Back to GetFilings.com



 
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: 0-26470
 
 
AMERICAN RETIREMENT VILLAS
PROPERTIES III, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
 
CALIFORNIA
  
33-0365417
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
  
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1 COSTA MESA, CA
  
92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
  
(ZIP CODE)
 
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨
 
The aggregate market value of the voting units held by non-affiliates of the issuer, computed by reference to the price at which units were sold, was $18,666,480 (for purposes of calculating the preceding amount only, all directors, executive officers and shareholders holding 5% or greater of the registrant’s units are assumed to be affiliates). The number of units outstanding as of June 30, 2002 was 18,666.
 

 
PART I    FINANCIAL INFORMATION
 
Item 1    Financial Statements
 
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands, except units)
 
ASSETS
   
June 30,
2002
     
December 31,
2001
  
Properties, at cost:
                  
Land
   
$
1,549
 
   
$
1,549
 
Building and improvements, less accumulated depreciation of $2,859 and $2,822 at June 30, 2002 and December 31, 2001, respectively
   
 
9,628
 
   
 
9,811
 
Furniture, fixtures and equipment, less accumulated depreciation of $911 and $805 at June 30, 2002 and at December 31, 2001, respectively
   
 
436
 
   
 
453
 
    
  
Net properties
   
 
11,613
 
   
 
11,813
 
Cash and cash equivalents
   
 
897
 
   
 
2,903
 
Restricted cash
   
 
86
 
   
 
85
 
Loan fees, less accumulated amortization of $39 and $311 at June 30, 2002 and December 31, 2001 respectively
   
 
234
 
   
 
146
 
Collateral deposit
   
 
2,000
 
   
 
—  
 
Other assets
   
 
969
 
   
 
934
 
    
  
    
$
15,799
 
   
$
15,881
 
    
  
LIABILITIES AND PARTNERS’ CAPITAL
                  
Notes payable to banks
   
$
17,660
 
   
$
13,736
 
Accounts payable
   
 
93
 
   
 
262
 
Accrued expenses
   
 
470
 
   
 
565
 
Amounts payable to affiliates
   
 
64
 
   
 
43
 
Distributions payable
   
 
48
 
   
 
74
 
    
  
Total liabilities
   
 
18,335
 
   
 
14,680
 
    
  
Partners’ capital (deficit):
                  
General partners
   
 
(2
)
   
 
(2
)
Special Limited Partners
   
 
(182
)
   
 
(142
)
Limited partners, 18,666 units outstanding at June 30, 2002 and December 31, 2001
   
 
(2,352
)
   
 
1,345
 
    
  
Total partners’ capital (deficit)
   
 
(2,536
)
   
 
1,201
 
    
  
    
$
15,799
 
   
$
15,881
 
    
  
 
See accompanying notes to the unaudited condensed consolidated financial statements.

2

 
American Retirement Villas Properties III, L.P.
(a California limited partnership)
 
Condensed Consolidated Statements of Operations
(unaudited)
(In thousands, except unit data)
 
    
For The Three Months Ended June 30,
   
For The Six Months Ended June 30,
  
    
2002
       
2001
   
2002
     
2001
  
Revenues:
                                    
Rent
   
$
1,500
 
     
$
1,514
   
$
3,032
     
$
3,021
 
Assisted living
   
 
143
 
     
 
185
   
 
306
     
 
365
 
Interest
   
 
11
 
     
 
31
   
 
23
     
 
73
 
Other
   
 
72
 
     
 
32
   
 
108
     
 
74
 
    
    
  
    
Total revenues
   
 
1,726
 
     
 
1,762
   
 
3,469
     
 
3,533
 
    
    
  
    
Costs and expenses:
                                    
Community property operations
   
 
867
 
     
 
849
   
 
1,735
     
 
1,719
 
Assisted living
   
 
116
 
     
 
123
   
 
252
     
 
251
 
General and administrative
   
 
110
 
     
 
71
   
 
169
     
 
156
 
Depreciation and amortization
   
 
214
 
     
 
211
   
 
393
     
 
419
 
Property taxes
   
 
46
 
     
 
46
   
 
92
     
 
93
 
Advertising
   
 
23
 
     
 
10
   
 
46
     
 
27
 
Interest
   
 
363
 
     
 
308
   
 
712
     
 
612
 
    
    
  
    
Total operating costs and expenses
   
 
1,739
 
     
 
1,618
   
 
3,399
     
 
3,277
 
    
    
  
    
Income (loss) from operations before franchise tax expense and extraordinary loss
   
 
(13
)
     
 
144
   
 
70
     
 
256
 
Franchise tax expense
   
 
4
 
     
 
5
   
 
4
     
 
5
 
    
    
  
    
Income (loss) from operations before extraordinary loss
   
 
(17
)
     
 
139
   
 
66
     
 
251
 
Extraordinary loss from extinguishment of debt
   
 
—  
 
     
 
—  
   
 
—  
     
 
(66
)
    
    
  
    
Net income (loss)
   
$
(17
)
     
$
139
   
$
66
     
$
185
 
    
    
  
    
Income (loss) Per limited partner unit:
                                    
Income (loss) from operations before extraordinary loss
   
$
(0.90
)
     
$
7.37
   
$
3.50
     
$
13.31
 
Extraordinary loss
   
 
—  
 
     
 
—  
   
 
—  
     
 
(3.50
)
    
    
  
    
Net income (loss)
   
$
(0.90
)
     
$
7.37
   
$
3.50
     
$
9.81
 
    
    
  
    
 
See accompanying notes to the unaudited condensed consolidated financial statements.

3

 
American Retirement Villas Properties III, L.P.
(a California limited partnership)
 
Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
 
    
FOR THE SIX MONTHS ENDED JUNE 30,
  
    
2002
       
2001
  
Cash flows from operating activities:
                    
Net income
   
$
66
 
     
$
185
 
Adjustments to reconcile net income to net cash provided by operating activities:
                    
Depreciation and amortization
   
 
393
 
     
 
419
 
Extraordinary loss from extinguishment of debt
   
 
—  
 
     
 
66
 
Change in assets and liabilities:
                    
(Increase) decrease in restricted cash
   
 
(1
)
     
 
85
 
(Increase) decrease in other assets
   
 
(22
)
     
 
60
 
Decrease in accounts payable and accrued expenses
   
 
(264
)
     
 
(32
)
Increase (decrease) in amounts payable to affiliate, net
   
 
21
 
     
 
(219
)
    
    
Net cash provided by operating activities
   
 
193
 
     
 
564
 
    
    
Cash flows from investing activities—Capital expenditures
   
 
(158
)
     
 
(254
)
    
    
Cash flows from financing activities:
                    
Principal repayments on notes payable to banks
   
 
(76
)
     
 
(5,156
)
Borrowing under refinancing
   
 
4,000
 
     
 
5,783
 
Capital expenditure replacement reserve
   
 
(13
)
     
 
(510
)
Loan fees paid
   
 
(123
)
     
 
(83
)
Mortgage insurance
   
 
—  
 
     
 
(29
)
Collateral deposit under refinancing
   
 
(2,000
)
     
 
—  
 
Distributions paid
   
 
(3,829
)
     
 
(5,673
)
    
    
Net cash used in financing activities
   
 
(2,041
)
     
 
(5,668
)
    
    
Net decrease in cash and cash equivalents
   
 
(2,006
)
     
 
(5,358
)
Cash and cash equivalents at beginning of period
   
 
2,903
 
     
 
8,458
 
    
    
Cash and cash equivalents at end of period
   
$
897
 
     
$
3,100
 
    
    
Supplemental schedule of cash flow information—Cash paid during the period for interest
   
$
678
 
     
$
654
 
    
    
 
See accompanying notes to the unaudited condensed consolidated financial statements.

4

 
American Retirement Villas Properties III, L.P.
(a California limited partnership)
 
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
June 30, 2002
 
(1)    SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying condensed consolidated financial statements of American Retirement Villas Properties III, L.P. 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 can be condensed or omitted.
 
The condensed consolidated financial statements include all normal and recurring adjustments that the Partnership considers necessary for the fair presentation of the partnership’s financial position and operating results. These are condensed consolidated financial statements. To obtain a more detailed understanding of our results, one should also read the condensed consolidated financial statements and notes in the partnership’s Form 10-K for 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 an indication of the results for the full year.
 
Principles of Consolidation
 
The condensed consolidated financial statements of American Retirement Villas Properties III, L.P. (the “Partnership” or “ARVPIII”) include the accounts of the Partnership, Retirement Inns III, LLC and ARV Chandler Villas, L.P. The Retirement Inns III, LLC and ARV Chandler Villas L.P. all of which are 100% owned and therefore consolidated into the Partnership.
 
Basis of Accounting
 
The Partnership maintains the records on the accrual method of accounting for financial reporting and Federal and state tax purposes.
 
Carrying Value of Real Estate
 
Property, furniture and equipment are stated at cost less accumulated depreciation which is charged to expense on a straight-line basis over the estimated useful lives of the assets as follows:
 
Buildings and improvements
   
27.5 to 35 years
Furniture, fixtures and equipment
   
3 to 7 years
 
The Partnership reviews the 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 Partnership estimates the future cash flows expected to result from using the assets and eventually disposing of them. 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.
 
Use of Estimates
 
In the preparation of the partnership’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management has made estimates and assumptions that affect the following:
 
 
•
 
reported amounts of assets and liabilities at the date of the financial statements;
 
 
•
 
disclosure of contingent assets and liabilities at the date of the financial statements; and
 
 
•
 
reported amounts of revenues and expenses during the reporting period.

5

 
Actual results could differ from those estimates.
 
Cash and Cash Equivalents
 
For purposes of reporting cash balances, the Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
 
Capital Expenditures
 
The Partnership capitalizes all assets obtained by purchase, trade or capital lease that have a useful life of more than one year and costs exceeding $500, or a group of similar assets purchased together where the total purchase price exceeds $1,000 and the cost of each asset exceeds $50. Improvements or additions to existing assets are also capital expenditures when they extend the useful life of the assets beyond their original life. Repair expenditures are expensed as incurred.
 
Impound Accounts
 
Our lenders hold certain of the partnership’s funds in impound accounts for payment of property taxes, insurance premiums and future property improvements (replacement reserves) on these properties. The Partnership includes these impound accounts in other assets.
 
Collateral Deposits
 
The Partnership was required by the lender to deposit $2.0 million dollars into a collateral deposit account held by the lender as part of the modification agreement to extend the maturity date, increase the debt and change the interest rate on one of the partnership’s loans.
 
Loan Fees
 
The Partnership amortizes loan fees using the effective interest method over the term of the respective notes payable, with the expense records in amortization expense.
 
General Insurance Liability
 
The Partnership 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 partnership’s estimates of the aggregate liability for claims incurred based on the partnership’s experience.
 
Revenue Recognition
 
ARVPIII enters into residency agreements with residents on a month-to-month basis. ARVPIII applies advance deposits to the first month’s rent. Revenue is recognized in the month earned for rent and assisted living services.
 
Advertising Costs
 
The Partnership expenses all advertising costs as they are incurred.
 
Net Income (Loss) Per Limited Partner Unit
 
Net income (loss) per limited partner unit was based on the weighted-average number of limited partner units outstanding of 18,666 for the three and six months ended June 30, 2002 and June 30, 2001.
 
New Accounting Pronouncements
 
The Partnership adopted SFAS No. 141 “Business Combinations”, SFAS No. 142 “Goodwill and Other Intangible Assets”, 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, 142, 143, and 144 did not have a material effect on the partnership’s financial position, results of operations, or cash flows.

6

 
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 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. The only impact we expect of adopting SFAS No. 145 is the reclassification of prior year extraordinary losses to 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 operation, plant closing, or other exit or disposal 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 is required to be applied prospectively after the adoption date, the Partnership cannot determine the potential effects that adoption of SFAS No. 146 will have on the partnership’s consolidated financial statements.
 
(2)    TRANSACTIONS WITH AFFILIATES
 
The Partnership has an agreement with ARV Assisted Living, Inc. (“ARV”), the partnership’s Managing General Partner, providing for a property management fee of five percent of gross revenues. These payments amounted to $168,000 and $173,000 for the six-month period and $83,000 and $86,000, for the three-month period ended June 30, 2002 and 2001, respectively. Additionally, the Partnership pays ARV a partnership management fee of 10 percent of cash flow before distributions, as provided for in the Partnership Agreement. These payments amounted to $28,000 and $58,000 for the six-month period and $13,000 and $19,000 for the three-month period ended June 30, 2002 and 2001, respectively.
 
(3)    NOTES PAYABLE:
 
At June 30, 2002 and December 31, 2001, notes payable to banks included the following (in thousands):
 
    
June 30, 2002
   
December 31, 2001
Note payable, bearing interest at 8.50% and 9.15% at June 30, 2002 and December 31, 2001, respectively; monthly principal and interest payment of $96 and $69 for 2002 and 2001, respectively. Due July 2003. Collateralized by an ALC and as described below.
   
$
11,919
   
$
7,979
Note payable, bearing interest at 8.06%, monthly principal and interest payment of $41. Due February 2036. Collateralized by an ALC.
   
 
5,741
   
 
5,757
    
  
Total notes payable
   
$
17,660
   
$
13,736
    
  
 
The annual principal payments of notes payable as of June 30, 2002 are as follows (in thousands):
 
For twelve months ended June 30,
       
2003
   
$
184
2004
   
 
11,807
2005
   
 
40
2006
   
 
44
2007
   
 
47
Thereafter
   
 
5,538
    
    
$
17,660
    
 
On January 9, 2001 ARVPIII refinanced one of the two ALCs with a thirty-five year HUD insured loan, bearing interest at 8.06% per annum. The prior debt was extinguished, resulting in an extraordinary loss due to the remaining costs, which were written off at the time of the refinancing. With respect to the loan on the other ALC, on February 1, 2002, the lender agreed to increase the principal

7

sum of the loan to $11,980,000, the maturity date was extended to July 1, 2003 and the interest rate was changed to 8.50% per annum. As a condition to the extension, the principal increase and the rate change, the lender required a $2.0 million cash collateral deposit, and the partnership’s Managing General Partner to guaranty $1.0 million of the loan, which was secured in part by (i) a pledge of partnership interests in ARVPIII, and (ii) a pledge of partnership interests in San Gabriel Retirement Villa, a California Limited Partnership (“SGRV”).
 
 
Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS
 
The following table sets forth a comparison of the six months ended June 30, 2002 and the six months ended June 30, 2001. The percentage increase (decrease) is based upon our Condensed Consolidated Statements of Operations and will not compute using the rounded amounts below.
 
    
For The Six Months Ended
  
(DOLLARS IN MILLIONS)
   
June 30, 2002
   
June 30, 2001
   
Increase/ (decrease)
  
Revenues:
                     
Rent
   
$
3.03
   
$
3.02
   
0.4
%
Assisted living
   
 
0.31
   
 
0.36
   
(16.2
)%
Interest and other revenue
   
 
0.13
   
 
0.15
   
(10.9
)%
    
  
  
Total revenue
   
 
3.47
   
 
3.53
   
(1.8
)%
    
  
  
Costs and expenses:
                     
Community property operations
   
 
1.78
   
 
1.74
   
2.0
%
Assisted living
   
 
0.25
   
 
0.25
   
0.4
%
General and administrative
   
 
0.17
   
 
0.16
   
8.3
%
Depreciation and amortization
   
 
0.40
   
 
0.42
   
(6.2
)%
Property taxes
   
 
0.09
   
 
0.09
   
(1.1
)%
Interest
   
 
0.71
   
 
0.61
   
16.3
%
    
  
  
Total costs and expenses
   
 
3.40
   
 
3.27
   
3.7
%
    
  
  
Income before taxes and extraordinary loss
   
 
0.07
   
 
0.26
   
(72.7
)%
    
  
  
 
The increase in assisted living community rental revenue of $0.01 million from $3.02 million for the six-month period ended June 30, 2001 to $3.03 million for six-month period ended June 30, 2002, or 0.4%, is primarily attributable to:
 
 
•
 
an increase in the average rental rate per occupied unit to $2,030 for the six-month period ended June 30, 2002 as compared with $1,801 for the six-month period ended June 30, 2001; offset by
 
•
 
a decrease in the average occupancy for our assisted living communities from 97.4% for the six-month period ended June 30, 2001 as compared with 86.9% for the six-month period ended June 30, 2002.
 
The decrease in assisted living revenue of $0.05 million from $0.36 million for the six-month period ended June 30, 2001 to $0.31 million for the six-month period ended June 30, 2002, or (16.2)%, is primarily attributable to:
 
 
•
 
a decrease in the average number of assisted living residents to 75 residents for the six-month period ended June 30, 2002 as compared with 98 residents for the six-month period ended June 30, 2001; offset in part by
 
•
 
an increase in the assisted living rate from $620 per month for the six-month period ended June 30, 2001 as compared with $681 per month for the six-month period ended June 30, 2002.
 
The increase in community property operations and assisted living operating expenses of $0.04 million from $1.99 million for the six-month period ended June 30, 2001 to $2.03 million for the six-month period ended June 30, 2002, or 2.0%, is primarily attributable to:
 
 
•
 
the increased salaries of staff and fringe benefits;
 
•
 
an increase in worker’s compensation insurance;
 
•
 
the increase in advertising and marketing expenses; and
 
•
 
the increase in utilities and auto rental; offset by
 
•
 
the decrease in variable expenses as result of the decrease in occupancy.

8

 
The increase in general and administrative expense of $0.01 million from $0.16 million for the six-month period ended June 30, 2001 to $0.17 million for the six-month period ended June 30, 2002, or 8.3%, is primarily attributable to:
 
 
•
 
an increase in property general liability insurance premiums; and
 
•
 
the increase in professional fees and accounting fees; offset by
 
•
 
the decrease in partnership administrative fees paid to our affiliate; and
 
•
 
a decrease in bad debt expense.
 
The decrease in depreciation and amortization of $0.03 million from $0.42 million for the six-month period ended June 30, 2001 to $0.39 million for the six-month period ended June 30, 2002, or (6.2)%, is primarily due to:
 
 
•
 
a decrease in amortization of loan fees; offset by
 
•
 
the increase in depreciation related to capital improvements of our ALCs.
 
The increase in interest expense of $0.10 million from $0.61 million for the six-month period ended June 30, 2001 to $0.71 million for the six-month period ended June 30, 2002, or 16.3%, is primarily due to:
 
 
•
 
a higher loan balance resulting from refinancing; offset in part by
 
•
 
a lower interest rate.
 
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.
 
    
For The Three Months Ended
  
(DOLLARS IN MILLIONS)
   
June 30, 2002
     
June 30, 2001
   
Increase/ (decrease)
  
Revenues:
                       
Rent
   
$
1.50
 
   
$
1.51
   
(0.9
)%
Assisted living
   
 
0.15
 
   
 
0.18
   
(22.7
)%
Interest and other revenue
   
 
0.08
 
   
 
0.07
   
31.7
%
    
  
  
Total revenue
   
 
1.73
 
   
 
1.76
   
(2.0
)%
    
  
  
Costs and expenses:
                       
Community property operations
   
 
0.89
 
   
 
0.86
   
3.6
%
Assisted living
   
 
0.11
 
   
 
0.12
   
(5.7
)%
General and administrative
   
 
0.11
 
   
 
0.07
   
54.9
%
Depreciation and amortization
   
 
0.21
 
   
 
0.21
   
1.4
%
Property taxes
   
 
0.05
 
   
 
0.05
   
(0.0
)%
Interest
   
 
0.37
 
   
 
0.31
   
17.9
%
    
  
  
Total costs and expenses
   
 
1.74
 
   
 
1.62
   
7.5
%
    
  
  
Income (loss) before taxes and extraordinary loss
   
$
(0.01
)
   
$
0.14
   
(109.0
)%
    
  
  
 
The decrease in assisted living community rental revenue of $0.01 million from $1.51 million for the three-month period ended June 30, 2001 to $1.50 million for the three-month period ended June 30, 2002, or (0.9)%, is primarily attributable to:
 
 
•
 
a decrease in the average occupancy for our assisted living communities to 85.5% for the three-month period ended June 30, 2002 as compared with 96.8% for the three-month period ended June 30, 2001; offset by
 
•
 
an increase in the average rental rate per occupied unit to $2,045 for the three-month period ended June 30, 2002 as compared with $1,817 for the three-month period ended June 30, 2001.
 
The decrease in assisted living revenue of $0.03 million from $0.18 million for the three-month period ended June 30, 2001 to $0.15 million for the three-month period ended June 30, 2002, or (22.7)%, is primarily attributable to:
 
 
•
 
a decrease in the average number of assisted living residents to 71 residents for the three-month period ended June 30, 2002 as compared with 98 residents for the three-month period ended June 30, 2001; offset by
 
•
 
an increase in the assisted living rate from $626 per month for the three-month period ended June 30, 2001 compared to $674 per month for the three-months ended June 30, 2002.

9

 
The increase in community property operations and assisted living operating expenses of $0.02 million from $0.98 million for the three-month period ended June 30, 2001 to $1.00 million for the three-month period ended June 30, 2002, or 2.0%, is primarily attributable to:
 
 
•
 
the increased salaries of staff and fringe benefits;
 
•
 
an increase in worker’s compensation insurance;
 
•
 
the increase in advertising and marketing expenses; and
 
•
 
the increase in utilities and auto rental; offset by
 
•
 
the decrease in variable expenses as result of the decrease in occupancy.
 
The increase in general and administrative expense of $0.04 million from $0.07 million for the three-month period ended June 30, 2001 to $0.11 million for the three-month period ended June 30, 2002, or 54.9%, is primarily attributable to:
 
 
•
 
the increase in property general liability insurance premiums; and
 
•
 
the increase in professional fees and accounting fees; offset by
 
•
 
the decrease in partnership administrative fees paid to our affiliate.
 
The increase in interest expense of $0.06 million from $0.31 million for the three-month period ended June 30, 2001 to $0.37 million for the three-month period ended June 30, 2002, or 17.9%, is primarily due to:
 
 
•
 
a higher loan balance resulting from refinancing; offset in part by
 
•
 
a lower interest rate.
 
LIQUIDITY AND CAPITAL RESOURCES
 
We expect that cash generated from the operations of our properties will be adequate to pay operating expenses, make necessary capital improvements, make required principal reductions of debt and provide distributions to our partners. On a long-term basis, our liquidity is sustained primarily from cash flow provided by operating activities.
 
For the six-month period ended June 30, 2002, net cash provided by operating activities was $0.19 million compared to $0.56 million for the corresponding period in 2001. The decrease was primarily due to:
 
 
•
 
a decrease in net income; adjusted by
 
•
 
an increase in the net change in amounts payable to affiliates, net; offset by
 
•
 
an increase in the net change in other assets; and
 
•
 
a decrease in the net change in accounts payable and accrued expenses.
 
During the six-month period ended June 30, 2002, our net cash used in investing activities was $0.16 million compared to cash used in investing activities of $0.25 million for the corresponding period in 2001. In 2001, there was a large capital improvement made on one of our ALCs as part of the requirement of the refinancing.
 
During the six-month period ended June 30, 2002, our net cash used in financing activities was $2.04 million compared to cash used in financing activities of $5.67 million for the corresponding period in 2001. The financing activities for the six-month period ended June 30, 2002 consist of:
 
 
•
 
distribution of the excess cash generated from the refinancing;
 
•
 
a collateral deposit made related to the amendment on one of our mortgage notes;
 
•
 
principal repayments on notes payable; and
 
•
 
loan fees paid and an increase in the capital expenditure replacement reserve; offset by
 
•
 
an increase in the principal amount of one of our existing loans.
 
We estimate that we will incur approximately $346,000 for capital expenditures during 2002 for physical improvements at our two assisted living communities. As of June 30, 2002 we have made approximately $158,000 in capital expenditures. The funds for these improvements should be available from operations and existing reserve funds.

10

 
In order to protect itself against lawsuits and claims relating to general and professional liability, we currently maintain third party insurance policies in amounts and covering risks that are consistent with industry practice. Under the terms of such insurance policies, our coverage is provided subject to varying deductible levels and liability amounts. As the results 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, our general liability coverage is subject to significant deductible levels on a per occurrence basis, for the nine months ended December 31, 2001 and the three months ended March 31, 2002. For the three months ended June 30, 2002, our general liability deductible per occurrence has again been materially increased. Losses up to these deductible levels are accrued based upon our estimates of the aggregate liability for claims incurred based on our experience. As the result of these continuing increases in both deductible amounts and premiums, there can be no assurance that we will be able to obtain all desired insurance coverage in the future on commercially reasonable terms or at all.
 
IMPACT OF INFLATION AND CHANGING PRICES
 
To date, inflation has not had a significant impact on the Partnership. Inflation could, however, affect our future revenues and operating income due to our dependence on the senior resident population, most of who 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 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
 
The Partnership is exposed to market risks related to fluctuations in the interest rates on the partnership’s fixed rate notes payable. With respect to the partnership’s fixed rate notes payable, changes in the interest rates affect the fair value of the notes payable, but not the partnership’s earnings or cash flows. The Partnership does 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 the earlier of maturity and any required refinancing of such debt. The Partnership does not currently have any variable interest rate debt and, therefore, is not subject to interest rate risk associated with variable interest rate debt. Currently, the Partnership does not utilize interest rate swap or exchange agreements and, therefore, is not subjected to interest rate risk associated with interest rate swaps.
 
None of the partnership’s total assets and total contract revenues as of and for the periods ended June 30, 2002 and 2001 were denominated in currencies other than the U.S. Dollar; accordingly, the Partnership believes that ARVPIII has no material exposure to foreign currency exchange risk. This materiality assessment is based on the assumption that the foreign currency exchange rates could change unfavorably by 10%. The Partnership has no foreign currency exchange contracts.

11

 
PART II    OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
The Partnership is from time to time subject to ordinary routine legal proceedings that arise in the normal course of business. While the Partnership cannot predict the results with certainty, the Partnership does not believe that any liability from any such lawsuits or other matters will have a material effect on the partnership’s financial position, results of operations, or liquidity.
 
Item 2.    Changes in Securities and Use of Preceeds
 
None.
 
Item 3.    Defaults Upon Senior Securities
 
None.
 
Item 4.    Submission of Matters to a Vote of Security Holders
 
None.
 
Item 5.    Other Information
 
None.
 
Item 6.    Exhibits and Reports on Form 8-K
 
 
(a)
 
The following documents are filed as a part of this Report:
 
10.17
   
Second Amendment to Multifamily Note between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.18
   
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.
10.19
   
Master Modification Agreement between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.20
   
Guaranty Agreement between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.21
   
Cash Collateral Pledge Agreement between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
 
 
(b)
 
Reports on Form 8-K
 
We did not file any reports on Form 8-K for the quarter ended June 30, 2002.

12

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. A CALIFORNIA LIMITED PARTNERSHIP, BY THE FOLLOWING PERSONS ON OUR BEHALF.
 
Date: August 9, 2002
 
ARV ASSISTED LIVING, INC.,
its Managing General Partner
By:
  
/s/    DOUGLAS M. PASQUALE        
   
Douglas M. Pasquale
Chief Executive Officer
 
 
By:
  
/s/    ABDO H. KHOURY        
   
Abdo H. Khoury
President and Chief Financial Officer

13