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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, 2000
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 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 [ ]
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
American Retirement Villas Properties III, L.P.
(a California limited partnership)
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
Properties, at cost:
Land $ 2,224 $ 2,224
Buildings and improvements, less accumulated
depreciation of $3,260 and $2,976 at June 30, 2000 and
December 31, 1999, respectively 12,494 12,768
Furniture, fixtures and equipment, less accumulated
depreciation of $602 and $527 at June 30, 2000 and
December 31, 1999, respectively 665 746
-------- --------
Net properties 15,383 15,738
Cash 2,529 2,190
Restricted cash 172 168
Loan fees, less accumulated amortization of $373 and $240
at June 30, 2000 and December 31, 1999, respectively 295 401
Other assets 400 289
-------- --------
$ 18,779 $ 18,786
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable to banks $ 13,249 $ 13,323
Notes payable to others 2,325 2,342
Accounts payable 95 116
Accrued expenses 536 486
Amounts payable to affiliate 109 118
Distributions payable to Partners 107 286
-------- --------
Total liabilities 16,421 16,671
-------- --------
Minority interest 128 115
-------- --------
Partners' capital (deficit):
General partners' deficit (135) (139)
Limited partners' capital, 18,666 units outstanding 2,365 2,139
-------- --------
Total partners' capital 2,230 2,000
-------- --------
Commitments and contingencies
$ 18,779 $ 18,786
======== ========
See accompanying notes to the unaudited financial statements.
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American Retirement Villas Properties III, L.P.
(a California limited partnership)
Consolidated Statements of Operations
(unaudited)
(In thousands, except unit data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2000 1999 2000 1999
------- ------- ------ -------
REVENUES:
Rent ................................. $ 1,852 $ 1,655 $3,759 $ 3,609
Assisted living ...................... 284 253 551 518
Interest and other ................... 66 202 158 311
------- ------- ------ -------
Total operating revenues .... 2,202 2,110 4,468 4,438
------- ------- ------ -------
COSTS AND EXPENSES:
Rental property operations ........... 1072 1008 2,186 2,126
Assisted living ...................... 149 156 329 313
Depreciation and amortization ........ 272 231 542 519
Interest ............................. 270 322 653 736
General and administrative ........... 85 103 171 189
Property taxes ....................... 57 57 114 137
Advertising .......................... 28 25 57 46
------- ------- ------ -------
Total operating costs and
expenses ................... 1,933 1,902 4,052 4,066
------- ------- ------ -------
Operating income ............ 269 208 416 372
Income tax expense ................... 3 -- 5 --
------- ------- ------ -------
Income from continuing operations
before minority interest in income of
majority owned entities, gain (loss)
on sale of properties and change in
accounting principle ................ 266 208 411 372
Minority interest in income of
majority owned entities ............. 39 36 119 87
------- ------- ------ -------
Net income before gain (loss) on sale
of properties and change in
accounting principle ................ 227 172 292 285
Gain (loss) on sale of properties .... -- (178) -- 4,562
------- ------- ------ -------
Net income before cumulative effect
of change in accounting principle ... 227 (6) 292 4,847
------- ------- ------ -------
Cumulative effect of change in
accounting principle ................ -- -- -- (96)
------- ------- ------ -------
Net income (loss) .................... $ 227 $ (6) $ 292 $ 4,751
======= ======= ====== =======
Net income per limited partner unit
before cumulative effect of change in
accounting principle ................ 12.09 .0 15.48 259.62
Cumulative effect of change in
accounting principle ................ -- -- -- (5.09)
------- ------- ------ -------
Net income (loss) per limited partner
unit ................................ $ 12.09 $ .0 $15.48 $254.53
======= ======= ====== =======
See accompanying notes to the unaudited financial statements.
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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 SIX MONTHS
ENDED JUNE 30,
---------------------
2000 1999
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Cash flows from operating activities:
Net income ................................................ $ 292 $ 4,751
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization ......................... 542 519
Gain on sale of properties ............................ -- (4,562)
Cumulative effect of change in accounting principle ... -- 96
Increase in minority interest ......................... 119 8
Change in assets and liabilities:
Increase in restricted cash ......................... (4) (2)
Increase in other assets ............................ (138) (231)
Increase (decrease) in accounts payable and accrued
expenses ........................................... 29 (734)
Increase (decrease) in amounts payable to affiliates,
net ................................................ (9) 15
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Net cash provided by (used in) operating
activities ................................... 831 (140)
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Cash flows used in investing activities:
Improvements and building construction .................. -- --
Proceeds from sale of properties ........................ -- 3,962
Additions to furniture, fixtures and equipment, net ..... (53) (90)
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Net cash provided by (used in) investing
activities .................................... (53) 3,872
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Cash flows from financing activities:
Proceeds from notes payable ............................. -- 13,191
Principal repayments on notes payable to banks and others (91) (10,081)
Proceeds from note receivable ........................... -- 2,765
Distributions paid ...................................... (348) (4,430)
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Net cash provided by (used in) financing
activities ................................... (439) 1,445
-------- --------
Net increase in cash ........................................ 339 5,177
Cash at beginning of period ................................. 2,190 1,900
-------- --------
Cash at end of period ....................................... $ 2,529 $ 7,077
======== ========
Supplemental disclosure of cash flow information-
Cash paid during the period for interest ................ $ 765 $ 808
======== ========
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, 2000
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
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 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 1999, 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.
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 Statement of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities,"
which was 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 in 1999 for the cumulative effect of this change in accounting
principle.
(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 $ 108,384 and $ 95,372 for the three-month period
and $219,994 and $210,427 for the six-month period ended June 30, 2000 and 1999
respectively. Additionally, a partnership management fee of 10 percent of cash
flow before distributions, as defined in the Partnership Agreement, amounted to
$ 44,379 and $ 40,372 for the three-month period and $ 88,474 and $ 91,939 for
the six-month period ended June 30, 2000 and 1999 respectively.
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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 of $13.2 million on two owned
communities. As part of the loan requirements, we created a wholly owned
subsidiary Retirement Inns III, LLC. The loan is for 24 months and is secured by
the various properties; in addition, ARV Assisted Living, our managing general
partner, is a guarantor on the loan for fraud, material misrepresentation and
certain covenants. The mortgage loans are due June 2001 and are in the process
of being refinanced with 30-year loans. However, we have not received the
approvals necessary to ensure the loans will be available.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONDENSED RESULTS OF OPERATIONS
For the Six Months
Ended June 30,
(DOLLARS IN MILLIONS) Increase/
2000 1999 (decrease)
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Revenue:
Rent ............................................... $ 3.8 $ 3.6 4.2%
Assisted living .................................... 0.6 0.5 6.4%
Interest and other revenue ......................... 0.1 0.3 (49.4)%
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Total revenue .............................. 4.5 4.4 0.7%
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Costs and expenses:
Rental property operations ......................... 2.3 2.2 2.8%
Assisted living .................................... 0.3 0.3 5.0%
General and administrative ......................... 0.2 0.2 (2.4)%
Depreciation and amortization ...................... 0.5 0.5 4.6%
Property taxes ..................................... 0.1 0.1 (16.9)%
Interest ........................................... 0.7 0.7 (11.3)%
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Total costs and expenses ................... 4.1 4.0 (0.2)%
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Operating income ........................... 0.4 0.4 10.2%
Minority interest in operations .................... 0.1 0.1 36.9%
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Net Income before gain (loss) on sale of properties
and change in accounting principle .................. 0.3 0.3 2.0%
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Net profit on sale of property ....................... -- 4.6 (100.0)%
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Net income before cumulative effect of change in
accounting principle ................................ 0.3 4.9 (94.0)%
Cumulative effect of change in accounting principle .. -- (0.1) (100.0)%
----- ----- ------
Net income ................................ $ 0.3 $ 4.8 (93.9)%
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The increase in rental revenue is attributable to:
o average occupancy for our assisted living communities increased to
97.3% for the six-month period ended June 30, 2000 compared to 92.7%
for the six-month period ended June 30, 1999; and
o an increase in average rental rate per occupied unit to $1,752 for the
six-month period ended June 30, 2000 compared to $1,598 for the
six-month period ended June 30, 1999; offset by
o only one and a half month of rent from senior apartments in 1999 due to
the sale of the three apartment projects on February 19, 1999.
The increase in assisted living revenue is attributable to an increase in
assisted living average monthly revenue from $670 for the six-month period ended
June 30, 1999 compared with $680 for the six-month period ended June 30, 2000.
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The decrease in interest and other revenue is attributable to:
o a lack of interest income from notes receivable in connection with the
sale of three apartment projects in February 1999; offset by
o an increase in interest earned from bank accounts which utilize
commercial paper investments; and
o a decrease in processing and other resident fees for the six-month
period ended June 30, 2000 due to competitor's waiving such fees to
increase occupancy.
The increase in rental property operations and assisted living operating
expenses is attributable to:
o increased occupancy in assisted living communities; and
o staffing requirements related to increased assisted living services
provided; and
o increased salaries of staff; offset by
o a decrease in expenses from senior apartments which were sold in 1999.
General and administrative expenses decreased due to a reduction of expenses due
to cost-cutting efforts.
Property taxes decreased due to the sale of the senior apartments in February
1999.
The decrease in interest expense is related to the following:
o buyer's assumption of the notes payable for the three senior apartments
sold on February 19, 1999; and
o $112,000 recovery of the interest rate lock and commitment fees
incurred in connection with the failed refinancing of certain notes
payable in 1998; offset by
o an increase in expense from refinancing in June 1999 of two
communities.
For the Three Months
Ended June 30,
(DOLLARS IN MILLIONS) Increase/
2000 1999 (decrease)
---- ---- ----------
Revenue:
Rent ......................................... $1.9 $1.7 11.9%
Assisted living .............................. 0.2 0.2 12.0%
Interest and other revenue ................... 0.1 0.2 (67.1)%
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Total revenue ........................ 2.2 2.1 4.4%
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Costs and expenses:
Rental property operations ................... 1.1 1.0 6.3%
Assisted living .............................. 0.1 0.2 (4.0)%
General and administrative ................... 0.1 0.1 (17.4)%
Depreciation and amortization ................ 0.3 0.2 (17.7)%
Property taxes ............................... 0.1 0.1 (0.8)%
Interest ..................................... 0.3 0.3 (16.3)%
---- ---- -------
Total costs and expenses ............. 2.0 1.9 1.8%
---- ---- -------
Operating income ..................... 0.2 0.2 28.1%
Minority interest in operations .............. 0.0 0.0 (7.2)%
---- ---- -------
Net income before gain(loss) on sale of property 0.2 0.2 32.5%
Net loss on sale of property ................... 0.0 (0.2) (100.0)%
---- ---- -------
Net income .......................... $0.2 $0.0 (3799.7)%
==== ==== =======
The increase in rental revenue is attributable to:
o average occupancy for our assisted living communities increased to
96.2% for the three-month period ended June 30, 2000 compared to 92.8%
for the three-month period ended June 30, 1999;
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o an increase in average rental rate per occupied unit to $1,745 for the
three-month period ended June 30, 2000 compared to $1,609 for
three-month period ended June 30, 1999.
The increase in assisted living revenue is attributable to an increase, noted
earlier, in assisted living average monthly revenue from $674 for the
three-month period ended June 30, 1999 compared with $687 for the three-month
period ended June 30, 2000.
The decrease in interest and other revenue is attributable to:
o a lack of interest income from notes receivable in connection with the
sale of three apartment projects in February 1999; offset by
o an increase in interest earned from bank accounts which utilize
commercial paper investments; and
o a decrease in processing and other resident fees for the three-month
period ended June 30, 2000 due to competitor's waiving such fees to
increase occupancy.
The increase in rental property operations and assisted living operating
expenses is attributable to:
o increased occupancy in assisted living communities; and
o staffing requirements related to increased assisted living services
provided; and
o increased salaries of staff; offset by
o a decrease in expenses from the senior apartments which were sold in
February 1999.
Minority interest and property taxes remained relatively constant between
periods.
The decrease in interest expense is related to the $112,000 recovery of the
interest rate lock and commitment fees incurred in connection with the failed
refinancing of certain notes payable in 1998; offset by the refinancing in June
1999 of two communities.
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, 2000, cash provided by operating
activities increased to $0.8 million compared to cash used in operating
activities of $0.1 million for the corresponding period in 1999.
During the six-month period ended June 30, 2000, our net cash used in investing
activities was $0.05 million compared to cash provided by investing activities
of $3.9 million for the corresponding period in 1999. The decrease was primarily
a result of the sale of the three senior apartment projects in 1999.
During the six-month period ended June 30, 2000, our net cash used in financing
activities was $0.4 million compared to $1.4 million provided by financing
activities for the corresponding period in 1999. The components of which are as
follows:
o Cash provided by proceeds from refinancing of two properties in June
1999; offset by
o repayments of bridge loan in 1999;
o Collection of $2.8 million receivable from the sale of apartments in
the first quarter of 1999; offset somewhat by
o Distribution of the sale proceeds from the senior apartment sale to the
partners.
The mortgage loans from Banc One are due June 2001 and, are in the process of
being refinanced with 30-year loans. However, the company has not received the
approvals necessary to ensure the loans will be available.
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Our debt agreements contain restrictive covenants requiring us to maintain a
certain level of debt service coverage. At June 30, 2000, we were not in
compliance with the debt service coverage ratio. We have obtained waivers for
those covenants with which we were not in compliance. Had we not obtained
waivers we would have been in default on certain debt agreements.
We anticipate spending approximately $300,000 for capital expenditures during
2000 for physical improvements at our communities. Funds for these improvements
are expected to 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 they will be able to
pass the subsequent increase in operating expenses onto the residents of the
communities by way of higher rental and assisted living rates. The
implementation of price increases is intended to lead to an increase in revenue,
however, those increases may result in an initial decline in occupancy and/or a
delay in increasing occupancy. If this occurs, revenues may remain constant or
even decline.
ITEM 3. QUANATITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest rates on our
fixed rate notes payable. Currently, we do not utilize interest rate swaps. 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" in Form-10K for the fiscal year ended
December 31, 1999.
For fixed rate debt, changes in interest rates generally affect the fair market
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
market 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 market value should not
have a significant impact on the fixed rate debt until we would be required to
refinance such debt.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. None
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
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Douglas M. Pasquale
President, Chief Executive Officer and
Chairman of the Board of ARV Assisted Living, Inc., General Partner
Date: August 11, 2000
By: /s/ Abdo H. Khoury
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Abdo H. Khoury
Senior Vice President and
Chief Financial Officer of ARV Assisted Living, Inc., General Partner
Date: August 11, 2000
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EXHIBIT INDEX
Exhibit Number Description
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27 Financial Data Schedule