the Loan to 8.50% (the "Rate Change"); and

     WHEREAS, Guarantor is the parent company of Borrower and has obtained
material benefits from the Loan and will obtain material benefits from the Loan
as increased, extended and otherwise amended pursuant to the Modification
Agreement; and

     WHEREAS, Lender has required that Guarantor guaranty a portion of the Loan
pursuant to the terms of this Agreement as a condition to agreeing to the
Increase, the Extension and the Rate Change, and entering into the Modification
Agreement.

     NOW, THEREFORE, in consideration of the premises, the mutual entry of the
Modification Agreement by the parties thereto, the Increase, the Extension, the
Rate Change and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Guarantor and Lender hereby agree
as follows:

                                    ARTICLE I

                      DEFINITIONS AND RULES OF CONSTRUCTION

     SECTION 1.1. Definitions. All capitalized terms which are not specifically
defined in this Agreement shall have the meanings assigned to such terms in the
Deed of Trust. In addition, the terms defined in the Preamble and Recitals
hereto and elsewhere herein shall have the respective meanings specified therein
or elsewhere herein, and the following terms shall have the following meanings:

     "ARVP III" means American Retirement Villas Properties III, L.P., a
California limited partnership.

     "ARVP III Pledge Agreement" means that certain American Retirement Villas
Properties III, L.P. Partnership Interest Pledge Agreement dated as of the date
hereof by Guarantor to and for the benefit of Lender.

     "Cash Collateral Agreement" means that certain Cash Collateral Pledge
Agreement dated as of the date hereof by Borrower for the benefit of Lender.

     "Collateral" means (a) (i) the partnership unit certificates of ARV PIII
and SGRV now owned or in the future acquired by Guarantor, (ii) any (if any)
certificates representing or evidencing the partnership units of ARVP III and
SGRV owned by Guarantor, (iii) any and all other property which may be delivered
to or held by Lender pursuant to the provisions of the ARV PIII Pledge Agreement
and the SGRV Pledge Agreement, and (iv) subject to the provisions of the ARV
PIII Pledge Agreement and the SGRV Pledge Agreement, all payments of principal
or interest, distributions, dividends,



cash, income, profits instruments, securities and other property from time to
time received, receivable or otherwise distributed in respect of, in exchange
for or upon conversion of, the partnership units of ARV PIII and SGRV owned by
Guarantor, and (v) subject to the provisions of the ARV PIII Pledge Agreement
and the SGRV Pledge Agreement, any and all voting and other rights, powers and
privileges accruing or incidental to an owner of the partnership units of ARV
PIII or SGRV and the other property referred to in clauses (i) through (iv); and
(b) all cash and non-cash proceeds and products of the portion of the Collateral
described in clause (a) above.

     "Enforcement Costs" means any and all funds, costs, expenses and charges of
any nature whatsoever (including, without limitation, attorney's fees and
expenses) advanced, paid or incurred by or on behalf of Lender under or in
connection with the administration or enforcement of this Agreement, including,
without limitation, (a) the compliance of Guarantor with any covenant, warranty,
representation or agreement of Guarantor made in or pursuant to this Agreement
or any of the other Loan Documents, and (b) the exercise, preservation,
maintenance, protection, operation, management, enforcement, collection, sale or
other disposition of, or realization upon, this Agreement, all or any part of
the Collateral and the rights and remedies of Lender hereunder, under applicable
law and otherwise.

     "Event of Default" has the meaning set forth in Article V.

     "Governmental Authority" means any nation or government, any state or other
political subdivision thereof and any entity or person exercising applicable
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, administration, official, service or other
instrumentality of the United States of America, of any state within the United
States of America, of any territory or possession of the United States of
America, of the District of Columbia, of any municipality within the United
States of America, or of any other governmental entity.

     "Lien" means any interest in property securing any obligation owed to, or a
claim by, a Person other than the owner of the property, whether such interest
is based on the common law, statute or contract, and including but not limited
to the lien, encumbrance, pledge, or security interest arising from a deed of
trust, mortgage, encumbrance, pledge, security agreement, conditional sale or
trust receipt or a lease, consignment or bailment for security purposes.

     "Loan Documents" shall have the meaning set forth in the Modification
Agreement.

     "Obligations" means collectively and includes (i) all present and future
liabilities and obligations of any kind and nature whatsoever of Borrower to
Lender both now existing and hereafter arising under, as a result of, on account
of, or in connection with, the Loan, (ii) the Note and any extensions, renewals
or replacements thereof, amendments thereto and restatements or modifications
thereof made at any time or from time to time hereafter, and/or (iii) the other
Loan Documents, including, without



limitation, future advances, principal, interest, indemnities, fees, late
charges, enforcement costs and other costs and expenses, whether direct,
contingent joint, several, joint and several, matured or unmatured, and (iv) any
other financing or other financial arrangement provided by Lender to Borrower.
In addition, Obligations shall include all Enforcement Costs hereunder.

     "Person" or "person" means and includes an individual, a company, a
corporation, a partnership, a joint venture, a trust, an unincorporated
association, a Governmental Authority or any other entity.

     "SGRV" means San Gabriel Retirement Villa, L.P., a California limited
partnership.

     "SGRV Pledge Agreement" means that certain San Gabriel Retirement Villa
Partnership Interest Pledge Agreement dated as of the date hereof by Guarantor
to and for the benefit of Lender.

     "UCC" means the Uniform Commercial Code as in effect in the State of
California.

     SECTION 1.2. Rules of Construction. Unless otherwise defined herein and
unless the context otherwise requires, all terms used herein which are defined
by the UCC shall have the same meanings assigned to them by the UCC unless and
to the extent varied by this Agreement. The words "hereof", "herein", and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement, and section, subsection, schedule, and exhibit references are
references to sections or subsections of, or schedules or exhibits to, as the
case may be, this Agreement unless otherwise specified. As used herein, the
singular number shall include the plural, the plural the singular, and the use
of the masculine, feminine or neuter gender shall include all genders, as the
context may require.

                                   ARTICLE II

                                  THE GUARANTY

     SECTION 2.1. The Guaranty. Guarantor absolutely, unconditionally and
irrevocably guarantees to Lender the due and punctual payment in full (and not
merely the collectibility) of the Obligations; provided, however, that absent
fraud or willful misconduct on behalf of Guarantor, Lender's sole right of
recourse against Guarantor shall be against the Collateral in an amount not to
exceed $1,000,000. The guaranty of Guarantor under this Agreement is a guaranty
of payment and performance and not merely of collection or enforceability and
shall remain in full force and effect until all of the Obligations are
indefeasibly paid in full. Guarantor agrees that:



               (a) The obligations of Guarantor under this Agreement shall be
               performed without demand by Lender and shall be unconditional
               irrespective of the genuineness, validity, regularity or
               enforceability of the Note, or any other Loan Document, and
               without regard to any other circumstance which might otherwise
               constitute a legal or equitable discharge of a surety or a
               guarantor. Guarantor hereby waives any and all benefits and
               defenses under California Civil Code Section 2810 and agrees that
               by doing so Guarantor shall be liable even if Borrower had no
               liability at the time of execution of the Note or any other Loan
               Document, or thereafter ceases to be liable. Guarantor hereby
               waives any and all benefits and defenses under California Civil
               Code Section 2809 and agrees that by doing so Guarantor's
               liability may be larger in amount and more burdensome than that
               of Borrower. Guarantor hereby waives the benefit of all
               principles or provisions of law, statutory or otherwise, which
               are or might be in conflict with the terms of this Agreement and
               agrees that Guarantor's obligations shall not be affected by any
               circumstances, whether or not referred to in this Agreement,
               which might otherwise constitute a legal or equitable discharge
               of a surety or a guarantor. Guarantor hereby waives the benefits
               of any right of discharge under any and all statutes or other
               laws relating to guarantors or sureties and any other rights of
               sureties and guarantors thereunder. Without limiting the
               generality of the foregoing, Guarantor hereby waives, to the
               fullest extent permitted by law, diligence in collecting the
               Obligations, presentment, demand for payment, protest, all
               notices with respect to the Note and this Agreement which may be
               required by statute, rule of law or otherwise to preserve
               Lender's rights against Guarantor under this Agreement, including
               notice of acceptance, notice of any amendment of the Loan
               Documents, notice of the occurrence of any default or Event of
               Default, notice of intent to accelerate, notice of acceleration,
               notice of dishonor, notice of foreclosure, notice of protest, and
               notice of the incurring by Borrower of any obligation or
               indebtedness. Guarantor also waives, to the fullest extent
               permitted by law, all rights to require Lender to (i) proceed
               against Borrower, (ii) if Borrower is a partnership, proceed
               against any general partner of Borrower, (iii) proceed against or
               exhaust any collateral held by Lender to secure the repayment of
               the Obligations, or (iv) pursue any other remedy it may now or
               hereafter have against Borrower, or, if Borrower is a
               partnership, any general partner of Borrower, including any and
               all benefits under California Civil Code Sections 2845, 2849 and
               2850.

               (b) Guarantor understands that the exercise by Lender of certain
               rights and remedies afforded Lender in other Loan Documents may
               affect or eliminate Guarantor's right of subrogation against
               Borrower and that Guarantor may therefore incur a partially or
               totally nonreimbursable liability under this Agreement.
               Nevertheless, Guarantor hereby authorizes and empowers Lender to
               exercise, in its sole and absolute discretion, any



                  right or remedy, or any combination thereof, which may then be
                  available, since it is the intent and purpose of Guarantor
                  that the obligations under this Agreement shall be absolute,
                  independent and unconditional under any and all circumstances.
                  Guarantor expressly waives any defense (which defense, if
                  Guarantor had not given this waiver, Guarantor might otherwise
                  have) to a judgment against Guarantor by reason of a
                  nonjudicial foreclosure. Without limiting the generality of
                  the foregoing, Guarantor hereby expressly waives any and all
                  benefits under (i) California Code of Civil Procedure Section
                  580a (which Section, if Guarantor had not given this waiver,
                  would otherwise limit Guarantor's liability after a
                  nonjudicial foreclosure sale to the difference between the
                  obligations of Guarantor under this Agreement and the fair
                  market value of the property or interests sold at such
                  nonjudicial foreclosure sale), (ii) California Code of Civil
                  Procedure Sections 580b and 580d (which Sections, if Guarantor
                  had not given this waiver, would otherwise limit Lender's
                  right to recover a deficiency judgment with respect to
                  purchase money obligations and after a nonjudicial foreclosure
                  sale, respectively), and (iii) California Code of Civil
                  Procedure Section 726 (which Section, if Guarantor had not
                  given this waiver, among other things, would otherwise require
                  Lender to exhaust all of its security before a personal
                  judgment could be obtained for a deficiency). Notwithstanding
                  any foreclosure of the lien of the ARV PIII Pledge Agreement
                  or the SGRV Pledge Agreement, whether by the exercise of the
                  power of sale contained in the ARV PIII Pledge Agreement or
                  the SGRV Pledge Agreement or by an action for judicial
                  foreclosure, Guarantor shall remain bound under this
                  Agreement.

                  (c) In accordance with California Civil Code Section 2856,
                  Guarantor also waives any right or defense based upon an
                  election of remedies by Lender, even though such election
                  (e.g., nonjudicial foreclosure with respect to any collateral
                  held by Lender to secure repayment of the Obligations)
                  destroys or otherwise impairs the subrogation rights of
                  Guarantor or the right of Guarantor (after payment of the
                  obligations guaranteed by Guarantor under this Agreement) to
                  proceed against Borrower for reimbursement, or both, by
                  operation of California Code of Civil Procedure Section 580d
                  or otherwise.

                  (d) In accordance with California Civil Code Section 2856,
                  Guarantor waives any and all other rights and defenses
                  available to Guarantor by reason of California Civil Code
                  Sections 2787 through 2855, inclusive, including any and all
                  rights or defenses Guarantor may have by reason of protection
                  afforded to Borrower with respect to any of the obligations of
                  Guarantor under this Agreement pursuant to the antideficiency
                  or other laws of the State of California limiting or
                  discharging Borrower's Obligations, including California Code
                  of Civil Procedure Sections 580a, 580b, 580d, and 726.



                    (e) In accordance with California Civil Code Section 2856,
                    Guarantor agrees to withhold the exercise of any and all
                    subrogation and reimbursement rights against Borrower,
                    against any other person, and against any collateral or
                    security for the Obligations, including any such rights
                    pursuant to California Civil Code Sections 2847 and 2848,
                    until the Obligations have been indefeasibly paid and
                    satisfied in full, all obligations owed to Lender under the
                    Loan Documents have been fully performed, and Lender has
                    released, transferred or disposed of all of its right, title
                    and interest in such collateral or security.

                    (f) At any time or from time to time and any number of
                    times, without notice to Guarantor and without affecting the
                    liability of Guarantor, (i) the time for payment of the
                    principal of or interest on the Obligations may be extended
                    or the Obligations may be renewed in whole or in part; (ii)
                    the time for Borrower's performance of or compliance with
                    any covenant or agreement contained in the Note or any other
                    Loan Document, whether presently existing or hereinafter
                    entered into, may be extended or such performance or
                    compliance may be waived; (iii) the maturity of the
                    Obligations may be accelerated as provided in the Note or
                    any other Loan Document; (iv) the Note or any other Loan
                    Document may be modified or amended by Lender and Borrower
                    in any respect, including an increase in the principal
                    amount; and (v) any security for the Obligations may be
                    modified, exchanged, surrendered or otherwise dealt with or
                    additional security may be pledged or mortgaged for the
                    Obligations.

                    (g) If more than one person executes this Agreement, the
                    obligations of those persons under this Agreement shall be
                    joint and several. Lender, in its discretion, may (i) bring
                    suit against Guarantor, or any one or more of the persons
                    constituting Guarantor, jointly and severally, or against
                    any one or more of them; (ii) compromise or settle with any
                    one or more of the persons constituting Guarantor, or any
                    other obligor of the Obligations, including Borrower, for
                    such consideration as Lender may deem proper; (iii) release
                    one or more of the persons constituting Guarantor, or any
                    other obligor of the Obligations, including Borrower, from
                    liability; and (iv) otherwise deal with Guarantor and any
                    other obligor of the obligations, including Borrower, or any
                    one or more of them, in any manner, and no such action shall
                    impair the rights of Lender to collect from Guarantor any
                    amount guaranteed by Guarantor under this Agreement. Nothing
                    contained in this paragraph shall in any way affect or
                    impair the rights or obligations of Guarantor with respect
                    to any other obligor of the Obligations.

                    (h) Any indebtedness of Borrower held by Guarantor now or in
                    the future is and shall be subordinated to the Obligations
                    and any such indebtedness of Borrower shall be collected,
                    enforced and received by




                  Guarantor, as trustee for Lender, but without reducing or
                  affecting in any manner the liability of Guarantor under the
                  other provisions of this Agreement.

                  (i) Guarantor shall have no right of, and hereby waives any
                  claim for, subrogation or reimbursement against Borrower or
                  any general partner of Borrower by reason of any payment by
                  Guarantor under this Agreement, whether such right or claim
                  arises at law or in equity or under any contract or statute,
                  until the Obligations have been paid in full and there has
                  expired the maximum possible period thereafter during which
                  any payment made by Borrower to Lender with respect to the
                  Obligations could be deemed a preference under the United
                  States Bankruptcy Code.

                  (j) If any payment by Borrower is held to constitute a
                  preference under any applicable bankruptcy, insolvency, or
                  similar laws, or if for any other reason Lender is required to
                  refund any sums to Borrower, such refund shall not constitute
                  a release of any liability of Guarantor under this Agreement.
                  It is the intention of Lender and Guarantor that Guarantor's
                  obligations under this Agreement shall not be discharged
                  except by Guarantor's performance of such obligations and then
                  only to the extent of such performance.



                                   ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

     Guarantor represents and warrants to Lender that the following statements
are true, correct and complete:

     SECTION 3.1. Authority. Guarantor has full power and authority to guaranty
the Obligations of Borrower under the Note and to execute, deliver and perform
the obligations of Guarantor in accordance with the terms of this Agreement
without the consent or approval of any Person other than any consent or approval
which has been obtained.

     SECTION 3.2. Review of Documents; Financial Statements; Taxes Etc. (a)
Guarantor has or has had an opportunity to examine the Loan Documents existing
on the date hereof, (b) Guarantor has a direct or indirect financial interest in
Borrower and the Loan to Borrower by the Lender will result in financial
benefits to the Guarantor, (c) the most recent financial statements of Guarantor
heretofore furnished to the Lender correctly and accurately present the
financial condition of Guarantor as of the date of such financial statement in
all material respects, and no material adverse change in the financial condition
of Guarantor has occurred since the date of such financial statement, (d)
Guarantor has filed, or has obtained extensions for the filing of, all federal,
state and local tax returns required to be filed by Guarantor, and has paid all
taxes shown as due on such returns, and (e) this Agreement constitutes the valid
and binding obligation of Guarantor enforceable in accordance with its terms.

     SECTION 3.3. Survival. All representations and warranties contained in or
made under or in connection with this Agreement (a) shall survive the execution,
delivery and performance of this Agreement, and (b) shall be true, correct and
complete at all times during which any of the Obligations (or commitments
therefor) are outstanding with the same effect as if such representations and
warranties had been made at such times.

                                   ARTICLE IV

                                    COVENANTS

     SECTION 4.1. Further Assurances. Guarantor covenants and agrees with Lender
that Guarantor shall, from time to time, at its expense, execute, deliver,
acknowledge and cause to be duly filed, recorded or registered, if applicable,
any other certificate, agreement, statement, instrument or other document and
take any other action that from time to time may be necessary or desirable, or
that Lender may reasonably request, in order to create, grant, convey, confirm,
preserve, validate or better assure to Lender the rights intended to be granted,
now or in the future, to Lender under this Agreement and the other Loan
Documents.



                                    ARTICLE V

                                     DEFAULT

     The occurrence of any one or more of the following events shall constitute
a default under the provisions of this Agreement, and the term "Event of
Default" means, whenever it is used in this Agreement, any one or more of the
following events:

     SECTION 5.1. Payment of Obligations. If any of the Obligations are not paid
as and when due and payable in accordance with the provisions of this Agreement,
the Note, and/or any of the other Loan Documents after giving effect to any
applicable grace or cure periods, if any;

     SECTION 5.2. Perform, etc. Other Provisions of This Agreement and other
Loan Documents. The failure of Guarantor to perform, observe or comply with any
of the provisions of this Agreement not otherwise covered by other subsections
of this Section 5 or any of the other Loan Documents, and such failure is not
cured to the satisfaction of Lender within a period of thirty (30) days after
the date of written notice thereof by Lender to Guarantor (or, whenever such a
failure is such that it cannot be cured within thirty (30) days after Guarantor
is given notice thereof, then within sixty (60) days from the date after
Guarantor is given notice thereof if, in the sole but reasonable discretion of
Lender, Guarantor is taking appropriate corrective action to cure the failure
and such failure will not impair the ability of Guarantor to perform its
obligations under this Agreement and the other Loan Documents or otherwise
adversely affects Lender's security in or right to the Collateral).

     SECTION 5.3. Performance of Provisions of the other Loan Documents. If an
Event of Default (as defined in the Deed of Trust) occurs, or subject to
applicable notice and cure periods provided therein, if Borrower or Guarantor,
as applicable, fails to perform, observe, or comply with any of the provisions
of the Note or any of the other Loan Documents.

     SECTION 5.4. Representations and Warranties. If any representation or
warranty contained herein or any statement or representation made in any
certificate or other information at any time given by or on behalf of Guarantor
or Borrower or furnished in connection with this Agreement or any of the other
Loan Documents shall prove to be false or incorrect in any material respect on
the date as of which made;

     SECTION 5.5. Liquidation, Termination, Dissolution, etc. If Guarantor,
SGRV, ARV PIII or Borrower shall liquidate, dissolve or terminate its existence,
or if, without the prior written consent of Lender, any change occurs in the
ownership or control of Guarantor, Borrower, SGRV or ARV PIII;

     SECTION 5.6. Inability to Pay Debts. If Guarantor, Borrower, SGRV or ARV
PIII admits in writing or in sworn testimony the inability to pay its debts as
they mature or shall make any assignment for the benefit of any of its
creditors;



     SECTION 5.7. Bankruptcy. If proceedings in bankruptcy, or for
reorganization of Guarantor, Borrower, SGRV or ARV PIII, or for the readjustment
of any debts of Guarantor, Borrower, SGRV or ARV PIII, under the Bankruptcy
Code, as amended, or any part thereof, or under any other applicable laws,
whether state or federal, for the relief of debtors, now or hereafter existing,
shall be commenced against or by Guarantor, Borrower, SGRV or ARV PIII
(provided, however, that with respect to any such proceedings not instituted by
Guarantor, Borrower, SGRV or ARV PIII, such proceedings will not be an Event of
Default if discharged within ninety (90) days of their commencement);

     SECTION 5.8. Receiver. A receiver or trustee shall be appointed for
Guarantor, Borrower, SGRV or ARV PIII or for any substantial part of the assets
of Guarantor, Borrower, SGRV or ARV PIII, or any proceedings shall be instituted
for the dissolution or the full or partial liquidation of the Guarantor,
Borrower, SGRV or ARV PIII (provided, however, that with respect to any such
appointments not requested or instituted by Guarantor, Borrower, SGRV or ARV
PIII, such appointment or proceedings will not be an Event of Default if such
receiver or trustee is discharged within ninety (90) days of his or her
appointment and/or such proceedings are discharged within ninety (90) days of
their commencement).

                                   ARTICLE VI

                               RIGHTS AND REMEDIES

     SECTION 6.1. Rights and Remedies. Upon the occurrence of an Event of
Default under the provisions of this Agreement, an amount equal to the lesser of
(i) total of the Obligations then outstanding (whether matured or unmatured and
regardless of whether any portion of such Obligations are then due and payable
by Borrower), or (ii) $1,000,000 (absent fraud or willful misconduct, in which
event the total amount of the Obligations then outstanding as set forth in
clause (i) above), shall immediately and automatically be due and payable by
Guarantor to Lender, without further action by, or notice of any kind from,
Lender unless expressly provided for herein, and Lender may at any time and from
time to time thereafter exercise any powers, rights and remedies available to
Lender under the provisions of this Agreement, the other Loan Documents and
applicable laws to liquidate the Collateral, all such powers, rights and
remedies being cumulative and enforceable alternatively, successively or
concurrently. Each and every Event of Default hereunder shall give rise to a
separate cause of action hereunder, and separate actions may be brought
hereunder as each cause of action arises.

     SECTION 6.2. Application. The proceeds of any payment for the payment of
all or any part of the Obligations coming into Lender's possession may be held,
segregated, or applied by Lender to any of the Obligations, whether matured or
unmatured, in such order and manner as Lender may determine in its sole
discretion.






     SECTION 6.3. No Waiver, etc. No failure or delay by Lender to
insist upon the strict performance of any term, condition, covenant or agreement
of this Agreement or of the other Loan Documents, or to exercise any right,
power or remedy consequent upon a breach thereof, shall constitute a waiver of
any such term, condition, covenant or agreement or of any such breach, or
preclude Lender from exercising any such right, power or remedy at any later
time or times. By accepting payment after the due date of any amount payable
under this Agreement or under any of the other Loan Documents, Lender shall not
be deemed to waive the right either to require prompt payment when due of all
other amounts payable under this Agreement or under any of the other Loan
Documents, or to declare a default for failure to effect such prompt payment of
any such other amount. The payment by Guarantor, or any other Person and the
acceptance by Lender or any other amount due and payable under the provisions of
this Agreement or the other Loan Documents at any time during which a default or
Event of Default exists shall not in any way or manner be construed as a waiver
of such default or Event of Default by Lender or preclude Lender from exercising
any right of power or remedy consequent upon such default or Event of Default.

                                   ARTICLE VII

                                  MISCELLANEOUS

     SECTION 7.1. Course of Dealing; Amendment. No course of dealing between
Lender and Guarantor shall be effective to amend, modify or change any provision
of this Agreement or the other Loan Documents. Lender shall have the right at
all times to enforce the provisions of this Agreement and the other Loan
Documents in strict accordance with the provisions hereof and thereof,
notwithstanding any conduct or custom on the part of Lender in refraining from
so doing at any time or times. The failure of Lender at any time or times to
enforce its rights under such provisions, strictly in accordance with the same,
shall not be construed as having created a custom in any way or manner contrary
to specific provisions of this Agreement or the other Loan Documents or as
having in any way or manner modified or waived the same. This Agreement may not
be amended, modified, or changed in any respect except by an agreement in
writing signed by Lender and Guarantor.

     SECTION 7.2. Waiver of Default. Lender may, at any time and from time to
time, execute and deliver to Guarantor a written instrument waiving, on such
terms and conditions as Lender may specify in such written instrument, any of
the requirements of this Agreement or any Event of Default or default and its
consequences, provided, that any such waiver shall be for such period and
subject to such conditions as shall be specified in any such instrument. In the
case of any such waiver, Guarantor and Lender shall be restored to their former
positions prior to such Event of Default or default and shall have the same
rights as they had hereunder. No such waiver shall extend to any subsequent or
other Event of Default or default, or impair any right consequent thereto and
shall be effective only in the specific instance and for the specific purpose
for which given.




     SECTION 7.3. Guaranty Absolute. All rights and remedies of Lender hereunder
and under applicable laws, the guaranty and all agreements and obligations of
Guarantor hereunder shall be absolute and unconditional irrespective of, and
shall not be released, discharged, impaired or affected by (a) any lack of
validity or enforceability of the Note, or any of the other Loan Documents, (b)
any change in the amount of any or all of the Obligations or any change in the
time, manner or place of payment of any or all of the Obligations or any change
of any other provision or term of any or all of the Obligations, (c) any
amendment to, or modification or waiver of, consent to, or departure from, any
of the provisions of any of the Loan Documents, (d) any exchange, substitution,
release, addition or non-perfection of any collateral and security for any of
the Obligations, (e) the release of, in whole or in part, any Person, including,
without limitation, Borrower or Guarantor, obligated or liable for the payment
of all or any part of the Obligations or any attempt, pursuit, enforcement or
exhaustion of any rights or remedies Lender may have against any such Person or
against any collateral and security for any or all of the Obligations, (f) the
failure, omission, lack of diligence or delay by Lender to exercise or enforce
any rights and remedies it may have under any of the Loan Documents or
applicable laws, and (g) any other event or circumstance which might otherwise
constitute a legal or equitable discharge, release or defense of Guarantor or of
the Collateral.

     SECTION 7.4. Notices. All notices, requests and demands to or upon the
parties to this Agreement shall be deemed to have been given or made when
delivered by hand, or when deposited in the mail, postage prepaid by registered
or certified mail, return receipt requested, or, in the case of telegraphic
notice, when delivered to the telegraphic company and when properly transmitted,
addressed as provided under the Deed of Trust (the address of the Guarantor
shall for all notice purposes be the same as the Borrower's address set forth in
the Deed of Trust).

     SECTION 7.5. Enforcement Costs. Guarantor shall pay to Lender upon demand
all Enforcement Costs. Enforcement Costs shall be included in the Obligations
secured hereby.

     SECTION 7.6. Severability. If any provision hereof is invalid and
unenforceable in any jurisdiction, then, to the fullest extent permitted by law,
(a) the other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be liberally construed in favor of Lender in order to
carry out the intentions of the parties hereto as nearly as may be possible, (b)
the invalidity or unenforceability of any provision hereof in any jurisdiction
shall not affect the validity or enforceability of such provision in any other
jurisdiction, and (c) the parties hereto shall endeavor, in good faith,
negotiations to replace the invalid or unenforceable provisions with valid and
enforceable provisions, the economic effect of which comes as close as possible
to that of the invalid or unenforceable provisions.

     SECTION 7.7. Assignment. Lender may, without prior notice to, or consent
of, Guarantor, sell, assign or transfer to any Person or Persons all or any part
of the Obligations, and in the event of any such assignment and rights and
remedies of Lender hereunder shall extend to, and vest in, any such assignee or
assignees who shall have the right to enforce the provisions of this Agreement
as fully as Lender, provided that Lender shall continue to have the unimpaired
right to enforce the provisions of this Agreement as to so much of



the Obligations that it has not sold, assigned or transferred. Guarantor will
fully cooperate with Lender in connection with any such assignment and will
execute and deliver such consents and acceptances to any such assignment and
amendments to this Agreement in order to effect any such assignment (including,
without limitation, the appointment of Lender as agent for itself and all
assignees).

     SECTION 7.8. Survival. All representations, warranties and covenants
contained among the provisions of this Agreement shall survive the execution and
delivery of this Agreement and all other Loan Documents.

     SECTION 7.9. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of Guarantor and Lender and their respective personal
representatives, successors and assigns, except that Guarantor shall not have
the right to assign their rights hereunder or any interest herein without the
prior written consent of Lender.

     SECTION 7.10. Continuing Agreement. This Agreement shall be continuing and
binding on Guarantor regardless of how long before or after the date hereof any
of the Obligations were or are incurred. This Agreement shall terminate when all
of the Obligations have been indefeasibly paid in full and no commitments
therefor are outstanding.

     SECTION 7.11. Applicable Law. This Agreement and the rights and obligations
of the parties hereunder shall be construed and interpreted in accordance with
the laws of the State of California, both in interpretation and performance.

     SECTION 7.12. Exhibits and Schedules. Any exhibits and schedules attached
to this Agreement are an integral part hereof and are hereby incorporated herein
and included in the term "this Agreement."

     SECTION 7.13. Headings. Article, Section, paragraph, and clause headings in
this Agreement are included herein for convenience of reference only, shall not
constitute a part of this Agreement for any other purpose, and shall not be
deemed to affect the meaning or construction of any of the provisions hereof.

     SECTION 7.14. Jurisdiction and Venue. Guarantor agrees that any controversy
arising under or in relation to this Agreement shall be litigated exclusively in
Ventura County, California (the "the Jurisdiction"). The state and federal
courts and authorities with jurisdiction in the Jurisdiction shall have
exclusive jurisdiction over all controversies which shall arise under or in
relation to this Agreement, the Note or any other Loan Document. Guarantor
irrevocably consents to service, jurisdiction, and venue of such courts for any
such litigation and waives any other venue to which it might be entitled by
virtue of domicile, habitual residence, or otherwise.




     SECTION 7.15. WAIVER OF JURY TRIAL. GUARANTOR AND LENDER EACH (A) AGREES
NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS
AGREEMENT OR THE RELATIONSHIP BETWEEN THE PARTIES AS GUARANTOR AND LENDER THAT
IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH
RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE
FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY,
KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.



     IN WITNESS WHEREOF, Guarantor has executed and delivered this Agreement
under its seal as of the day and year first written above.

ATTEST:                                    ARV ASSISTED LIVING, INC.,
                                           a Delaware corporation

_____________________                      By: /s/ Abdo H. Khoury
(SEAL)                                        -------------------------------
                                           Name:   Abdo H. Khoury
                                           Title:  President

EX-10.108

                                                                  Exhibit 10.108

                        CASH COLLATERAL PLEDGE AGREEMENT

     THIS CASH COLLATERAL PLEDGE AGREEMENT (this "Agreement") is made this 19th
day of February, 2002, by RETIREMENT INNS III, LLC, a Delaware limited liability
company (the "Pledgor"), to and for the benefit of RED MORTGAGE CAPITAL, INC.,
an Ohio corporation (the "Lender").

                                 R E C I T A L S

     WHEREAS, the Lender has previously made a loan to the Pledgor in the
original principal amount of Eight Million Two Hundred Nine Thousand Nine
Hundred Dollars ($8,209,900) (the "Loan") pursuant to the terms of that certain
Multifamily Note dated as of June 27, 1999, by Pledgor to the order of the
Lender (the "Original Note"), as amended pursuant to the terms of that certain
First Amendment to Multifamily Note dated as of December 28, 2000 between
Pledgor and Lender (the "First Amendment to Note" and together with the Original
Note, the "Existing Note"), as further amended pursuant to the terms of that
certain Second Amendment to Multifamily Note dated as of even date herewith
between Pledgor and Lender (the "Second Amendment to Note") (the Original Note,
as amended by the First Amendment and the Second Amendment, as the same may be
from time to time, renewed, extended, further amended, restated, supplemented or
otherwise modified is herein called the "Note") and is secured, in part, by a
first mortgage lien on the real property (the "Mortgaged Property") described on
Exhibit A to that certain Multifamily Deed of Trust, Assignment of Rents,
Security Agreement and Fixture Filing dated as of June 27, 1999 by Pledgor for
the benefit of the Lender (the "Original Deed of Trust"), recorded among the
Official Records of Ventura County, California (the "Land Records") on June 28,
1999 as Instrument No. 99-122405, as amended by that certain Amendment to
Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture
Filing dated as of August 31, 1999 between Pledgor and the Lender (the "First
Amendment to Deed of Trust"), recorded among the Land Records on September 10,
1999 as Instrument No. 99-173435, as affected by that certain Confirmatory
Assignment of Multifamily Deed of Trust, Assignment of Rents, Security Agreement
and Fixture Filing dated as of December 12, 2000, effective as of October 2,
2000, by Banc One Capital Funding Corporation, an Ohio corporation to Provident
Mortgage Capital, Inc., now known as Red Mortgage Capital, Inc. (the
"Confirmatory Assignment", and together with the Original Deed of Trust and the
First Amendment to Deed of Trust, the "Existing Deed of Trust"), recorded among
the Land Records on January 31, 2001 as Instrument No. 2001-0018605-00, as
further amended by that certain Second Amendment to Multifamily Deed of Trust,
Assignment of Rents, Security Agreement and Fixture Filing dated as of even date
herewith between Pledgor and Lender (the "Second Amendment to Deed of Trust")
(the Original Deed of Trust, as amended by the First Amendment to Deed of Trust
and the Second Amendment to Deed of Trust, as the same may be from time to time
renewed, extended, further amended, restated, supplemented or otherwise modified
is herein called the "Deed of Trust"); and

     WHEREAS, the Pledgor has requested and the Lender has agreed pursuant to
the terms and conditions of that certain Master Modification Agreement dated as
of even date herewith by and among the Pledgor, ARV Assisted Living, Inc., a
Delaware corporation (the "Guarantor"), and the Lender (the "Modification
Agreement") to (i) increase the principal sum of the Loan to $11,980,000 (the
"Increase"), (ii) extend the Maturity Date (as such term is defined in the
Existing Note) of the Loan to July 1, 2003 (the "Extension"), and (iii) change
the interest rate of the Loan to 8.50% (the "Rate Change"); and

     WHEREAS, as a condition to the Extension, the Increase and the Rate Change,
Lender has required Pledgor to deposit with and pledge to Lender cash in the
amount of Two Million Dollars ($2,000,000) (the "Deposit"), and to grant to
Lender a continuing security interest in and to such Deposit.



     NOW, THEREFORE, in consideration of the Extension, the Rate Change, the
Increase, these premises and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Pledgor and Lender hereby
agree as follows:

                                    ARTICLE I

                      DEFINITIONS AND RULES OF CONSTRUCTION

     Definitions. All capitalized terms which are not specifically defined in
this Agreement shall have the meanings assigned to such terms in the Deed of
Trust. In addition, the terms defined in the Preamble and Recitals hereto and
elsewhere herein shall have the respective meanings specified therein or
elsewhere herein, and the following terms shall have the following meanings:

     "Cash Collateral Account" means that certain account entitled the "ARV/RMC
Cash Pledge Account," to be established and maintained by Lender, and any
successor or replacement account designated and pledged to Lender as the "Cash
Collateral Account" under this Agreement; and which account shall be an interest
bearing account, bearing interest (calculated monthly) at the then money market
rate of interest obtainable by Lender.

     "Collateral" has the meaning set forth in Section 2.2.

     "Deposit" has the meaning set forth in the Recitals.

     "Enforcement Costs" means any and all funds, costs, expenses and charges of
any nature whatsoever (including, without limitation, attorney's fees and
expenses) advanced, paid or incurred by or on behalf of Lender under or in
connection with the administration or enforcement of this Agreement, including,
without limitation, (a) the compliance of Pledgor with any covenant, warranty,
representation or agreement of Pledgor made in or pursuant to this Agreement or
any of the other Loan Documents, and (b) the exercise, preservation,
maintenance, protection, operation, management, enforcement, collection, sale or
other disposition of, or realization upon, this Agreement, all or any part of
the Collateral, the Security Interest and the rights and remedies of Lender
hereunder, under applicable law and otherwise.

     "Event of Default" has the meaning set forth in Article V.

     "Loan Documents" has the meaning set forth in the Modification Agreement.

     "Lien" means any mortgage, deed of trust, pledge, security interest,
assignment, encumbrance, judgment, lien, claim or charge of any kind in, on, of
or in respect of, any asset or property or any rights to any asset or property,
including, without limitation, (a) any interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to any such asset or property, and (b) the filing of, or any agreement
to give, any financing statement relating to any such asset or property under
the Uniform Commercial Code of any jurisdiction.

     "Obligations" means all past, present and future indebtedness, liabilities,
and obligations of Borrower and/or any other Person to Lender of any kind,
nature or description whatsoever under, arising as a result of, pursuant to,
and/or in connection with, the provisions of this Agreement, the Note and/or any
of the other Loan Documents, including, without limitation, (a) such
indebtedness, liabilities, and obligations of Pledgor to Lender which consist of
principal, interest, fees, late charges, attorneys' fees, Enforcement Costs,
collection costs, due or to become due, future advances, direct, indirect,
primary, secondary, joint, several, joint and several, fixed or contingent,
liquidated or unliquidated, regardless of how they arise or by what agreement or
instrument they may be evidenced or whether they are evidenced by any agreement
or instrument, and whether incurred as maker, endorser, surety, guarantor or
otherwise, (b) any and all renewals, extensions, and rearrangements of any such
indebtedness, liabilities, and obligations, (c) the "Obligations" as such term
is described and defined in any other Loan Documents, and (d) any other
obligations, either direct or indirect, of Pledgor to Lender.

                                       2



     "Person" means and includes an individual, a corporation, a partnership, a
joint venture, a trust, a limited liability company, an unincorporated
association, a government or political subdivision or agency thereof, or any
other entity.

     "Security Interest" means the security interest and other Liens in the
Collateral granted hereunder.

     "UCC" means the Uniform Commercial Code as in effect on the date hereof in
the State of California.

     Rules of Construction. Unless otherwise defined herein and unless the
context otherwise requires, all terms used herein which are defined by the UCC
shall have the same meanings assigned to them by the UCC unless and to the
extent varied by this Agreement. The words "hereof", "herein", and "hereunder"
and words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement, and
section, subsection, schedule, and exhibit references are references to sections
or subsections of, or schedules or exhibits to, as the case may be, this
Agreement unless otherwise specified. As used herein, the singular number shall
include the plural, the plural the singular, and the use of the masculine,
feminine or neuter gender shall include all genders, as the context may require.

                                   ARTICLE II

                                 THE COLLATERAL

Deposits with Lender.

     (a) Pledgor hereby covenants and agrees to make the Deposit with Lender
concurrently with the execution by the Pledgor and the Lender of the
Modification Agreement.

     (b) Lender hereby covenants and agrees upon execution of the Modification
Agreement to (i) establish and maintain the Cash Collateral Account and (ii)
deposit the Deposit into the Cash Collateral Account upon receipt thereof.

     The Pledge. In order to secure the full and punctual payment of the
Obligations, and to secure Pledgor's performance under this Agreement and the
performance of the other Loan Documents, Pledgor hereby transfers, pledges,
assigns, sets over, delivers and grants to Lender a first priority continuing
lien and security interest in and to all of the following property of Pledgor,
both now owned and existing and hereafter created, acquired and arising (all
being collectively referred to as the "Collateral") and all right, title and
interest of Pledgor in and to the Collateral:

          (a) Deposits into the Cash Collateral Account. (i) All deposits by
Pledgor, including, but not limited to the Deposit, into the Cash Collateral
Account; and

          (b) Proceeds. All cash and non-cash proceeds and products of the
portion of the Collateral described in clause (a) above, including, without
limitation, all property or deposit accounts which may from time to time be
acquired directly or indirectly with any proceeds of such Collateral.

          SECTION 2.3. Interest on Cash Collateral Account. Until the occurrence
of an Event of Default, all interest, dividends, cash, income or other property
now or hereafter accrued, payable or distributable under, on, to or by reason of
the Cash Collateral Account shall be credited against interest due on the Note
for the immediately succeeding month after such accrued interest, dividend,
cash,

                                       3



income or other property is calculated. Upon the occurrence of an Event of
Default, all interest, dividends, cash, income or other property shall accrue to
and become part of the amounts on deposit in the Cash Collateral Account and
part of the Collateral for the benefit of Lender, and shall not be distributable
to Borrower at any time except upon payment in full of all Obligations and the
termination of this Agreement.

          SECTION 2.4. Security Interest Security Only. The Security Interest is
granted as security only and shall not subject Lender to, or transfer or in any
way affect or modify, any obligation or liability of Pledgor with respect to any
of the Collateral or any transaction in connection therewith.

                                   ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

     Pledgor represents and warrants to Lender that the following statements are
true, correct and complete:

     Title and Authority. As of the date hereof, Pledgor is the owner of the
Collateral, subject only to the Lien hereof. Pledgor has full power and
authority to grant the Security Interest to Lender in the Collateral pursuant
hereto and to execute, deliver and perform the obligations of Pledgor in
accordance with the terms of this Agreement without the consent or approval of
any Person other than any consent or approval which has been obtained.

     Survival. All representations and warranties contained in or made under or
in connection with this Agreement (a) shall survive the execution, delivery and
performance of this Agreement, and (b) shall be true, correct, and complete at
all times during which any of the Obligations (or commitments therefor) are
outstanding with the same effect as if such representations and warranties had
been made at such times.

                                   ARTICLE IV

                                    COVENANTS

     Pledgor covenants and agrees with Lender as follows:

     Title, Liens and Taxes. Pledgor shall, at its cost and expense, take any
and all actions necessary to defend its title to the Collateral against all
Persons other than Lender and to defend the Security Interest of Lender in the
Collateral and the priority (or intended priority) thereof, against any adverse
Lien of any nature whatsoever. Except to the extent contested in good faith,
Pledgor will pay all taxes and assessments levied or placed on the Collateral
prior to the date when any interest or penalty would accrue for the nonpayment
thereof.

     Further Assurances. Pledgor shall, from time to time, at its expense,
execute, deliver, acknowledge and cause to be duly filed, recorded or registered
any statement, transfer, assignment, endorsement, instrument, paper, agreement
or other document and take any other action that from time to time may be
necessary or desirable, or that Lender may reasonably request, in order to
create, preserve, continue, perfect,

                                       4



confirm or validate the Security Interest or to enable Lender to obtain the full
benefits of this Agreement or to exercise and enforce any of its rights, powers
and remedies hereunder. Pledgor shall pay all costs of, and incidental to, the
filing, recording or registration of any such document as well as any
recordation, transfer or other tax required to be paid in connection with any
such filing, recordation or registration. Pledgor hereby covenants to save
harmless and indemnify Lender from and against any liability resulting from the
failure to pay any required documentary stamps, recordation and transfer taxes
and recording costs incurred by Lender in connection with this Agreement which
covenant shall survive the termination of this Agreement and the payment of all
other Obligations. Pledgor agrees that a carbon, photographic, photostatic or
other reproduction of this Agreement or of a financing statement signed by
Pledgor in connection with this Agreement shall be sufficient as a financing
statement.

     Care and Protection of Collateral. Pledgor shall perform, observe, and
comply with all of the terms and provisions to be performed, observed or
complied with by it under each contract, agreement or obligation relating to the
Collateral. Lender shall have no duty to, and Pledgor hereby releases Lender
from all claims for loss or damage caused by the failure of Lender to, collect,
protect, preserve or enforce any of the Collateral or preserve rights against
account debtors and prior parties to the Collateral other than claims arising
from Lender's gross negligence or willful misconduct.

     Other Liens, Withdrawals, etc. Without the prior written consent of Lender,
Pledgor will not (a) assign, transfer, dispose of, pledge or grant or permit a
Lien to exist on, the Collateral or (b) withdraw any moneys or funds on deposit
pursuant to the Cash Collateral Account, including, but not limited to, the
Deposit.

                                    ARTICLE V

                                     DEFAULT

     The occurrence of any one or more of the following events shall constitute
a default under the provisions of this Agreement, and the term "Event of
Default" means, whenever it is used in this Agreement, any one or more of the
following events:

     Payment of Obligations. If any of the Obligations are not paid as and when
due and payable in accordance with the provisions of this Agreement, the Note
and/or any of the other Loan Documents after giving effect to any applicable
grace or cure periods, if any;

     Perform, etc. Other Provisions of This Agreement and other Loan Documents.
The failure of Pledgor to perform, observe or comply with any of the provisions
of this Agreement not otherwise covered by other subsections of this Section 5
or any of the other Loan Documents, and such failure is not cured to the
satisfaction of Lender within a period of thirty (30) days after the date of
written notice thereof by Lender to Pledgor (or, whenever such a failure is such
that it cannot be cured within thirty (30) days after Pledgor is given notice
thereof, then within sixty (60) days from the date after Pledgor is given notice
thereof if, in the sole but reasonable discretion of Lender, Pledgor is taking
appropriate corrective action to cure the failure and such failure will not
impair the ability of Borrower to perform its obligations under this Agreement
and the other Loan Documents or otherwise adversely affects Lender's security in
or right to the Collateral).

                                       5



     Performance of Provisions of the other Loan Documents. If an Event of
Default (as defined in the Deed of Trust) occurs, or subject to applicable
notice and cure periods provided therein, if Pledgor fails to perform, observe
or comply with any of the provisions of the Note or any of the other Loan
Documents.

     Representations and Warranties. If any representation or warranty contained
herein or any statement or representation made in any certificate or other
information at any time given by or on behalf of Pledgor or furnished in
connection with this Agreement or any of the other Loan Documents shall prove to
be false or incorrect in any material respect on the date as of which made;

     Liquidation, Termination, Dissolution, etc. If Pledgor shall liquidate,
dissolve or terminate its existence, or if, without the prior written consent of
Lender, any change occurs in the ownership or control of Pledgor;

     Inability to Pay Debts. If Pledgor admits in writing or in sworn testimony
the inability to pay its debts as they mature or shall make any assignment for
the benefit of any of its creditors;

     Bankruptcy. If proceedings in bankruptcy, or for reorganization of Pledgor,
or for the readjustment of any debts of Pledgor, under the Bankruptcy Code, as
amended, or any part thereof, or under any other applicable laws, whether state
or federal, for the relief of debtors, now or hereafter existing, shall be
commenced against or by Pledgor (provided, however, that with respect to any
such proceedings not instituted by Pledgor, such proceedings will not be an
Event of Default if discharged within ninety (90) days of their commencement);

     Receiver. A receiver or trustee shall be appointed for Pledgor or for any
substantial part of the assets of Pledgor, or any proceedings shall be
instituted for the dissolution or the full or partial liquidation of the Pledgor
(provided, however, that with respect to any such appointments not requested or
instituted by Pledgor, such appointment or proceedings will not be an Event of
Default if such receiver or trustee is discharged within ninety (90) days of his
or her appointment and/or such proceedings are discharged within ninety (90)
days of their commencement).

                                   ARTICLE VI

                               RIGHTS AND REMEDIES

     Rights and Remedies of Lender. Upon and after the occurrence of an Event of
Default, Lender may, without notice or demand other than expressly provided for
under the provisions of this Agreement, apply the Collateral to the repayment of
any and all Obligations then outstanding in accordance with Section 6.2 below,
and exercise in any jurisdiction in which enforcement hereof is sought, any and
all rights and remedies Lender may have under this Agreement or any other Loan
Document, or under applicable law, including the rights and remedies of a
secured party under the UCC, all such rights

                                       6



and remedies being cumulative and enforceable alternatively, successively or
concurrently.

     Application. The Collateral may be held, segregated, or applied by Lender
to any of the Obligations, whether matured or unmatured, in such order and
manner as Lender may determine in its sole discretion.

     No Waiver, etc. No failure or delay by Lender to insist upon the strict
performance of any term, condition, covenant or agreement of this Agreement or
of any of the other Loan Documents, or to exercise any right, power or remedy
consequent upon a breach thereof, shall constitute a waiver of any such term,
condition, covenant or agreement or of any such breach, or preclude Lender from
exercising any such right, power or remedy at any later time or times. By
accepting payment after the due date of any amount payable under this Agreement
or under any of the other Loan Documents, Lender shall not be deemed to waive
the right either to require prompt payment when due of all other amounts payable
under this Agreement or under any of the other Loan Documents, or to declare a
default for failure to effect such prompt payment of any such other amount. The
payment by Pledgor, or any other Person and the acceptance by Lender or any
other amount due and payable under the provisions of this Agreement or the other
Loan Documents at any time during which a default or Event of Default exists
shall not in any way or manner be construed as a waiver of such default or Event
of Default by Lender or preclude Lender from exercising any right of power or
remedy consequent upon such default or Event of Default.

                                   ARTICLE VII

                                  MISCELLANEOUS

     Course of Dealing; Amendment. No course of dealing between Lender and
Pledgor shall be effective to amend, modify or change any provision of this
Agreement or the other Loan Documents. Lender shall have the right at all times
to enforce the provisions of this Agreement and the other Loan Documents in
strict accordance with the provisions hereof and thereof, notwithstanding any
conduct or custom on the part of Lender in refraining from so doing at any time
or times. The failure of Lender at any time or times to enforce its rights under
such provisions, strictly in accordance with the same, shall not be construed as
having created a custom in any way or manner contrary to specific provisions of
this Agreement or the other Loan Documents or as having in any way or manner
modified or waived the same. This Agreement may not be amended, modified, or
changed in any respect except by an agreement in writing signed by Lender and
Pledgor.

     Waiver of Default. Lender may, at any time and from time to time, execute
and deliver to Pledgor a written instrument waiving, on such terms and
conditions as Lender may specify in such written instrument, any of the
requirements of this Agreement or any Event of Default or Default and its
consequences, provided, that any such waiver shall be for such period and
subject to such conditions as shall be specified in any such instrument. In the
case of any such waiver, Pledgor and Lender

                                       7



shall be restored to their former positions prior to such Event of Default or
default and shall have the same rights as they had hereunder. No such waiver
shall extend to any subsequent or other Event of Default or default, or impair
any right consequent thereto and shall be effective only in the specific
instance and for the specific purpose for which given.

     Security Interest Absolute. All rights and remedies of Lender hereunder and
under applicable laws, the Security Interest and all agreements and obligations
of Pledgor hereunder shall be absolute and unconditional irrespective of, and
shall not be released, discharged, impaired or affected by (a) any lack of
validity or enforceability of the Note or any of the other Loan Documents, (b)
any change in the amount of any or all of the Obligations or any change in the
time, manner or place of payment of any or all of the Obligations or any change
of any other provision or term of any or all of the Obligations, (c) any
amendment to, or modification or waiver of, consent to, or departure from, any
of the provisions of any of the Loan Documents, (d) any exchange, substitution,
release, addition or non-perfection of any collateral and security for any of
the Obligations, (e) the release of, in whole or in part, any Person, including,
without limitation, Pledgor, obligated or liable for the payment of all or any
part of the Obligations or any attempt, pursuit, enforcement or exhaustion of
any rights or remedies Lender may have against any such Person or against any
collateral and security for any or all of the Obligations, (f) the failure,
omission, lack of diligence or delay by Lender to exercise or enforce any rights
and remedies it may have under any of the Loan Documents or applicable laws, and
(g) any other event or circumstance which might otherwise constitute a legal or
equitable discharge, release or defense of Pledgor or of the Collateral.

     Notices. All notices, requests and demands to or upon the parties to this
Agreement shall be deemed to have been given or made when delivered by hand, or
when deposited in the mail, postage prepaid by registered or certified mail,
return receipt requested, or, in the case of telegraphic notice, when delivered
to the telegraphic company and when properly transmitted, addressed as provided
under the Deed of Trust.

     Performance for Pledgor. Pledgor hereby appoints Lender the
attorney-in-fact of Pledgor for the purpose of carrying out the ministerial
provisions of this Agreement and taking any action and executing any instrument
which Lender may deem necessary or advisable to accomplish the purposes hereof,
which appointment is irrevocable and coupled with an interest. Without limiting
the generality of the foregoing, Lender shall have the right, upon the
occurrence and during the continuance of an Event of Default, with full power of
substitution either in Lender's name or in the name of Pledgor, to the extent
necessary or advisable to accomplish the purposes hereof (a) to ask for, demand,
sue for, collect, receive, receipt and give acquittance for any and all moneys
due or to become due and under and by virtue of any Collateral, (b) to give full
discharge for all or any part of the Collateral, (c) to settle, compromise,
prosecute or defend any action, claim or proceeding with respect to all or any
part of the Collateral, (d) to sell, assign, endorse, pledge, transfer and make
any agreement respecting all or any part of the Collateral, or (e) otherwise
deal with all or any part of the Collateral as though Lender were the absolute
owner thereof; provided, however, that nothing herein

                                       8



contained shall, and no action taken by Lender or omitted to be taken with
respect to the Collateral or any part thereof, give rise to any defense,
counterclaim or offset in favor of Pledgor or to any claim or action against
Lender.

     Enforcement Costs. Pledgor shall pay to Lender upon demand all Enforcement
Costs. Enforcement Costs shall be included in the Obligations secured hereby.

     Severability. If any provision hereof is invalid and unenforceable in any
jurisdiction, then, to the fullest extent permitted by law, (a) the other
provisions hereof shall remain in full force and effect in such jurisdiction and
shall be liberally construed in favor of Lender in order to carry out the
intentions of the parties hereto as nearly as may be possible, (b) the
invalidity or unenforceability of any provision hereof in any jurisdiction shall
not affect the validity or enforceability of such provision in any other
jurisdiction, and (c) the parties hereto shall endeavor, in good faith,
negotiations to replace the invalid or unenforceable provisions with valid and
enforceable provisions, the economic effect of which comes as close as possible
to that of the invalid or unenforceable provisions.

     Assignment. Lender may, without prior notice to, or consent of, Pledgor,
sell, assign or transfer to any Person or Persons all or any part of the
Obligations, and in the event of any such assignment, the Security Interest and
rights and remedies of Lender hereunder shall extend to, and vest in, any such
assignee or assignees who shall have the right to enforce the provisions of this
Agreement as fully as Lender, provided that Lender shall continue to have the
unimpaired right to enforce the provisions of this Agreement as to so much of
the Obligations that it has not sold, assigned or transferred. Pledgor will
fully cooperate with Lender in connection with any such assignment and will
execute and deliver such consents and acceptances to any such assignment and
amendments to this Agreement in order to effect any such assignment (including,
without limitation, the appointment of Lender as agent for itself and all
assignees).

     Survival. All representations, warranties and covenants contained among the
provisions of this Agreement shall survive the execution and delivery of this
Agreement and all other Loan Documents.

     Binding Effect. This Agreement shall be binding upon and inure to the
benefit of Pledgor and Lender and their respective personal representatives,
successors and assigns, except that Pledgor shall not have the right to assign
their rights hereunder or any interest herein without the prior written consent
of Lender.

     Continuing Agreement. This Agreement and the Security Interest shall be
continuing and binding on Pledgor regardless of how long before or after the
date hereof any of the Obligations were or are incurred. This Agreement and the
Security Interest shall terminate when all of the Obligations have been
indefeasibly paid in full and no commitments therefor are outstanding, at which
time Lender will reassign and deliver to Pledgor, against receipt, such of the
Collateral as still held by Lender (if any) and not sold

                                       9



or otherwise applied by Lender pursuant to the terms hereof. Any such
reassignment shall be without recourse to or warranty by Lender at the expense
of Pledgor.

     Applicable Law. This Agreement and the rights and obligations of the
parties hereunder shall be construed and interpreted in accordance with the laws
of the State of Ohio, both in interpretation and performance.

     Duplicate Originals and Counterparts. This Agreement may be executed in any
number of duplicate originals or counterparts, each of such duplicate originals
or counterparts shall be deemed to be an original and all taken together shall
constitute but one and the same instrument.

     Exhibits and Schedules. Any exhibits and schedules attached to this
Agreement are an integral part hereof and are hereby incorporated herein and
included in the term "this Agreement."

     Headings. Article, Section, paragraph, and clause headings in this
Agreement are included herein for convenience of reference only, shall not
constitute a part of this Agreement for any other purpose, and shall not be
deemed to affect the meaning or construction of any of the provisions hereof.

     Termination. The Security Interest granted hereby shall terminate upon the
payment in full of the Obligations. Upon such termination, Lender shall take all
such actions as may be reasonably requested by Pledgor to evidence the release
of the Security Interest granted hereby.

                     [REMAINDER OF PAGE INTENTIONALLY BLANK]

                                       10



     IN WITNESS WHEREOF, each of the parties hereto have executed and delivered
this Agreement under their respective seals as of the day and year first written
above.

ATTEST:                              RETIREMENT INNS III, LLC,
                                     a Delaware limited liability company


                                     By: /s/ Abdo Khoury             (SEAL)
- ---------------------                   -------------------------------
                                        Name:  Abdo H. Khoury
                                        Title: Manager

ATTEST:                              RED MORTGAGE CAPITAL, INC.,
                                     an Ohio corporation

                                     By:                                (SEAL)
- ---------------------                   -------------------------------
                                        Name:
                                        Title:

                                       11

EX-10.109

                                                                  Exhibit 10.109

                                AMENDED TERM NOTE

Lender:  LFSRI II Assisted Living LLC                         New York, New York
Principal Amount:  $11,500,000                                    April 24, 2002

     FOR VALUE RECEIVED, the undersigned ARV Assisted Living Inc., a Delaware
corporation (the "Borrower"), hereby promises to pay to the order of the Lender
set forth above or its assigns or transferees (the "Holder") the Principal
Amount set forth above, or, if less, the aggregate unpaid principal amount of
the Term Loans (as defined in the Loan Agreement referred to below) owing to the
Holder, payable at such times, and in such amounts, as are specified herein.

     The Borrower promises to pay interest on the unpaid Principal Amount of the
Term Loans from the date made until such Principal Amount is paid in full, at a
per annum interest rate equal to LIBOR plus the Applicable Margin (computed on
the basis of a year of 360 days and the actual number of days elapsed) in such
manner as specified in the Loan Agreement.

     The Borrower promises to make payments of the Principal Amount to the
Holder on the dates and in the amounts as follows:

     July 1, 2002 ........................................  $1,500,000
     July 1, 2003 ........................................  $1,500,000
     July 1, 2004 ........................................  $8,500,000

Any amounts outstanding under the Note (including, but not limited to, Principal
Amounts, interest, fees and expenses) shall be fully due and payable on July 1,
2004.

     Any amounts paid pursuant to the foregoing or prepaid in accordance with
the terms of the Loan Agreement may not be reborrowed under the Loan Agreement
or this Amended Term Note. Any prepayment of the Principal Amount shall be
applied against and reduce the Principal Amount in the order of maturity
commencing on the earliest Payment Date following the date of such prepayment.

     Both principal and interest are payable in Dollars to the Holder, at LFSRI
II Assisted Living LLC, c/o Lazard Freres Real Estate Investors L.L.C., 30
Rockefeller Plaza, New York, NY 10020, Attention: Chief Financial Officer and
General Counsel, or any other address indicated in writing by the Holder to the
Borrower, in immediately available funds.

     This Amended Term Note is entitled to the benefits of the Term Loan
Agreement, dated as of April 24, 2000, as amended by that certain Amendment to
the Term Loan Agreement, dated as of April 24, 2002, between the Borrower and
the Holder (as amended, restated, supplemented or otherwise modified from time
to time) (the "Loan Agreement"). Capitalized terms used herein and not defined
herein are used herein as defined in the Loan Agreement.

     Pursuant to the Loan Agreement, that certain Term Note, dated as of April



24, 2000, made by the Borrower in favor of the Holder in the principal amount of
$10,000,000 was replaced and the indebtedness evidenced thereunder (together
with the amounts advanced by the Holder on the date hereof) shall be evidenced
by this Amended Term Note. All obligations and rights of the Borrower and the
Holder relating to the Term Loans shall be governed by the Loan Agreement and
this Amended Term Note.

     The Loan Agreement, among other things, contains provisions for
acceleration of the maturity of the unpaid principal amount of this Amended Term
Note upon the happening of certain stated events and also for prepayments on
account of the Principal Amount hereof prior to the maturity hereof, upon the
terms and conditions therein specified.

     Demand, diligence, presentment, protest and notice of non-payment and
protest are hereby waived by the Borrower.

     The parties hereto intend to conform to and contract in strict conformance
with all applicable usury laws. The provisions of this Amended Term Note and of
all agreements between the Borrower and the Holder are hereby expressly limited
so that in no contingency or event whatsoever, whether by reason of prepayment,
late payment, default, demand for payment, acceleration of the maturity of this
Amended Term Note or otherwise, shall the amount contracted for, charged, paid
or agreed to be paid to the Holder for the use, forbearance or detention of
money to be loaned under this Amended Term Note or otherwise exceed the maximum
amount permissible under applicable law (the "Maximum Rate"). If, from any
circumstance whatsoever, performance or fulfillment of any provision hereof or
of any agreement between the Borrower and the Holder shall, at the time of the
execution and delivery thereof or at the time performance of such provision
shall be due, involve or purport to require any payment in excess of the limits
prescribed by law, the obligation to be performed or fulfilled shall be reduced
automatically to the limit of such validity without the necessity of execution
of any amendment or new document. If, from any circumstance whatsoever, the
Holder shall ever receive anything of value deemed interest under applicable law
which would exceed interest at the Maximum Rate, an amount equal to any amount
which would have been excessive interest shall be applied to the reduction of
the outstanding principal balance of this Amended Term Note in the inverse order
of its maturity and not to the payment of interest, or if such amount which
would have been excessive interest exceeds the outstanding principal balance of
this Amended Term Note, such excess shall be refunded to the Borrower. All sums
contracted for, charged, paid or agreed to be paid to the Holder for the use,
forbearance or detention of the indebtedness of the Borrower to the Holder
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated, and spread throughout the full stated term of such indebtedness so
that the amount of interest on account of such indebtedness does not exceed the
Maximum Rate. Notwithstanding anything to the contrary contained herein, it is
not the intention of the Holder to accelerate the maturity of any interest that
has not accrued at the time of such acceleration or to collect unearned interest
at the time of such acceleration. The provisions of this paragraph shall control
all existing and future agreements between the Borrower and the Holder.

     Except as otherwise stated herein, the Loan Agreement shall be in full

                                       2



force and effect and is hereby confirmed and ratified in all respects. This
Amended Term Note shall be governed by, and construed and interpreted in
accordance with, the law of the State of New York.

                  [remainder of page intentionally left blank]

                                       3



     IN WITNESS WHEREOF, the Borrower has caused this Amended Term Note to be
executed and delivered by its duly authorized officer as of the day and year and
at the place set forth above.

                                ARV ASSISTED LIVING, INC.


                                By: /s/ Abdo Khoury
                                    ------------------------------------
                                    Name: Abdo Khoury

                                    Title: President and Chief Financial Officer

                                       4

EX-10.110

                                                                  Exhibit 10.110

                      AMENDMENT TO THE TERM LOAN AGREEMENT

     AMENDMENT TO THE TERM LOAN AGREEMENT (this "Amendment"), dated as of April
24, 2002, by and between ARV ASSISTED LIVING, INC., a Delaware corporation (the
"Borrower") and LFSRI II ASSISTED LIVING LLC, a Delaware limited liability
company (the "Lender").

W I T N E S S E T H:

     WHEREAS, the Borrower and the Lender entered into that certain Term Loan
Agreement, dated as of April 24, 2000, between the Borrower and the Lender (the
"Original Loan Agreement") pursuant to which the Lender advanced $10,000,000
(the "Term Loan") to the Borrower as evidenced by that certain Term Note, dated
as of April 24, 2000 (the "Note");

     WHEREAS, under the terms of the Original Loan Agreement, the Initial
Maturity Date (as defined in the Original Loan Agreement) of the Term Loan and
the Note is April 24, 2002;

     WHEREAS, the Original Loan Agreement provides for, among other things, the
Borrower's right, subject to certain conditions set forth therein, to extend the
Maturity Date of the Note to April 24, 2003 and pursuant to a letter dated
February 12, 2002, the Borrower has notified the Lender that the Borrower
intends to extend such Maturity Date;

     WHEREAS, the Borrower and Prometheus Assisted Living LLC, a Delaware
limited liability company and an affiliate of the Lender ("Prometheus"), entered
into that certain Amended and Restated Promissory Note (the "Prometheus Note"),
dated as of December 27, 2001, in the principal amount of $1,500,000;

     WHEREAS, the Borrower desires to pay to Prometheus all amounts outstanding
under the Prometheus Note;

     WHEREAS, the Borrower has requested the Lender to (i) increase the amounts
available to be borrowed under the Original Loan Agreement from $10,000,000 to
$11,500,000, (ii) make an additional term loan in the amount of $1,500,000 under
the Original Loan Agreement (as amended by this Amendment) and (iii) extend the
Maturity Date to July 1, 2004;

     WHEREAS, the Note shall be replaced and the indebtedness evidenced
thereunder, together with any additional indebtedness to be incurred by the
Borrower under the terms of this Amendment, shall be evidenced by an amended
term note, dated as of the date of this Amendment, made by the Borrower in favor
of the Lender in the aggregate principal amount of $11,500,000 (the "Amended
Note"); and

     WHEREAS, the Lender is willing to amend the Original Loan Agreement and the
Note upon the terms and conditions set forth herein and in the Amended Note.

     NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the parties hereby agree as follows:

     Section 1. Defined Terms. Capitalized terms used herein without definition
shall have the meanings ascribed to such terms as set forth in the Original Loan
Agreement.

     Section 2. Amendments to the Original Loan Agreement. The Original Loan
Agreement is hereby amended as follows:

          A. Definitions. The following definitions set forth in Section 1.1 of
the Original Loan Agreement are hereby amended and restated in their entirety as
follows:

             "Amendment" means the Amendment to the Term Loan Agreement, dated
as of April 24, 2002, by and between the Borrower and the Lender.

             "Applicable Margin" means 9.54% per annum.



             "Commitment" means the Commitment of the Lender to make Term
Loans to the Borrower in the aggregate principal amount not to exceed
$11,500,000.

             "Maturity Date" means July 1, 2004.

             "Maturity Date Extension Fee" means an amount equal to $250,000.

             "Note" means the amended term note, dated as of April 24, 2002,
made by the Borrower in favor of the Lender in the principal amount of
$11,500,000.

             "Original Loan Agreement" means that certain Term Loan Agreement,
dated as of April 24, 2000, between the Borrower and the Lender.

             "Payment Date" shall have the meaning set forth in Section 2.3.

             "Prometheus Note" means that certain amended and restated
promissory note, dated as of December 27, 2001, issued by the Borrower for the
benefit of Prometheus Assisted Living LLC in the principal amount of $1,500,000.

          B. Term Loan. Section 2.1 of the Original Loan Agreement is hereby
amended and restated in its entirety as follows:

             "Section 2.1. The Term Loans. On the terms and subject to the
     conditions contained in the Original Loan Agreement, the Lender loaned
     $10,000,000 to the Borrower (the "Term Loan"). On the terms and subject to
     the conditions set forth in the Amendment, on the date of the Amendment,
     the Lender shall make available to the Borrower an additional term loan in
     the amount of $1,500,000 for the sole purpose of the repayment of the
     Prometheus Note by the Borrower. Such additional term loan shall be a "Term
     Loan" for purposes of this Agreement. The Lender shall not have any
     obligation to make available any additional funds to the Borrower pursuant
     to this Agreement."

          C. Repayment of Term Loan. Section 2.3 of the Original Loan Agreement
is hereby amended and restated in its entirety as follows:

             "Section 2.3. Repayment of Term Loans. The Borrower shall repay
     the outstanding principal amount of the Term Loans, together with accrued
     and unpaid interest to the date of such payment on the principal amount
     paid, on the dates (each a "Payment Date") and in the amounts as follows:

               July 1, 2002 .............................    $1,500,000
               July 1, 2003 .............................    $1,500,000
               July 1, 2004 .............................    $8,500,000

     Any amounts outstanding under the Note (including, but not limited to,
     principal, interest, fees and expenses) shall be fully due and payable on
     the Maturity Date."

          D. Optional Prepayments. Section 2.5 of the Original Loan Agreement is
hereby amended and restated in its entirety as follows:

             "Section 2.5. Optional Prepayments. (a) The Borrower may at any
     time, upon at least ten Business Days' prior notice to the Lender stating
     the proposed date and aggregate principal amount of the prepayment, prepay
     the outstanding principal amount of the Term Loans, in whole or part,
     together with accrued and unpaid interest to the date of such prepayment on
     the principal amount prepaid, without any premium or penalty (other than
     amounts owing pursuant to Section 2.11(b)). Any prepayment of the principal
     amount shall be applied against and reduce the principal amount in the
     order of maturity commencing on the earliest Payment Date following the
     date of such repayment. Upon the giving of such notice of prepayment, the
     principal amount of the Term Loans specified to be prepaid shall become
     irrevocably due and payable on the date specified for such prepayment.

             (b) Amounts of any Term Loan prepaid, may not be reborrowed."


                                       2


          E. Costs and Expenses. "Fried, Frank, Harris, Shriver & Jacobson"
shall be inserted following the words "Lender's counsel," in the parenthetical
to the first sentence of Section 9.3 of the Original Loan Agreement.

          F. Notices, Etc. The addresses set forth for the provision of notice
to Lender in paragraph (b) of Section 9.6 of the Original Loan Agreement are
hereby amended and restated in their entirety as follows:

             "if to the Lender:
             LFSRI II Assisted Living LLC
             c/o Lazard Freres Real Estate Investors L.L.C.
             30 Rockefeller Plaza
             New York, NY 10020
             Attention: Chief Financial Officer and General Counsel
             Telecopy no: (212) 332-5641 and (212) 332-1793

             with a copy to:
             Fried, Frank, Harris, Shriver & Jacobson
             One New York Plaza
             New York, NY  10004
             Attention: Lee S. Parks, Esq.
             Telecopy no: (212) 859-4000"

          G. Entire Agreement. The words "the Amendment and the Amended Term
Note" shall be inserted following the words "This Agreement" in the first
sentence of Section 9.14 of the Original Loan Agreement.

          H. Form of Note. Exhibit A of the Original Loan Agreement is hereby
amended and replaced in its entirety by replacing such exhibit with the Form of
Amended Term Note attached hereto as Annex A.

          I. Interpretation. The following is hereby inserted as Section 9.16 of
the Original Loan Agreement:

             "Section 9.16. Interpretation. For avoidance of doubt, all
     references to "the date hereof" or "the Closing Date" in the Agreement
     refer to April 24, 2000, the closing date of the original loan
     transaction."

          J. Deletions. Sections 2.2, 2.7 and 2.9 of the Original Loan Agreement
are hereby deleted in their entirety, the words "intentionally omitted" shall be
inserted in their place and the numbering of the remaining sections of the
Agreement shall not be changed.

     Section 3. Representations and Warranties of Borrower. To induce the Lender
to enter into this Amendment, the Borrower represents and warrants to the Lender
that, on and as of the date of this Amendment (a) the representations and
warranties set forth in Article IV of the Original Loan Agreement are true and
correct in all material respects on and as of the date of this Amendment and
with the same effect as though made on and as of such date, (b) no Default or
Event of Default has occurred and is continuing, (c) the transactions
contemplated herein do not and will not violate any Requirement of Law with
respect to the Borrower, its Subsidiaries or the Lender and are not enjoined,
temporarily, preliminarily or permanently and (d) there has not been a Material
Adverse Change since


                                       3



December 31, 2001 and there have been no events or developments that in the
aggregate have had a Material Adverse Effect.

     Section 4. Cancellation of the Notes; Issuance of Amended Note. On the date
of this Amendment, the Note and the Prometheus Note shall be cancelled and
Borrower shall issue to the Lender the Amended Note.

     Section 5. Payment of Maturity Date Extension Fee. On the date of this
Amendment, the Borrower shall deliver an amount equal to the Maturity Date
Extension Fee in immediately available funds to the Lender.

     Section 6. Officer's Certificate. On the date of this Amendment, the
Borrower shall deliver a certificate executed on its behalf by one of its duly
authorized officers certifying that the representations and warranties set forth
in Section 3 hereof are true and correct as of the date of this Amendment.

     Section 7. Conditions to Funding and Effectiveness of Amendment. This
Amendment shall not be effective and the Lender shall not be obligated to extend
any amounts pursuant hereto unless (i) the representations and warranties set
forth in Section 3 hereof are true and correct as of the date of this Amendment,
(ii) the Borrower has issued the Amended Note to the Lender, (iii) the Borrower
has paid the Maturity Date Extension Fee to the Lender in accordance with
Section 5 hereof, and (iv) the Lender has received an officer's certificate in
accordance with Section 6 hereof. Notwithstanding anything to the contrary
contained in Section 3.2 of the Original Loan Agreement, other than the
conditions set forth in this Section 7, there are no conditions precedent to the
making of the Term Loan in the amount of $1,500,000 pursuant to this Amendment.

     Section 8. Repayment of Prometheus Note. Immediately following the
completion of the transactions contemplated herein, the Borrower shall repay to
Prometheus all amounts owing under the Prometheus Note, including, but not
limited to, accrued and unpaid interest to the date of such repayment, in
accordance with the terms of the Prometheus Note.

     Section 9. Original Loan Agreement in Full Force and Effect. Except as
expressly provided herein or in the Amended Note, the Original Loan Agreement
and all other documents relating thereto shall remain in full force and effect
and are hereby confirmed and ratified in all respects.

                  [remainder of page intentionally left blank]


                                       4


     IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.

                                ARV ASSISTED LIVING, INC.

                                By:   /s/ ABDO KHOURY
                                      ------------------------------------------
                                      Name:  Abdo Khoury
                                      Title: President & Chief Financial Officer


                                LFSRI II ASSISTED LIVING LLC

                                By:   LF Strategic Realty Investors II L.P.
                                      Its Managing Member


                                By:   Lazard Freres Real Estate Investors L.L.C.
                                      Its General Partner


                                By:   __________________________________________
                                      Name:
                                      Title:


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