---




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 MARCH 31, 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 registrant, 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 March
31, 2002 was 18,666.





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PART IFINANCIAL INFORMATION





ITEM 1FINANCIAL STATEMENTS





AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.


(A California Limited Partnership)





CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)


(In thousands, except units)





March 31, 2002


December 31, 2001ASSETSProperties, at cost:Land

$
1,549


$
1,549Building and improvements, less accumulated depreciation of $2,935 and $2,822 at March 31, 2002 and December 31, 2001, respectively


9,726



9,811Furniture, fixtures and equipment, less accumulated depreciation of $853 and $805 at March 31, 2002 and at December 31, 2001, respectively


453



453Net properties


11,728



11,813Cash


1,051



2,903Restricted cash


86



85Loan fees, less accumulated amortization of $312 and $311 at March 31, 2002 and December 31, 2001 respectively


267



146Other assets


2,971



934$
16,103


$
15,881LIABILITIES AND PARTNERS CAPITALNotes payable to banks

$
17,708


$
13,736Accounts payable


92



262Accrued expenses


551



565Amounts payable to affiliates


50



43Distributions payable


221



74Total liabilities


18,622



14,680Partners capital (deficit):General partners


(2
)


(2
)Special Limited Partners


(182
)


(142
)Limited partners, 18,666 units outstanding at March 31, 2002 and December 31, 2001


(2,335
)


1,345Total partners capital (deficit)


(2,519
)


1,201$
16,103


$
15,881





See accompanying notes to the unaudited financial statements.




2




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AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.


(a California limited partnership)





CONDENSED CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)


(In thousands, except unit data)





For the Three Months Ended March 31,2002

2001Revenues:Rent

$
1,532

$
1,507Assisted living


163


180Interest


12


42Other


36


42Total operating revenues


1,743


1,771Costs and expenses:Community property operations


868


870Assisted living


136


128General and administrative


59


85Depreciation and amortization


179


208Property taxes


46


47Advertising


23


17Interest


349


304Total operating costs and expenses


1,660


1,659Income from operations before extraordinary loss


83


112Extraordinary loss from extinguishment of debt





66Net income

$
83

$
46Per limited partner unit:Income from operations before extraordinary loss


4.41


5.98Extraordinary loss





(3.52
)Net income

$
4.41

$
2.46








See accompanying notes to the unaudited financial
statements.




3




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AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.


(a California limited partnership)





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In thousands)





For the Three Months Ended March 31,2002


2001Cash flows from operating activities:Net income

$
83


$
46Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization


179



208Extraordinary loss from extinguishment of debt






66Change in assets and liabilities:Increase in restricted cash


(1
)


(3
)Increase in other assets


(17
)


(56
)Decrease in accounts payable and accrued expenses


(184
)


(37
)Increase (decrease) in amounts payable to affiliate, net


7



(244
)Net cash provided by (used in) operating activities


67



(20
)Cash flows from investing activities:Additions to furniture, fixtures and equipment


(93
)


(80
)Net cash used in investing activities


(93
)


(80
)Cash flows from financing activities:Principal repayments on notes payable to banks and others


(28
)


(5,123
)Borrowing under refinancing


4,000



5,783Replenishment reserve under refinancing


(20
)


(522
)Loan fees paid


(122
)


(112
)Collateral deposit under refinancing


(2,000
)


Distributions paid


(3,656
)


(5,500
)Net cash used in financing activities


(1,826
)


(5,474
)Net decrease in cash


(1,852
)


(5,574
)Cash at beginning of period


2,903



8,458Cash at end of period

$
1,051


$
2,884Supplemental schedule of cash flow informationcash paid during the period for interest

$
322


$
341





See accompanying notes to the unaudited financial statements.




4




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AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.


(a California limited partnership)





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


March 31, 2002





(1)    SIGNIFICANT ACCOUNTING POLICIES





Basis of Presentation





We prepared the accompanying condensed consolidated financial statements of American Retirement Villas Properties III, L.P. following the
requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by 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 we consider necessary for the fair presentation of our 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 our 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 may not be the same as those 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. are 100% owned and therefore consolidated into the Partnership.





Basis of Accounting





We maintain our 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 yearsFurniture, fixtures and equipment

3 to 7 years





We review our 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, we estimate 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.




5




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Use of Estimates





In the preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we have made estimates and assumptions that affect the
following:





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

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

| |  |  | reported amounts of revenues and expenses during the reporting period.
| | - |  | ----------------------------------------------------------------------




Actual results could differ from those estimates.





Capital Expenditures





We capitalize 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. Refurbishment expenditures are expensed as incurred.





Impound Accounts





The U.S. Department of Housing and Urban Development (HUD) insures the financing on certain of our properties. HUD requires
lender to hold certain of our funds in impound accounts for payment of property taxes, insurance and future property improvements (replacement reserves) on these properties. We include these impound accounts in other assets.





Collateral Deposits





We were required by
the lender to put $2.0 million dollars in a collateral deposit account held by the lender as part of the agreement to extend the maturity date, increase the debt and change the interest rate on one of our notes. We also include this collateral
deposit in other assets.





Loan Fees





We amortize loan fees using the effective interest method over the term of the respective note payable.





Rental Income





Rent agreements with tenants are on a month-to-month basis. We apply advance deposits to the first months rent.
Revenue is recognized in the month earned for rent and assisted living services.





Advertising Costs





We expense 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 at March 31, 2002 and March 31, 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 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




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(2)    TRANSACTIONS WITH AFFILIATES





We have an agreement with ARV Assisted Living, Inc. (ARV), our Managing General Partner, providing for a property management fee of five percent of gross revenues
amounting to $85,000 and $86,000, for the three-month periods ended March 31, 2002 and 2001, respectively. Additionally, we pay ARV a partnership management fee of 10 percent of cash flow before distributions, as defined in the Partnership
Agreement, which amounted to $15,000 and $38,000 for the three-month periods ended March 31, 2002 and 2001, respectively.





(3)    NOTE PAYABLE:





At March 31, 2002 and December 31, 2001, notes payable to banks and
others included the following (in thousands):





March 31, 2002

December 31, 2001Note payable, bearing interest at 8.50% and 9.15% at March 31, 2002 and December 31, 2001, respectively; monthly principal and
interest payment of $96 and $69 for 2002 and 2001, respectively. Due July 2003. Collateralized as described below.

$
11,959

$
7,979Note payable, bearing interest at 8.06%, monthly principal and interest payment of $41. Due February 2036. Collateralized by
Chandler Villas.


5,749


5,757Total notes payable

$
17,708

$
13,736





The annual principal payments of notes payable as of March 31, 2002 are as
follows (in thousands):





For twelve months ended March 31,2003

$
1792004


11,8492005


402006


432007


47Thereafter


5,550$
17,708





On January 9, 2001 we 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 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, our Managing General Partner to guaranty $1.0 million of the loan, and an additional security of (i) a pledge of partnership interests of ARVPIII, and (ii) a
pledge of partnership interests of San Gabriel Retirement Villa, a California Limited Partnership (SGRV).




7




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ITEM 2MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Three months endedMarch 31, 2002

March 31, 2001


Increase/(decrease)(Dollars in Millions)Revenues:Rent

$
1.53

$
1.51


1.3
%Assisted living


0.16


0.18


(11.1
)%Interest and other revenue


0.05


0.08


(37.5
)%Total revenue


1.74


1.77


(1.7
)%Costs and expenses:Community property operations


0.89


0.89


0.0
%Assisted living


0.14


0.13


7.7
%General and administrative


0.06


0.09


(33.3
)%Depreciation and amortization


0.18


0.20


(10.0
)%Property taxes


0.05


0.05


0.0
%Interest


0.34


0.30


13.3
%Total costs and expenses


1.66


1.66


0.00
%Operating income


0.08


0.11


(27.3
)%Extraordinary loss from extinguishment of debt





(0.06
)

(100.0
)%Net income

$
0.08

$
0.05


60.0
%





The increase in assisted living community rental revenue of $0.02 million from
$1.51 million for three-month period ended March 31, 2001 to $1.53 million for three-month period ended March 31, 2002, or 1.3%, is primarily attributable to:





| |  |  | an increase in average rental rate per occupied unit to $2,017 for the three-month period ended March 31, 2002 as compared with $1,783 for the three-month period ended
March 31, 2001; offset by
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a decrease in average occupancy for our assisted living communities from 98.1% for the three-month period ended March 31, 2001 as compared with 88.4% the three-month period
ended March 31, 2002.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The decrease in assisted living revenue of $0.02 million from $0.18 million for the
three-month period ended March 31, 2001 to $0.16 million for the three-month period ended March 31, 2002, or (11.1)%, is primarily attributable to:





| |  |  | a decrease in average number of assisted living residents to 79 residents for the three-month period ended March 31, 2002 as compared with 99 residents for the three-month
period ended March 31, 2001; offset somewhat by
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | an increase in the assisted living rate from $606 per month for the three-month period ended March 31, 2001 as compared with $687 per month for the three-months ended March 31,
2002.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The increase in community property operations and assisted living operating expenses of $0.01 million
from $1.02 million for the three-month period ended March 31, 2001 to $1.03 million for the three-month period ended March 31, 2002, or 1.0%, is primarily attributable to the increased salaries of staff and fringe benefits.





The decrease in general and administrative expense of $0.03 million from $0.09 million for the three-month period ended March 31, 2001 to $0.06 million
for the three-month period ended March 31, 2002, or (33.3)%, is primarily attributable to:





| |  |  | the decrease in partnership administrative fees paid to our affiliate;
| | - |  | ----------------------------------------------------------------------

| |  |  | the decrease in bad debt expense;
| | - |  | ---------------------------------

| |  |  | the decrease in professional fees; offset by
| | - |  | --------------------------------------------

| |  |  | an increase in property general liability insurance.
| | - |  | ----------------------------------------------------




The decrease in depreciation and amortization of $0.02 million from $0.20 million for the three-month period ended March 31, 2001 to $0.18 million for the three-month period ended March 31, 2002, or (10.0)%, is
primarily due to:





| |  |  | a decrease in amortization of loan fees related to the refinancing in January 2001 of one ALC;
| | - |  | ----------------------------------------------------------------------------------------------

| |  |  | a decrease in amortization of loan fees related to the other ALC which was fully amortized in June 2001; offset by
| | - |  | ------------------------------------------------------------------------------------------------------------------

| |  |  | the increase in depreciation related to capital improvements on our ALCs.
| | - |  | -------------------------------------------------------------------------



8




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The increase in interest expense of $0.04 million from $0.30 million for the three-month period
ended March 31, 2001 to $0.34 million for the three-month period ended March 31, 2002, or 13.3%, is primarily due to:





| |  |  | a higher loan balance resulting from refinancing; offset somewhat 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 three-month period ended March 31, 2002, net cash provided by operating activities was $0.07 million compared to net cash used
in operating activities of $0.02 million for the corresponding period in 2001. The increase was primarily due to:





| |  |  | an increase in net income, adjusted by
| | - |  | --------------------------------------

| |  |  | an increase in the net change in amounts payable to affiliates, net; offset by
| | - |  | ------------------------------------------------------------------------------

| |  |  | a decrease in the net change in accounts payable and accrued expenses.
| | - |  | ----------------------------------------------------------------------




During the three-month period ended March 31, 2002, our net cash used in investing activities was $0.09 million compared to cash used in investing activities of $0.08 million for
the corresponding period in 2001. The increase was a result of the physical improvements at our two assisted living communities.





During the three-month period ended March 31, 2002, our net cash used in financing activities was $1.8 million compared to cash used in financing activities of $5.5 million for the corresponding period in 2001. The financing activities
for the three-months ended March 31, 2002 consist of:





| |  |  | distribution of the excess cashed 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 replenishment 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 March 31, 2002 we have made approximately $93,000 in
capital expenditures. The funds for these improvements should be available from operations.





We are not aware of any trends,
other than national economic conditions which have had, or which may be reasonably expected to have, a material favorable or unfavorable impact on the revenues or income from the operations or sale of properties. We believe that if the inflation
rate increases we will be able to pass the subsequent increase in operating expenses onto the residents of the communities by way of higher rental and assisted living rates. The implementation of price increases is intended to lead to an increase in
revenue however, those increases may result in an initial or permanent decline in occupancy and/or a delay in increasing occupancy. If this occurs, revenues may remain constant or decline.





ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We are exposed to market risks related to fluctuations in the interest rates on our fixed rate notes payable. With respect to our fixed rate notes payable, changes in the interest rates affect the fair market value of
the notes payable, but not our earnings or cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on the fixed
rate debt until the earlier of maturity and any required refinancing of such debt. We do not currently have any variable interest




9




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rate debt and, therefore, are not subject to interest rate risk associated with variable interest rate debt. Currently, we do not utilize interest rate swap or
exchange agreements and, therefore, are not subject to interest rate risk associated with interest rate swaps.





Less than 1% of
our total assets and total contract revenues as of and for the periods ended March 31, 2002 and 2001 were denominated in currencies other than the U.S. Dollar; accordingly, we believe that we have 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%. We have no foreign currency exchange contracts.





PART IIOTHER INFORMATION





ITEM 1.    LEGAL PROCEEDINGS





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





ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS





None.





ITEM 3.    DEFAULTS UPON SENIOR SECURITIES





None.





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





None.





ITEM 5.    OTHER INFORMATION





None.





ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





(a)The following documents are filed as a part of this Report:





None





(b)Reports on Form 8K





We did not file any report on Form 8-K for the quarter ended March 31, 2002.




10




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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,
| | ------------------------------------------

| | A California Limited Partnership,
| | ---------------------------------




| | By the following persons on our behalf.
| | ---------------------------------------




Date:  May
14, 2002


ARV ASSISTED LIVING, INC., its managing General PartnerBy:

/s/    DOUGLAS M. PASQUALEDouglas M. Pasquale Chief Executive Officer





By:

/s/    ABDO H. KHOURYAbdo H. Khoury President and Chief Financial Officer




11