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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ____________ TO ____________
COMMISSION FILE NUMBER: 0-26470
AMERICAN RETIREMENT VILLAS
PROPERTIES III, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-365417
------------------------------ ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1 COSTA MESA, CA 92626
-------------------------------------- --------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
American Retirement Villas Properties III, L.P.
(a California limited partnership)
Condensed Balance Sheets
(Unaudited)
(In thousands)
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
-------- ----------
Properties, at cost:
Land $ 2,224 $ 4,674
Buildings and improvements, less accumulated
depreciation of $2,505 and $5,177 at June 30, 1999 and
December 31, 1998, respectively 13,029 23,669
Furniture, fixtures and equipment, less accumulated
depreciation of $451 and $395 at June 30, 1999 and
December 31, 1998, respectively 809 874
-------- --------
Net properties 16,062 29,216
Cash 7,077 1,900
Restricted cash 164 162
Other assets 630 400
-------- --------
$ 23,933 $ 31,678
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable to banks $ 15,716 $ 23,071
Accounts payable 168 677
Accrued expenses 216 441
Amounts payable to affiliate 137 122
Distributions payable to Partners 93 399
-------- --------
Total liabilities 16,330 24,710
-------- --------
Commitments and contingencies
Minority interest 103 95
-------- --------
Partners' capital (deficit):
General partners' deficit (90) (90)
Limited partners' capital, 18,666 units outstanding 7,590 6,963
-------- --------
Total partners' capital 7,500 6,873
-------- --------
$ 23,933 $ 31,678
======== ========
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties III, L.P.
(a California limited partnership)
Statements of Operations
(unaudited)
(In thousands, except unit data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -----------------------------
1999 1998 1999 1998
-------- -------- -------- --------
REVENUES:
Rent..................................... $ 1,655 $ 1,987 $3,609 $3,895
Assisted living.......................... 253 231 518 448
Interest and other....................... 202 141 311 206
------- ------- ------ ------
Total revenues.................. 2,110 2,359 4,438 4,549
------- ------- ------ ------
COSTS AND EXPENSES:
Rental property operations .............. 1,031 1,054 2,153 2,022
Assisted living ......................... 124 89 248 176
Depreciation and amortization............ 231 379 519 714
Interest ................................ 323 495 736 968
General and administrative .............. 112 144 230 280
Property taxes........................... 57 70 137 141
Advertising.............................. 25 29 43 50
Minority interest........................ 36 37 87 72
------- ------- ------ ------
Total costs and expenses........ 1,939 2,297 4,153 4,423
------- ------- ------ ------
Operating income......................... 171 62 285 126
Gain (loss) on sale of properties........ (177) -- 4,562 --
------- ------- ------ ------
Net income before cumulative effect
of change in accounting principle........ (6) 62 4,847 126
Cumulative effect of change in
accounting principle..................... -- -- (96) --
------- ------- ------ ------
Net income (loss)........................ $ (6) $ 62 $ 4,751 $ 126
====== ======= ====== ======
Net income (loss) per limited
partner unit ............................ $ .0 $ 3.32 $254.52 $ 6.75
====== ======= ======= =======
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties III, L.P.
(a California limited partnership)
Statements of Cash Flows
(unaudited)
(In thousands)
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income ......................................... $ 4,751 $ 126
Adjustments to reconcile net income to net cash
provided by
Operating activities:
Depreciation and amortization .................. 519 714
Gain on sale of properties .................... (4,562)
Cumulative effect of change in accounting
principle .................................... 96
Interest expense on notes payable to bank
added to principle ........................... -- 74
Change in assets and liabilities:
Increase in restricted cash ................. (2) (5)
Increase in other assets .................... (231) (218)
Increase(decrease) in accounts payable
and accrued liabilities ................... (734) 425
Increase in amounts payable from
affiliates, net ........................... 15 576
Increase in minority interest ............... 8 12
-------- --------
Net cash provided by (used in) operating
activities ............................ (140) 1,704
-------- --------
Cash flows used in investing activities:
Improvements and building construction ........... -- (835)
Proceeds from sale of properties ................. 3,962 --
Additions to furniture, fixtures and
equipment, net .................................. (90) (333)
-------- --------
Net cash used in investing activities ... 3,872 (1,168)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable ...................... 13,191 663
Principal repayments on notes payable to banks
and others ..................................... (10,081) (166)
Proceeds from note receivable .................... 2,765 --
Distributions paid ............................... (4,430) (354)
-------- --------
Net cash provided by financing
activities ........................... 1,445 143
-------- --------
Net increase in cash ................................. 5,177 679
Cash at beginning of period .......................... 1,900 1,086
-------- --------
Cash at end of period ................................ $ 7,077 $ 1,765
======== ========
Supplemental disclosure of cash flow information-
Cash paid during the period for interest ......... $ 808 $ 968
======== ========
Supplemental schedule of non-cash investing and
financing activities:
Notes payable assumed by the buyer of the
senior apartments ............................ $ 10,605 --
========
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties III, L.P.
(a California limited partnership)
Notes to Financial Statements
(Unaudited)
June 30, 1999
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
We prepared the accompanying condensed financial statements of American
Retirement Villas Properties III, L.P. following the requirements of the
Securities and Exchange Commission ("SEC") for interim reporting. As permitted
under those rules, certain footnotes or other financial information that are
normally required by generally accepted accounting principles ("GAAP") can be
condensed or omitted.
The financial statements include all normal and recurring adjustments that we
consider necessary for the fair presentation of our financial position and
operating results. These are condensed financial statements. To obtain a more
detailed understanding of our results, one should also read the financial
statements and notes in our Form 10-K for 1998, which is on file with the SEC.
The results of operation can vary during each quarter of the year. Therefore,
the results and trends in these interim financial statements may not be the same
as those for the full year.
USE OF ESTIMATES
In preparing the financial statements conforming with GAAP, we have made
estimates and assumptions that affect the following:
o Reported amount of assets and liabilities at the date of the
financial statements;
o Disclosure of contingent assets and liabilities at the date of
the financial statements; and
o Reported amounts of revenues and expenses during the reporting
period.
Actual results could differ from those estimates.
RECENT ACCOUNTING DEVELOPMENTS
In April 1998, the Accounting Standard Executive Committee issued State of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities,"
which is effective for fiscal years beginning after December 15, 1998. The SOP
provides guidance on the financial reporting of start-up activities and
organizational costs. It requires costs of start-up activities and
organizational costs to be expensed when incurred and, upon adoption, the
write-off as a cumulative effect of a change in accounting principle of any
previously capitalized start-up or organizational costs. We adopted the
provision of SOP 98-5 on January 1, 1999 and reported a charge of approximately
$96,000 for the cumulative effect of this change in accounting principle.
(2) TRANSACTIONS WITH AFFILIATES
The Partnership has an agreement with ARV Assisted Living, Inc., the
Partnership's Managing General Partner, providing for a property management fee
of five percent of gross revenues amounting to $ 95,000 and $ 210,000, for the
three-month and the six-month periods ended June 30, 1999. Additionally, a
partnership management fee of 10 percent of cash flow before distributions,
as defined in the Partnership Agreement, amounted to $ 40,000 and$ 92,000 for
the three-month and the six-month periods ended June 30, 1999.
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(3) SALE OF SENIOR APARTMENT PROJECTS
On February 19, 1999 we sold the three senior apartment projects for
approximately $17.4 million, net of costs. In connection with the sale, we
received cash of approximately $4.0 million, $2.8 million in notes receivable
paid in June, and assumption of mortgage balances of approximately $10.6 million
by the buyer.
(4) NOTES PAYABLE
On June 28, 1999, we obtained financing from Banc One for $13.2 million on two
owned communities. As part of the loan requirements, we established a wholly
owned subsidiary Retirement Inns III, LLC. The loan is for 24 months and is
secured by the various properties; in addition, ARV Assisted Living, our general
partner is a guarantor on the loan for fraud, material misrepresentation and
certain covenants. The loan term is for 24 months with a lender option to extend
for 10 years. The interest rate is 9.15% and the payments are based upon a 25
year principal and interest amortization schedule.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the Six Months
Ended June 30,
(DOLLARS IN MILLIONS) Increase/
1999 1998 (decrease)
------ ------ -------
Revenue:
Rent ................................................ $ 3.6 $ 3.9 (7.4)%
Assisted living ..................................... 0.5 0.4 15.6%
Interest and other revenue .......................... 0.3 0.2 (5.7)%
------ ------ ------
Total revenue ............................... 4.4 4.5 (2.5)%
------ ------ ------
Costs and expenses:
Rental property operations .......................... 2.2 2.0 6.4%
Assisted living ..................................... 0.2 0.2 41.3%
General and administrative .......................... 0.2 0.3 (17.2)%
Depreciation and amortization ....................... 0.5 0.7 (27.4)%
Property taxes ...................................... 0.1 0.1 (2.4)%
Interest ............................................ 0.7 1.0 (24.0)%
Minority interest in operations ..................... 0.1 0.1 20.1%
------ ------ ------
Total costs and expenses .................... 4.1 4.4 (6.1)%
------ ------ ------
Operating income ............................ 0.3 0.1 126.1%
Net gain on sale of property .......................... 4.6 100.0% 100.0%
------ ------ ------
Net income before cumulative effect of change in
accounting principle ................................ 4.9 0.1 4851%
Cumulative effect of change in accounting principle ... (0.1) -- (100.0)%
------ ------ ------
Net income ................................. $ 4.8 $ 0.1 4751%
====== ====== ======
The decrease in rental revenue is attributable to:
o only one and a half months of rent from senior apartments in
1999 due to the sale of the three apartment projects on February
19, 1999; offset by
o average occupancy for our assisted living communities increased
to 92% for the six month period ended June 30, 1999 compared to
91.8% for the six month period ended June 30, 1998; and
o an increase in average rental rate per occupied unit to $1,769
for the six month period ended June 30, 1999 compared to $1,477
the six month period ended June 30, 1998;
The increase in assisted living revenue is attributable to an increase in
assisted living average from $654 per month for the six month period ended June
30, 1998 compared with $757 per month for the six month period ended June 30,
1999.
The increase in interest and other revenue is attributable to:
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o bank accounts which utilize commercial paper investments were
used during 1999; and
o an increase in processing and other resident fees for the six
month period ended June 30, 1999 resulting from increasing
occupancy.
The increase in rental property operations and assisted living operating
expenses is attributable to:
o increased occupancy of Villa Las Posas as the community was in
the lease-up phase during 1998;
o staffing requirements related to increased assisted living
services provided;
o increased salaries of staff; offset by
o decrease in rent due to sale of three apartment projects on
February 19, 1999.
Minority interest and property taxes remained constant between periods.
The decrease in interest expense is related to the buyer's assumption of the
notes payable for the three senior apartments sold on February 19, 1999.
The decrease in depreciation and amortization expense is related to sale of the
three senior apartments and the elimination of amortization of start-up costs
due to the adoption of SOP 98-5 which required us to write-off all capitalized
start-up costs in the first quarter 1999.
Cumulative effect of change in accounting principle is a result of the adoption
of SOP 98-5 which requires that costs of start-up activities and organizational
costs be expensed as incurred.
For the Three Months
Ended June 30,
--------------------
(DOLLARS IN MILLIONS) Increase/
1999 1998 (decrease)
----- ----- ---------
Revenue:
Rent .............................. $ 1.7 $ 2.0 (16.7)%
Assisted living ................... 0.2 0.2 9.8%
Interest and other revenue ........ 0.2 0.2 42.4%
----- ----- -----
Total revenue ............. 2.1 2.4 (10.6)%
----- ----- -----
Costs and expenses:
Rental property operations ........ 1.0 1.1 (2.2)%
Assisted living ................... 0.1 0.1 38.9%
General and administrative ........ 0.1 0.1 (22.6)%
Depreciation and amortization .. .. 0.2 0.4 (39.1)%
Property taxes .................... 0.1 0.1 (18.7)%
Interest .......................... 0.3 .5 (34.8)%
Minority interest in operations ... 0.0 0.0 (1.6)%
----- ----- -----
Total costs and expenses .. 1.9 2.3 (25.9)%
----- ----- -----
Operating income .......... 0.2 0.1 50.0%
Net loss on sale of property ........ (0.2) -- 100.0%
----- ----- -----
Net income ............... $ 0.0 $ 0.1 100.0%
===== ===== =====
The decrease in rental revenue is attributable to:
o no rent for the second quarter of 1999 from the senior
apartments due to the sale of the three apartment projects on
February 19, 1999; offset by:
o average occupancy for our assisted living communities increased
to 92% for the three month period ended June 30, 1999 compared
to 91.8% for the three month period ended June 30, 1998;
o an increase in average rental rate per occupied unit to $1,629
per month for the three month period ended June 30, 1999
compared to $1,471 per month the three month period ended June
30, 1998.
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The increase in assisted living revenue is attributable to an increase, noted
earlier, in assisted average cost from $654 for the three month period ended
June 30, 1998 compared with $757 for the three month period ended June 30, 1999.
The increase in interest and other revenue is attributable to:
o bank accounts which utilize commercial paper investments were
used during 1999; and
o an increase in processing and other resident fees for the six
month period ended June 30, 1999 resulting from increasing
resident inquiries.
The increase in rental property operations and assisted living operating
expenses is attributable to:
o increased occupancy of Villa Las Posas as the community was in
the lease-up phase during 1998;
o staffing requirements related to increased assisted living
services provided;
o increased salaries of staff;
o decrease in lease expense due to sale of three apartment
projects on February 19, 1999.
Minority interest and property taxes remained constant between periods.
The decrease in interest expense is related to the buyer's assumption of the
notes payable for the three senior apartments sold on February 19, 1999.
The decrease in depreciation and amortization expense is related to sale of the
three senior apartments and the elimination of amortization of start-up costs
due to the adoption of SOP 98-5 which required us to write-off all capitalized
start-up costs in the first quarter 1999.
The loss of sale of property of $0.2 million is attributable to the brokerage
fee for the loan assumption in the first quarter of 1999 not paid until the
second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
We expect that the cash to be generated from operations of all our properties
will be adequate to pay operating expenses, fund necessary capital improvements,
meet required principal payments of debt and pay quarterly distributions. On a
long-term basis, our liquidity is sustained primarily from cash flow provided by
operating activities.
During the six month period ended June 30, 1999, cash used in operating
activities decreased to $0.1 million compared to cash provided by operating
activities of $1.7 million for the corresponding period in 1998. The decrease
was due to payables and accrued expense reductions.
During the six month period ended June 30, 1999, our net cash provided by
investing activities was $3.9 million compared to cash used in investing
activities of $1.2 million for the corresponding period in 1998. The increase
was primarily a result of the sale of the three senior apartment projects.
During the six month period ended June 30, 1999, our net cash provided by
financing activities was $1.4 million compared to $0.1 million for the
corresponding period in 1998.
o Cash provided by proceeds from refinancing of two properties in
June 1999;
o Collection of $2.8 million receivable from the sale of
apartments in the first quarter 1999; offset somewhat by
o Distribution of the sale proceeds from the senior apartment sale
to the partners.
We anticipate spending approximately $400,000 for capital expenditures during
1999 for physical improvements at our communities. Funds for these improvements
are expected to be available from operations.
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We are not aware of any trends, other than national economic conditions which
have had, or which may be reasonably expected to have, a material favorable or
unfavorable impact on the revenues or income from the operations or sale of
properties. We believe that if the inflation rate increases. 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 decline in occupancy and/or a
delay in increasing occupancy. If this occurs, revenues may remain constant or
even decline.
YEAR 2000 ISSUE
General
We use certain computer programs that were written using two digits rather than
four to define the year. As a result, those programs may recognize a date using
"00" as the year 1900 rather than the year 2000. In the event this were to occur
with any of our computer programs, a system failure or miscalculation causing
disruptions of operations could occur. Such a failure could cause the temporary
inability to process transactions, send invoices or engage in similar normal
business activities. We have developed a comprehensive program to test and
modify our information technology to address the Year 2000 Issue. We believe
that our program is on schedule for completion by the end of 1999, and that
there will be no material impact on our business, results of operations,
financial position or liquidity as a result of Year 2000 Issues.
Program
Our program is focused on the following three main projects:
o information technology infrastructure -- all of our hardware and
software systems;
o community maintenance -- community specific systems, including
alarms (security, fire and emergency call), elevator, phone,
HVAC, and other systems; and
o third party suppliers/vendors.
For each component, we are addressing the Year 2000 Issues in the following six
phases:
o taking inventory of systems with potential Year 2000 Issues;
o assigning priorities to systems identified with Year 2000
Issues;
o assessing items which may have a material effect on our
operations;
o testing items assessed as material;
o replacing or repairing material non-compliant items; and
o designing and implementing business continuation plans.
We have initiated communications with the third-party providers of certain of
our administrative services, as well as our significant suppliers of services
and products, to determine the extent to which we are vulnerable to those
parties' failures to remediate their own Year 2000 Issues. We completed our
evaluation of those suppliers during the third quarter of 1998. We do not
presently believe that third party Year 2000 issues will have a material adverse
effect on us. However, there can be no guarantee that the systems of other
companies on which our operations or systems rely will be remedied on a timely
basis or that a failure by another company to remediate its systems in a timely
manner would not have a material adverse effect on us.
Costs
We have successfully converted our accounting to a Year 2000 compliant system.
And, we expect to implement the other changes necessary to address our Year 2000
Issues. We do not believe that the cost of such actions will have a material
adverse effect on our financial position, results of operations or liquidity. We
are currently unable to assess the costs to remediate any Year 2000 Issues that
may result from the assessment.
Risks
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We believe that our Year 2000 program will be completed by the end of the third
quarter of 1999. Our program's schedule is based on a number of factors and
assumptions, such as:
o the accuracy and completeness of responses to our inquiries; and
o the availability of skilled personnel to complete the program.
Our program's schedule could be adversely impacted if either of the factors and
assumptions is incorrect. The failure to correct a material Year 2000 Issue
could result in an interruption in our normal business operations. There can be
no assurance, however, that there will not be delays in, or increased costs
associated with, the implementation of such changes, and our inability to
implement such changes could have a material adverse effect on our business,
operating results, and financial condition.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 10.1 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns III, LLC
Exhibit 10.2 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns III, LLC (1)
Exhibit 10.14 Letter Agreement as to the Loans in the aggregate amount
of $13,382,200 from Banc One Capital Funding Corporation to
Retirements Inns III
Exhibit 10.16 Note and Agreement as to Retirement Inns III, LLC
Exhibit 27 Financial Data Schedule
- -------------
(1) Pursuant to instruction number 2 of Item 601 of Regulation S-K, this
document has not been filed as an exhibit. See Schedule I to Exhibit 10.1
which sets forth the material details in which this document differs from
the document filed as Exhibit 10.1.
B. REPORTS OF FORM 8-K
None
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN RETIREMENT VILLAS PROPERTIES III,
A CALIFORNIA LIMITED PARTNERSHIP
By: ARV Assisted Living, Inc.,
a Delaware Corporation
(Managing General Partner)
By: /s/ Douglas M. Pasquale
--------------------------------------
Douglas M. Pasquale
President, Chief Executive Officer and
Director of ARV Assisted Living, Inc.
Date: August 12, 1999
By: /s/ Abdo H. Khoury
------------------------------------------
Abdo H. Khoury
Senior Vice President, Chief Financial
Officer of ARV Assisted Living, Inc.
Date: August 12, 1999
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