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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-26470
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
A CALIFORNIA LIMITED PARTNERSHIP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0365417
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, SUITE D-1, COSTA MESA, CALIFORNIA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
UNITS OF LIMITED PARTNERSHIP
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes [X] No [ ]
The aggregate market value of voting Units (all voting) held by non-affiliates
of Registrant, computed by reference to the price at which such units were sold,
was $18,608,140 as of March 31, 1998, a date within sixty (60) days of the
filing of this Form 10-K. On that date there were 18,666 Units outstanding.
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TABLE OF CONTENTS
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.,
A CALIFORNIA LIMITED PARTNERSHIP
PART I
ITEM 1. BUSINESS
Overview
Industry Overview
The Partnership's Assisted Living Services
Factors Affecting Future Results Regarding Forward-looking Statements
Competition
Government Regulation
Risks Common to the Partnership's Assisted Living Operations
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<PAGE> 3
PART I
ITEM 1. BUSINESS
OVERVIEW
American Retirement Villas Properties III ("ARVP III", the "Partnership" or the
"Registrant") is the owner and operator of three assisted living communities
("ALCs"), which house and provide personal care and support services to its
senior residents in California and Arizona, and three senior apartment complexes
in Southern California. The three ALCs contain an aggregate of 379 units. All
three senior apartments are located in Southern California and contain an
aggregate of 416 units.
ARVP III is a California limited partnership, which was formed in June of 1989
to develop, finance, acquire and operate senior housing. The general partners
are: ARV Assisted Living, Inc. ("ARVAL"), which serves as Managing General
Partner, Gary L. Davidson, John A. Booty, John S. Jason, Tony Rota, and David P.
Collins (collectively known as "General Partners"). The General Partners make
all decisions concerning property acquisitions and will make all decisions
concerning dispositions of the communities, subject to the limited partners'
rights to approve or disapprove of the sale of substantially all of the ARVP
III's assets.
On September 15, 1989, the Registrant began offering a total of 35,000 Units at
$1,000 per unit The offering terminated on October 31, 1992 and the Registrant
realized gross offering proceeds of $18,664,000. In January and March of 1993,
the Partnership repurchased and effectively retired 10 units for $8,500 and 3
units for $2,550, from Limited Partners. During 1993, the Registrant applied for
and earned block grants totaling a gross amount of approximately $1,081,000
allocated to two of its properties. Total grant funds received amounted to
approximately $1,059,000. All of the proceeds from the Offering and a portion of
the proceeds from the block grants were allocated to, and spent on, properties
which the Registrant either owns outright or through its interest as managing
general partner of the partnership which holds title to the respective property.
Although the expiration of the minimum holding period (five to seven years) has
run for certain facilities, there is no definite plan to sell any facility in
accordance with a timetable. Any determination regarding sale will be dependent
upon the current and projected operating performance, the needs of the
Registrant, the availability of buyers and buyers' financing and, in general,
the relative merits of continued operation as opposed to sale. On any sale, the
Registrant may accept purchase money obligations, unsecured or secured by
mortgages as payment, depending upon then prevailing economic conditions that
are customary in the area in which the property is located, credit of the buyer
and available financing alternatives. (See ITEM 2, "PROMISSORY NOTES RESULTING
FROM THE SALE OF HERITAGE POINTE CLAREMONT) In such event, full distribution to
the Partners may be delayed until the notes are paid at maturity, sold,
refinanced or otherwise liquidated.
INDUSTRY OVERVIEW
Assisted Living. Assisted living can be viewed as falling near the middle of the
elder care continuum, between home-based care at one end and long-term skilled
nursing facilities and acute care hospitals at the other. Assisted living
represents a combination of housing, personalized support services, and health
care designed to respond to the individual needs of the senior elderly who need
help in activities of daily living, but do not need the medical care provided in
a skilled nursing facility.
Senior Apartments. The Partnership provides affordable senior apartments to
qualified independent seniors who do not need or want the services provided by
congregate care or ALCs. These independent housing communities are intended for
people who enjoy an active lifestyle but want to be free of the burdens and
responsibilities of owning and maintaining a home.
The Partnership believes its assisted living and senior apartment businesses
benefit from significant trends affecting the long-term care industry. The first
is an increase in the demand for elder care resulting from the continued aging
of the U.S. population, with the average age of the Partnership's residents
falling within the fastest growing segments of the U.S. population. While
increasing numbers of Americans are living longer and healthier lives, many
gradually require increasing assistance with activities of daily living, and are
not able to continue to age in place at home. The second is the effort to
contain health care costs by the government, private insurers and managed care
organizations by limiting lengths of stay, services, and reimbursement amounts
to persons in acute care hospitals and skilled nursing facilities. Assisted
living offers a
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cost effective long-term care alternative while preserving a more independent
lifestyle for those senior elderly who do not require the broader array of
medical services that acute care hospitals and skilled nursing facilities are
required to provide. Other trends benefiting the Partnership include the
increased financial net worth of the elderly population, the increase in the
population of individuals living alone and the increasing number of women who
work outside the home and are therefore less able to care for their elderly
relatives. The Partnership believes that these trends will result in an
increasing demand for assisted living services and senior apartment communities,
which may fill the gap between aging at home and aging in more expensive skilled
nursing facilities.
Aging Population. The primary consumers of long-term health care services are
persons over the age of 65. This group represents one of the fastest growing
segments of the population. According to U.S. Bureau of the Census data, the
segment of the population over 65 years of age is currently 13% of the total
population or 34 million people. That number is projected to grow to 20% of the
total population or 69 million people by the year 2030. Additionally, the number
of people aged 85 and older, which comprises the largest percentage of residents
at long-term care facilities, is currently 3.7 million and is projected to
increase to 8.5 million by the year 2030.
The Partnership believes that growth in the industry is being driven by several
factors. Advances in the medical and nutrition field have resulted in an
increased life expectancy, resulting in larger numbers of elderly people. The
increased number of women in the labor force has reduced the supply of
caregivers. Historically, unpaid women (mostly daughters or daughters-in-law)
represented a large portion of the caregivers of the non-institutionalized
senior elderly. As a result of changing societal patterns, the population of
individuals living alone has increased significantly since 1960. This increase
has been the result of an aging population in which women outlive men by an
average of 6.8 years, rising divorce rates, and an increase in the number of
unmarried individuals.
Limitation on the Supply of Long-Term Care Facilities. The majority of states in
the U.S. have enacted Certificate of Need or similar legislation, which
generally limits the construction of skilled nursing facilities and the addition
of beds or services in existing skilled nursing facilities. High construction
costs, limitations on government reimbursement for the full cost of
construction, and start-up expenses also act to constrain growth in the supply
of such facilities. Such legislation benefits the assisted living industry by
limiting the supply of skilled nursing beds for the senior elderly. Cost factors
are placing pressure on skilled nursing facilities to shift their focus toward
higher acuity care which enables them to charge higher fees, thus creating a
shortage of lower acuity care availability, and thereby increasing the pool of
potential assisted living residents.
While Certificates of Need generally are not required for ALCs, except in a few
states, most states do require assisted living providers to license their
communities and comply with various regulations regarding building requirements
and operating procedures and regulations. States typically impose additional
requirements on assisted living facilities over and above the standard
congregate care requirements. Further, the limited pool of experienced assisted
living staff and management, as well as the costs and start-up expenses to
construct an assisted living community, provide an additional barrier of entry
to the assisted living business.
Cost Containment Pressures of Health Reform. In response to rapidly rising
health care costs, both government and private pay sources have adopted cost
containment measures that have encouraged reduced lengths of stay in hospitals
and skilled nursing facilities. The federal government has acted to curtail
increases in health care costs under Medicare by limiting acute care hospital
reimbursement for specific services to preestablished fixed amounts. Private
insurers have also begun to limit reimbursement for medical services in general
to predetermined "reasonable" charges. Managed care organizations, such as
health maintenance organizations ("HMOs") and preferred provider organizations
("PPOs") are reducing hospitalization costs by negotiating for discounted rates
for hospital services and by monitoring and decreasing hospitalization. The
Partnership anticipates that both HMOs and PPOs increasingly may direct patients
away from the more expensive nursing care facilities into less expensive ALCs.
These cost containment measures have produced a "push-down" effect. As the
number of patients being "pushed down" from acute care hospitals to skilled
nursing facilities increases, the demand for residential options such as ALCs to
serve patients who historically have been served by skilled nursing facilities
will also increase. In addition, skilled nursing facility operators are
continuing to focus on improving occupancy and expanding services (and fees) to
subacute patients requiring very high levels of nursing care. As the level of
skilled nursing facility patients increases, the supply of nursing facility
space will be filled by patients with higher acuity needs paying higher fees,
which again will
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provide opportunities for assisted living communities to increase their
occupancy and services to residents requiring lesser levels of care than
generally can be expected for patients in skilled nursing facilities.
THE PARTNERSHIP'S ASSISTED LIVING SERVICES
The Partnership provides services and care at its ALCs which are designed to
meet the individual needs of its residents. The services provided by the
Partnership are designed to enhance both the physical and mental well-being of
the senior elderly in each of its ALCs by promoting their independence and
dignity in a home-like setting. The Partnership's assisted living program
includes the following:
Personalized Care Plan. A primary element of the Partnership's strategy is
the concept of "personalized" care to meet each ALC resident's specific
needs. This concept of customizing services to meet the needs of the
residents begins with the resident admissions process, where the community's
management staff, the resident, the resident's family, and the resident's
physician discuss the resident's needs and develop a plan for the resident's
care. If recommended by the resident's physician, additional health care or
medical services may be provided at the community by a third party home
health care agency or other medical provider. The care plan is reviewed and
modified on a regular basis.
Basic Service and Care Package. The basic service and care package at the
Partnership's assisted living communities generally includes the following:
meals in a communal, "home-like" setting, housekeeping, linen and laundry
service, social and recreational programs, security, utilities and
transportation in the Partnership's van or minibus. Other care services can
be provided under the basic package based upon the individual's personalized
health care plan.
Additional Services. The Partnership has designed its additional assisted
living service program which is available to residents on a personalized
basis.
Level One: Assistance to residents in the self-administration of
medication. Where necessary, the assisted living staff will
consult with the family, the physician or the insurance
company of a resident to designate a home health care agency
to administer the appropriate medication.
Level Two: In addition to the services provided under Level One,
assistance with bathing, dressing and grooming, escorting to
and from meals and activities, reading mail, writing letters,
shopping and other specialized activities. These services are
provided on an as-needed basis and at the convenience of the
resident within the overall operation of the community.
Level Three: All of the services provided under Level One and Level Two,
and, in addition, provision of those services on a 24-hour
basis. Further, this level provides appropriate services for
individuals who need help with incontinence.
In addition to the above levels, the Partnership provides other levels of
assistance to its ALC residents in order to meet their individual needs.
No personalized services are offered to residents in the Partnership's senior
apartment communities.
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The Partnership's business, results of operations and financial condition are
subject to many risks, including those set forth below. Certain statements
contained in this report including, without limitation, statements containing
the words "believes," "anticipates," "expects," and words of similar import,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Partnership, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
Partnership has made forward-looking statements in this report concerning, among
other things the level of future capital expenditures. These statements are only
predictions, however; actual events or results may differ materially as a result
of risks facing the Partnership. These risks include, but are not limited to,
those items discussed below. Certain of these factors are discussed in more
detail elsewhere in this report including, without limitation, under the
captions "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Given these uncertainties, readers are
cautioned not to place undue reliance on such forward-looking statements, which
speak only
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as of the date of this report. The Partnership disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.
COMPETITION
The health care industry is highly competitive and the Company expects that the
assisted living business in particular will become more competitive in the
future. The Partnership continues to face competition from numerous local,
regional and national providers of assisted living and long-term care whose
facilities and services are on either end of the senior care continuum from
skilled nursing facilities and acute care hospitals to companies providing home
based health care, and even family members. In addition, the Partnership expects
that as assisted living receives increased attention among the public and
insurance companies, competition from current and new market entrants, including
companies focused on assisted living as well as hospitality companies expanding
into the market, will increase. Some of the Partnership's competitors operate on
a not-for-profit basis or as charitable organizations, while others have, or may
obtain, greater financial resources than those available to the Partnership.
GOVERNMENT REGULATION
Assisted Living. Health care is an area subject to extensive regulation and
frequent regulatory change. Currently, no federal rules explicitly define or
regulate assisted living. While specific assisted living regulation has not yet
been enacted, the Partnership is and will continue to be subject to varying
degrees of regulation and licensing by health or social service agencies and
other regulatory authorities in the various states and localities in which it
operates or intends to operate. Changes in, or the adoption of, such laws and
regulations, or new interpretations of existing laws and regulations, could have
a significant effect on methods of doing business, costs of doing business and
amounts of reimbursement from governmental and other payors. In addition, the
President and Congress have proposed in the past, and may propose in the future,
health care reforms that could impose additional regulations on the Partnership
or limit the amounts that the Partnership may charge for its services. The
Partnership cannot make any assessment as to the ultimate timing and impact that
any pending or future health care reform proposals may have on the assisted
living, home health care, nursing facility or on the health care industry in
general. No assurance can be given that any such reform will not have a material
adverse effect on the business, financial condition or results of operations of
the Partnership.
RISKS COMMON TO THE PARTNERSHIP'S OPERATIONS
Staffing and Labor Costs. Personnel at each of the Partnership's communities are
employees of ARVAL. As of December 31, 1997, approximately 112 people were
employed at the communities. The Partnership competes with other providers of
assisted living and senior housing with respect to attracting and retaining
qualified personnel. The Partnership also is dependent upon the available labor
pool of employees. A shortage of qualified personnel may require ARVAL to
enhance its wage and benefits package in order to compete. In addition, many
health care workers in the nursing home industry are unionized. While there are
currently no unionized employees at any of the Partnership's communities, any
unionization or threat of unionization of workers in the assisted living
industry or at the Partnership's communities could increase the Partnership's
labor costs. No assurance can be given that the Partnership's labor costs will
not increase, or that if they do increase, they can be matched by corresponding
increases in revenues.
Obtaining Residents and Maintaining Rental Rates. As of December 31, 1997, the
Communities owned or leased by the Partnership had a combined occupancy rate of
95%. Occupancy may drop due to changes in the health of residents, increased
competition from other providers of senior housing and assisted living services
which may give residents more choices with respect to the provision of such
housing and services, the re-evaluation of ALC residents regarding retention
criteria, changes in management and staffing, and implementation of the
Partnership's assisted living programs. There can be no assurance that, at any
time, any ALCs will be substantially occupied at assumed rents. If operating
expenses increase, local rental market conditions may limit the extent to which
rents may be increased. In addition, the failure of the Partnership to
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generate sufficient revenue could result in an inability to meet minimum rent
obligations under the Partnership's long-term operating leases and make interest
and principal payments on its indebtedness.
General Real Estate Risks. The performance of the Partnership's ALCs and senior
apartment communities are influenced by factors affecting real estate
investments, including the general economic climate and local conditions, such
as an oversupply of, or a reduction in demand for, ALCs and senior housing.
Other factors include the attractiveness of properties to residents, zoning,
rent control, environmental quality regulations or other regulatory
restrictions, competition from other forms of housing and the ability of the
Partnership to provide adequate maintenance and insurance and to control
operating costs, including maintenance, insurance premiums and real estate
taxes.
ITEM 2. PROPERTIES
The following table sets forth, as of December 31, 1997 the location, the date
on which operations commenced, number of units, and the Company's interest in
the property.
<TABLE>
<CAPTION>
COMMENCED
COMMUNITY LOCATION OPERATIONS UNITS INTEREST
--------- -------- ---------- ----- --------
<S> <C> <C> <C> <C>
ASSISTED LIVING
COMMUNITIES
Bradford Square Placentia, CA 1992 (a) 92 Fee Owned
Chandler Villas Chandler, AZ 1992 164 Fee Owned
Villa Las Posas Camarillo, CA 1997 (b) 123 Fee Owned
SENIOR APARTMENTS
Cedar Villas Ontario, CA 1992 137 Fee Owned
Pacific Villas Pomona, CA 1992 132 Fee Owned
Villa Azusa Azusa, CA 1993 147 Fee Owned
</TABLE>
(a) The Partnership is the 50% Managing General Partner of the
partnership that owns this ALC.
(b) The Partnership commenced operations of Villa Las Posas in December
1997.
PROMISSORY NOTES RESULTING FROM THE SALE OF HERITAGE POINTE CLAREMONT
In September 1993, the Registrant contracted to sell a senior apartment complex
located in Claremont, California to Claremont Senior Partners ("CSP") for
$12,281,900. The managing general partner of the Registrant (ARVAL) is the
Special Limited Partner of CSP. The transaction closed on December 30, 1993. CSP
assumed the balance of the construction loan of $4,852,216 (although the
Registrant remained fully liable for the loan) and the Registrant had taken back
two notes receivable to finance the sale.
In September 1994, CSP obtained permanent financing, the proceeds of which were
primarily utilized to pay off the existing balance on the construction loan and
a portion of the existing principal and interest on the Partnership's related
promissory notes. As a result, both promissory notes were amended and the
combined balance due was reduced to $6,076,110 (eliminating the portion related
to the construction loan). The notes bear interest at 8% and the outstanding
balance and interest are payable from excess cash flows as defined in the CSP
partnership agreement. Additionally, these notes continue to be collateralized
by certain CSP partners' interests in CSP and are due January 25, 2010.
In April 1996 and January 1995, CSP paid $1,444,000 and $1,145,000 to the
Partnership as principal and interest reductions of the promissory notes. Prior
to 1996, this transaction had not been treated as a completed sale for
accounting purposes under the requirements of Statements of Financial Accounting
Standards Board No. 66 ("SFAS 66"); however, the sale was considered legally
consummated.
Upon the receipt of the principal and interest payment from CSP in April 1996, a
sufficient investment as defined by SFAS 66 was made and the sale was
recognized. As CSP's excess cash flows do not currently exceed the interest
payment requirements, SFAS 66 requires profit on the sale to be recognized under
the cost recovery method as payments are received on the notes. During 1997, the
Partnership received payments and recorded gains totaling $290,000 on these
notes.
ITEM 3. LEGAL PROCEEDINGS
There are various legal proceedings pending to which the Registrant is a party,
or to which some of its properties are subject, arising in the normal course of
business. The Registrant does not believe the ultimate resolution of those
proceedings will have a material adverse affect on the Registrant's financial
position or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to Unit Holders in the fourth quarter of the fiscal
year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS
There is no established public trading market for the Registrant's securities.
As of December 31 1997, there were approximately 1,849 Unit Holders of record
owning 18,652 units. For the year ended December 31, 1997, the Registrant made
no distributions. For the year ended December 31, 1996, the Registrant made
distributions of $25.02 per unit, all of which represented a distribution of
earnings to the Unit Holders; and for the year ended December 31, 1995, the
Registrant made distributions of $15.03, all of which represented a return of
capital to the Unit Holders.
ITEM 6. SELECTED FINANCIAL DATA
The following table represents financial data for each of the last five years.
Certain of this financial data has been derived from the Registrant's audited
financial statements included elsewhere in this Form 10-K and should be read in
conjunction with those financial statements and accompanying notes and with
"Management's Discussion and Analysis of Financial Condition Results of
Operations" at Item 7. This table is not covered by the Independent Auditors'
Report.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except unit data)
<S> <C> <C> <C> <C> <C>
Revenues $6,333 $6,140 $6,095 $6,136 $5,382
Net income (loss) 229 483 (464) (699) (775)
Net income (loss) (per limited partner 12.27 25.63 (24.62) (37.07) (41.15)
unit)
Total assets 31,241 25,300 32,794 34,794 35,378
Partners' capital 8,547 8,318 8,307 9,054 12,592
Notes payable to banks and others 20,889 16,023 20,746 21,279 19,661
Distributions of earnings (per limited -- 25.02 -- -- --
partner unit)
Distributions - return of capital (per -- -- 15.03 150.71 34.45
limited partner units)
Total distributions (per limited -- 25.02 15.03 150.71 34.45
partner unit)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY
The General Partners expect that the cash to be generated from operations of all
the Registrant's properties will be adequate to pay operating expenses and
provide distributions to the Partners. On a long-term basis, the Partnership's
liquidity is sustained primarily from cash flow provided by operating
activities. For the year ended December 31, 1997, net cash provided by operating
activities was approximately $1.4 million compared to $1.3 million for the year
ended December 31, 1996 and $906,000 for the year ended December 31, 1995.
During 1997, the Partnership used net cash in investing activities of $6.0
million compared to $71,000 for the year ended December 31, 1996. Net cash
provided by investing activities was $755,000 for the year ended December 31,
1995. During 1997, the Partnership constructed Villa Las Posas, a new 123-unit
ALC located in Camarillo, California. During 1995, the Partnership received a
deposit on the sale of Heritage Point Claremont and received payments related to
the sale totaling $290,000 and $1.5 million in December 31, 1997 and 1996,
respectively. The Partnership's other investing activities consisted primarily
of capital improvements and construction costs made on its six properties.
During 1997, the Partnership had net cash provided by financing activities of
$4.8 million compared to net cash used in financing activities of $862,000 for
the year ended December 31, 1996 and $2.7 million for the year ended 1995. The
Partnership's financing activities consisted of borrowings or repayments on
notes payable and lines of credit, construction loan draws and distributions
made to partners.
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In 1992, the Partnership purchased three properties subject to existing notes
payable in favor of banks. These notes were not formally assumed in the purchase
and contain provisions that require payment in full upon the sale of these
properties. The Partnership is negotiating or plans to negotiate with the banks
to assume these notes under the original payment terms, has made payments on the
notes under those terms and believes these notes will not be called by the
banks. Until such time as the notes are formally assumed by the Partnership,
however, they are considered due on demand. As of December 31, 1997, outstanding
balances on these notes were $10.9 million. If the Partnership is unable to
negotiate reasonable terms with the existing lender, management believes
alternate financing on favorable terms could be obtained. Additionally, the
Partnership has a $5.2 million construction loan, related to one of its
properties, which is due on October 1, 1998. The Partnership intends to obtain
permanent financing during 1998 in order to pay off the obligations under the
construction loan.
The General Partners are not aware of any trends, other than national economic
conditions, which had or which may be reasonably expected to have a material
favorable or unfavorable impact on revenues or income from the operations or
sale of properties. The General Partners believe that if the inflation rate
increases they will be able to recover subsequent increases in operating
expenses from higher rental and assisted living rates.
CAPITAL RESOURCES
The Registrant contemplates spending approximately $700,000 for capital
expenditures during 1998 for physical improvements at its six projects. The
funds for these improvements should be available from operations.
There are no known material trends, favorable or unfavorable, in the
Registrant's capital resources, and there is no expected change in the mix of
such resources.
RESULTS OF OPERATIONS
During December 1997, the Partnership commenced operations of Villa Las Posas, a
123-unit ALC located in Camarillo, California.
Revenue for the years ended December 31, 1997, 1996 and 1995 includes rent
revenue, assisted living revenue, interest earned on cash balances and other
revenue. Total revenue for the year ended December 31, 1997 increased to $6.3
million from $6.1 million for the years ended December 31, 1996 and 1995.
The largest component of revenue, rent income, increased by 3% or $164,000 from
1996 to 1997 and by 6% or $316,000 from 1995 to 1996. The increases from 1996 to
1997 are due to slight increases in average rental rates and the increase from
1995 to 1996 is a result of slight increases in overall community average
occupancy and rental rates.
Revenue from assisted living income increased by 43% or $182,000 from 1996 to
1997 and by $22% or $75,000 from 1995 to 1996. The increase in assisted living
revenue can be attributed to aggressive assisted living services marketing, and
the resulting increase in the number of residents using the program.
Interest, grants and other revenue decreased by 56% or $153,000 from 1996 to
1997 and 56% or $346,000 from 1995 to 1996. Interest income results from
interest earned on cash deposits. Other revenue generally includes processing
fees and beauty shop revenue. The decrease between years is primarily due to the
reduction of Partnership's notes receivable related to the Heritage Pointe
Claremont property sale during 1996.
Total costs and expenses for the years ended 1997, 1996 and 1995 were $6.4
million, $6.2 million, and $6.6 million, respectively.
The largest component of expenses, rental property operations, consists
primarily of property management costs, payroll related expenses, utilities,
food expenses and maintenance and supplies. Rental property operating expenses
increased by 9% or $241,000 from 1996 to 1997 and by 6% or $142,000 from 1995 to
1996. The changes in rental property operating expenses are primarily due to the
fluctuations in aggregate occupancy levels and payroll expenses.
7
<PAGE> 10
Assisted living expenses consist primarily of payroll expenses and supplies
related to the provision of assisted living services. Assisted living expenses
increased by 19% or $38,000 from 1996 to 1997 and by 17% or $29,000 from 1995 to
1996 as a result of the increase in the related staff providing assisted living
services. This increase corresponds with the increase in assisted living
revenue.
General and administrative expenses are comprised of, but not limited to, costs
for accounting, partnership administration, bad debt expense, data processing,
investor relations, insurance and professional services. General and
administrative expense increased by 24% or $101,000 from 1996 to 1997 and 4% or
$18,000 from 1995 to 1996. Effective April 1, 1997, ARVAL began allocating bulk
expenses on a monthly basis in order to increase efficiency. As a result, all
costs allocated in 1997 are included in general and administrative expenses
rather than property operations and general and administrative expenses, which
accounts for the increase in general and administrative expenses from 1996 to
1997.
Depreciation and amortization expenses decreased by 9% or $90,000 from 1996 to
1997 and by 20% or $251,000 from 1995 to 1996. Depreciation and amortization
expense decreased primarily due to the sale of Heritage Point Claremont
effective in April 1996.
Property tax expense decreased by 6% or $17,000 from 1996 to 1997 and 16% or
$52,000 from 1995 to 1996. The slight decreases are due to successful appeals on
property tax assessments on certain of the Partnership's properties.
Interest expense decreased 11% or $172,000 from 1996 to 1997 and 14% or $265,000
from 1995 to 1996. These decreases are due to the decrease in borrowings on the
Partnership's line of credit during 1996 and 1995. The Partnership no longer has
this line of credit.
FUTURE CASH DISTRIBUTIONS
The General Partners believe that the Registrant's ability to make cash
distributions to limited partners depends on factors such as future costs of
long-term financing associated with the Camarillo site, the extent of start-up
losses incurred in the initial leasing and operation of the Camarillo ALC, the
Registrant's ability to rent the available units and maintain high occupancy
rates, the Registrant's ability to control both operating and administrative
expenses, the Registrant's ability to maintain adequate working capital, the
absence of any losses from uninsured property damage (e.g., earthquakes) or
future litigation, the Registrant's ability to generate proceeds from the sales
of its properties and the Registrant's ability to renew existing leases under
favorable terms.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. ARVAL had developed a
plan to address the Year 2000 issue for its financial information systems and,
during the year ended December 31, 1997, began converting its computer systems
to be Year 2000 compliant. However, ARVAL abandoned its attempted accounting
software conversion in February 1998, when numerous application errors were
discovered in the software package ARVAL had purchased. As a result, ARVAL is
currently reassessing its planned conversion efforts for its financial and
operational information systems as well as related operational issues at its
communities. While an estimate of the total project costs is not currently
available due to the recent events, it is expected that the cost will be funded
from operating cash flow.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and the Report of Independent Auditors are listed at
Item 14 and are included beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
8
<PAGE> 11
INDIVIDUAL GENERAL PARTNERS OF THE REGISTRANT
JOHN A. BOOTY. Mr. Booty, age 59, is a graduate of the University of California
at Berkeley, from which he also holds a Master's Degree in Business
Administration. Mr. Booty was with Ford Motor Company Aeronutronics, Development
Research Associates and Booz Allen and Hamilton, of which Mr. Booty was a Vice
President. In 1979, he co-founded California Retirement Villas Corporation which
merged into ARVAL. In 1996, Mr. Booty retired as President of ARVAL but he
returned on an interim basis in 1997. Mr. Booty continues to serve as a Director
of ARVAL.
DAVID P. COLLINS. Mr. Collins, age 60, received his Bachelor's Degree from St.
Anselm College, Manchester, New Hampshire in 1960. His first association with
ARVAL occurred in 1982. Mr. Collins is a registered principal with the National
Association of Securities Dealers, Inc., and from its formation in December
1985, has been President of ARV Capital Corporation. Mr. Collins is a member and
former Chairman of the Board of the Orange County Chapter of the International
Association for Financial Planners. For many years, Mr. Collins was active in
the field of international finance, mostly in the Middle East, and in 1971, was
a founder of the World Trade Center Association of Orange County. Effective
December 31, 1997, Mr. Collins resigned as Senior Executive Vice President of
ARVAL. Mr. Collins continues to serve as a Director of ARVAL.
GARY L. DAVIDSON. Mr. Davidson, age 63, an attorney, received his Bachelor's
Degree in 1958 and his Juris Doctor Degree in 1961 from the University of
California at Los Angeles. Mr. Davidson has practiced law in Orange County since
1962. During his professional career, he has been active in numerous business
and professional sports ventures. In 1979, he co-founded the predecessor to
ARVAL. In October 1997, Mr. Davidson resigned as Chief Executive Officer,
Director and Chairman of the Board of ARVAL.
JOHN S. JASON, 62, graduated from the University of Indiana with a degree in
Business Administration. He was associated with KPMG Peat Marwick LLP for 6
years. In 1979, he co-founded the predecessor to ARVAL. In February 1993, Mr.
Jason retired from his positions as a Director and as Executive Vice President
of ARVAL.
TONY ROTA, 69, is a licensed real estate broker, and has been active in real
estate investments since 1958. In 1979, he co-founded the predecessor to ARVAL.
In November 1992, Mr. Rota retired from his positions as a Director and as Vice
President of ARVAL.
EXECUTIVE OFFICERS OF ARV ASSISTED LIVING, INC. ("ARVAL")
HOWARD G. PHANSTIEL. Mr. Phanstiel, age 49, was appointed Chairman and Chief
Executive Officer of the Company on December 5, 1997. From December 1994 to
September 1997, Mr. Phanstiel was the Executive Vice President, Finance and
Information Systems of Wellpoint Health Networks, Incorporated, a large managed
care company. From 1989 to 1994, he served in various capacities at Prudential
Bache, including Chairman and Chief Executive Officer of Prudential Bache
International Bank and Managing Director of Prudential Bache Securities, Inc.
Mr. Phanstiel received his Bachelor's Degree and his Master of Public
Administration from Syracuse University.
GRAHAM P. ESPLEY-JONES. Mr. Espley-Jones, age 38, graduated from Pepperdine
University with an MBA and from San Diego State University with a degree in
Business Administration. Mr. Espley-Jones is a Registered Representative and
Financial Principal with the National Association of Securities Dealers
("NASD"). From 1985 to 1988 he served as the Controller for the real estate
division of First California Savings Bank. Mr. Espley-Jones joined ARVAL in 1988
and serves as Chief Financial Officer and Assistant Secretary.
SHEILA M. MULDOON. Ms. Muldoon, age 42, has acted as the Company's General
Counsel since April 1996, and prior to that time was employed as Assistant
General Counsel since September 1994. Prior to that date Ms. Muldoon was the
General Counsel of Osprey Financial Group, Inc. From 1990 to 1993, she worked
with the FDIC as a Senior Attorney in the Real Estate Section of the Legal
Division. Prior to that time, Ms. Muldoon was a partner in the San Diego law
firm of Higgs, Fletcher & Mack. Ms. Muldoon did her undergraduate work at the
University of Notre Dame, and received her law degree from The Hastings College
of the Law.
ERIC K. DAVIDSON. Mr. Eric Davidson, age 35, became the Senior Vice President of
the Company in charge of acquisitions in April 1996. He has been employed by the
Company since September of 1994. Prior to that time, Mr. Davidson was a real
estate broker with Cushman & Wakefield for more than nine years, specializing in
commercial real estate transactions. Mr. Davidson is a graduate of U.C.
Berkeley.
9
<PAGE> 12
DIRECTORS OF ARVAL
For a description of Messieurs Phanstiel, Booty and Collins, please see above.
R. BRUCE ANDREWS. Mr. Andrews, age 57, has served as President and Chief
Executive Officer of Nationwide Health Properties, Inc. (a New York Stock
Exchange listed REIT) since September 1989 and a director of that company since
October 1989. Mr. Andrews had previously served as a director of American
Medical International, Inc., a hospital management company, and served as its
Chief Financial Officer from 1970 to 1985 and its Chief Operating Officer in
1985 and 1986. Mr. Andrews is also a director of Alexander Haagen Properties,
Inc..
MAURICE J. DEWALD. Mr. DeWald, age 58, is Chairman and Chief Executive Officer
of Verity Financial Group based in Irvine, California. Mr. DeWald founded Verity
Financial in 1992 to develop and implement investment opportunities in the U.S.
and internationally. Previously, Mr. DeWald had a 30 year career at KPMG Peat
Marwick LLP, where he was a Managing Partner and served on its Board of
Directors. Mr. DeWald is currently a director of several other firms, including:
Tenet Healthcare Corporation, Dai-Ichi Kangyo Bank of California, and Monarch
Funds. He is also a trustee of St. John's Hospital and Health Care Foundation
and Loyola Marymount University, and serves on the advisory Council of the
University of Notre Dame School of Business. Mr. DeWald is a Certified Public
Accountant.
ROBERT P. FREEMAN. Mr. Freeman, age 52, is President and Managing Director of
Lazard Freres Real Estate Investors, LLC ("LFREI"), which he joined in 1992. Mr.
Freeman received a Juris Doctor Degree from Harvard Law School and a Bachelors
Degree from Stanford University. He is currently a director of American
Apartment Communities, Atlantic American Properties Trust and Commonwealth
Atlantic Properties.
MURRY N. GUNTY. Mr. Gunty, age 30, is a Vice President of LFREI, which he joined
in 1995. From 1993 to 1995, he was associated with J.E. Robert Company, a real
estate investment company. He is currently a director of Atlantic American
Properties Trust. Mr. Gunty received a Master of Business Administration Degree
from Harvard Business School and a Bachelor of Arts Degree from Harvard College.
KENNETH M. JACOBS. Mr. Jacobs, age 39, is a Managing Director in the Banking
Group of Lazard Freres & Co. LLC, which position he has held since 1991. He
received a Master of Business Administration Degree from Stanford Graduate
School of Business and a Bachelor of Arts Degree from The University of Chicago.
JOHN J. RYDZEWSKI. Mr. Rydzewski, age 44, is an investment banker specializing
in health care finance. He has been a member of the firm Benedetto, Gartland &
Greene, Inc. since 1993. Mr. Rydzewski served as Executive Vice President and
Chief Financial Officer in 1992 for Four Winds, Inc., a provider of behavioral
health care services. He also served as a Vice President in the health care
finance group of Kidder, Peabody & Co. Incorporated from 1986 to 1992. He has
served as a director of United Medical Corporation, a diversified health
services provider, and Maxim Healthcare Corporation, a behavioral health
services provider. Mr. Rydzewski received a Master of Business Administration
and a Bachelor of Science Degree from the Wharton School of the University of
Pennsylvania and is a Certified Public Accountant.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the General Partners' potential compensation and
the compensation which the General Partners are earning.
<TABLE>
<CAPTION>
<S> <C>
Acquisition Fees
(ARV Assisted Living, Inc.) A property acquisition fee of 2% of
Gross Offering Proceeds to be paid for
services in connection with the
selection and purchase of Projects and
related negotiations. In addition, a
development, processing and renovation
fee of 3.5% of Gross Offering Proceeds
to be paid for services in connection
with negotiations for or the renovation
or improvement of existing facilities
and the development, processing or
construction of Projects developed by
the Registrant. There were no property
acquisitions, development, processing
or renovation fees for the years ending
December 31, 1997, 1996 and 1995.
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
<S> <C>
Rent-Up and Staff Training Fees
(ARV Assisted Living, Inc.) Rent-up and staff training fees of 4.5%
of the Gross Offering Proceeds allocated
to each specific acquired or developed
Project. Such fees will be paid for
services in connection with the opening
and initial operations of the Projects
including, without limitation, design
and implementation of the advertising,
direct solicitation and other campaigns
to attract residents and the initial
hiring and training of managers, food
service specialists, activities
directors and other personnel employed
in the individual communities. There
were no rent-up and staff training fees
for the years ending December 31, 1997,
1996 and 1995.
Property Management Fees
(ARV Assisted Living, Inc.) A property management fee of 5% of gross
revenues paid for managerial services
including general supervision, hiring of
onsite management personnel employed by
ARVAL, renting of units, installation
and provision of food service,
maintenance, and other operations.
Property management fees for the years
ending December 31, 1997, 1996 and 1995
were $316,000, $298,000, and $280,000,
respectively.
Partnership Management Fees
(ARV Assisted Living, Inc.) A partnership management fee of 10% of
cash flow before distributions is paid
for implementing the Partnership
business plan, supervising and
management of Partnership affairs
including general administration,
coordination of legal, audit, tax, and
insurance matters. Partnership
management fees for the years ending
December 31, 1997, 1996 and 1995 were
$119,000, $112,000, and $92,000,
respectively.
Sale of Partnership Projects
(ARV Assisted Living, Inc.) The Limited Partnership Agreement
permits payment or compensation in the
form of real estate commissions to the
General Partners or its Affiliates which
is subordinated to a return to Limited
Partners of their capital contributions
plus an 8% per annum, cumulative, but
not compounded, return thereon from all
sources, including prior distribution of
cash flow. Any such compensation shall
not exceed 3% of the gross sales price
or 50% of the standard real estate
brokerage commission, whichever is less.
In fiscal 1997, 1996 and 1995, no real
estate selling commissions were paid the
General Partner.
Subordinated Incentive Compensation
(ARV Assisted Living, Inc.) ARV Assisted Living, Inc. is entitled to
receive 15% of the Proceeds of Sale or
Refinancing subordinated to a return of
initial Capital Contributions plus
cumulative, but not compounded return on
capital contributions varying from 8% to
10% per annum. In 1997, 1996 and 1995,
no incentive compensation was paid.
Partnership Interest
(General Partners) 1% of all items of capital, profit or
loss, and liquidating Distributions,
subject to a capital account adjustment.
Reimbursed Expenses & Credit
Enhancement (General Partners) General Partners may receive fees for
personal guarantees of loans made to the
Registrant. All Registrant's expenses
shall be billed directly to and paid by
the Registrant. General Partners may be
reimbursed for the actual cost of goods
and materials obtained from unaffiliated
entities and used for or by the
Registrant. The Managing Partner will be
reimbursed for administrative services
necessary to the prudent operation of
Registrant, provided that such
reimbursement is at the lower of its
actual cost or the amount which the
Registrant would be required to pay to
independent parties for comparable
administrative services in the same
geographic location. The total
reimbursements to ARVAL amounted to $1.6
million, $1.4 million, and $1.2 million
for the years ending December 31, 1997,
1996 and 1995 respectively.
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C>
Finder Fees
(ARV Assisted Living, Inc.) The General Partners received finders
fees in conjunction with obtaining
grants for the rehabilitation of Cedar
Villas and Villa Azusa. The finders fees
amount to 10% of the total grant money
received by the Registrant. No finder
fees for the years ending December 31,
1997, 1996 and 1995 were paid.
Indemnity Fees
(General Partners) The General Partners received $96,000
for indemnifying and holding UHSI, Costa
and Husky harmless from any liabilities
as a result of the Registrant's buy-out
of their interests in HPCP. No indemnity
fees for the years ending December 31,
1997, 1996 and 1995 were paid.
</TABLE>
SEE FOOTNOTE 3 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TRANSACTIONS WITH
AFFILIATES).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other than the compensation earned by the General Partners, as set out under
ITEM 11 above, no General Partner or Affiliate receives any direct or indirect
compensation from the Registrant. The Managing Partner receives a management fee
of 5% of Gross Revenues. Because these fees are payable without regard to
whether particular facilities are generating Cash Flow or otherwise benefiting
the Registrant, a conflict of interest could arise in that it might be to the
advantage of the General Partners that a facility be retained or re-financed
rather than sold. On the other hand, an Affiliate of the General Partners may
earn a real estate commission on sale of a property, creating incentive to sell
what might be a profitable property.
The General Partners have authority to invest the Registrant's funds in
properties or entities in which they, or any affiliate has an interest, provided
the Registrant acquires a controlling interest. In any such investment,
duplicate property management or other fees will not be permitted. The General
Partners or Affiliates may, however, purchase property in their own names and
temporarily hold title to facilitate acquisition for the Registrant, provided
that such property is purchased by the Registrant at cost (including
acquisition, closing and carrying costs). The General Partners will not
commingle Registrant's funds with those of any other person or entity.
Conflicts of interest exist to the extent that communities owned or operated
compete, or are in a position to compete for residents, general managers or key
employees with assisted living facilities owned or operated by the General
Partners and Affiliates in the same geographic area. The General Partners will
seek to reduce any such conflicts by offering such persons their choice of
residence or employment on comparable terms in any facility.
The personnel working at each facility are employed by ARVAL. ARVAL pays payroll
and retirement benefit expenses on the Registrant's behalf and is subsequently
reimbursed by the Registrant. The retirement benefit expense consists of
contributions made to an employee stock ownership plan ("ESOP"). Effective April
1, 1991, ARVAL approved an ESOP to enable all eligible employees of ARVAL and
its affiliates to own common stock in ARVAL. The last contribution made to the
ESOP was on March 31, 1995. Effective January 1, 1997, ARVAL established a
savings plan ("the Savings Plan") that qualifies as a deferred salary
arrangement under Section 401 (k) of the Internal Revenue Code. Total Savings
Plan expense was $6,000 for the year ended December 31, 1997.
Further conflicts may exist if and to the extent that other affiliated owners of
assisted living facilities seek to refinance or sell at the same time as the
Registrant. The General Partners will seek to reduce any such conflicts by
making prospective purchasers aware of all properties available for sale.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(i) Independent Auditors' Report.
(ii) Consolidated Balance Sheets - December 31, 1997 and 1996.
12
<PAGE> 15
(iii) Consolidated Statements of Operations - Years ended December 31,
1997, 1996 and 1995.
(iv) Consolidated Statements of Partners' Capital - Years ended December
31, 1997, 1996 and 1995.
(v) Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996 and 1995.
(vi) Notes to Consolidated Financial Statements.
(vii) Financial Statement Schedule - Schedule III - Real Estate and
Related Accumulated Depreciation and Amortization - December 31,
1997.
(b) Reports on Form 8-K. The registrant did not file any 8-K reports
during the last quarter of 1997.
(c) Exhibit 27 - Financial Data Schedule
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT
/s/ HOWARD G. PHANSTIEL
By: Howard G. Phanstiel, Chief Executive Officer and
Chairman of the Board of ARVAL, Managing General Partner
/s/ GRAHAM P. ESPLEY-JONES
By: Graham P. Espley-Jones, Chief Financial Officer and
Assistant Secretary of ARVAL, Managing General Partner
/s/ JOHN A. BOOTY
By: John A. Booty, Director of ARVAL,
Managing General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ HOWARD G. PHANSTIEL Chief Executive Officer March 31, 1998
Howard G. Phanstiel and Chairman of the Board of ARVAL,
Managing General Partner
/s/ GRAHAM P. ESPLEY-JONES Chief Financial Officer March 31, 1998
Graham P. Espley-Jones and Assistant Secretary of ARVAL,
Managing General Partner
/s/ JOHN A. BOOTY Director of ARVAL, March 31, 1998
John A. Booty Managing General Partner
</TABLE>
14
<PAGE> 17
AMERICAN RETIREMENT VILLAS
PROPERTIES III, L.P.
(A California Limited Partnership)
Annual Report - Form 10-K
Consolidated Financial Statements and Schedule
Items 8 and 14(a)
December 31, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE> 18
Annual Report - Form 10-K
Items 8 and 14(a)
Index to Consolidated Financial Statements and Schedule
-------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets - December 31, 1997 and 1996 F-2
Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Partners' Capital - Years ended December 31, 1997, 1996
and 1995 F-4
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
Schedule
- --------
Real Estate and Related Accumulated Depreciation and
Amortization - December 31, 1997 Schedule III
</TABLE>
All other schedules are omitted, as the required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes.
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
To ARV Assisted Living, Inc.
as the Managing General Partner
of American Retirement Villas Properties III, L.P.:
We have audited the consolidated financial statements of American Retirement
Villas Properties III, L.P., a California limited partnership, as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we have also audited the consolidated financial statement schedule
listed in the accompanying index. These consolidated financial statements and
consolidated financial statement schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Retirement
Villas Properties III, L.P. as of December 31, 1997 and 1996 and the results of
its operations and its cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
March 31, 1998
<PAGE> 20
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Consolidated Balance Sheets
December 31, 1997 and 1996
(IN THOUSANDS, EXCEPT UNITS)
<TABLE>
<CAPTION>
ASSETS 1997 1996
--------- --------
<S> <C> <C>
Properties, at cost:
Land $ 4,674 $ 4,674
Building and improvements, less accumulated depreciation
of $4,122 and $3,373 in 1997 and 1996, respectively 24,695 19,076
Furniture, fixtures and equipment, less accumulated depreciation
of $373 and $498 in 1997 and 1996, respectively 191 322
------- -------
Net properties 29,560 24,072
Cash 1,086 893
Restricted cash 153 137
Loan fees, less accumulated amortization of $175 and $140 in 1997
and 1996, respectively 70 105
Amounts receivable from affiliates 265 --
Other assets 107 93
------- -------
$31,241 $25,300
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Notes payable to banks $16,086 $11,116
Notes payable to others 4,803 4,907
Accounts payable 974 454
Accrued expenses 328 280
Amounts payable to affiliates 383 138
Distributions payable to Partners 46 46
------- -------
Total liabilities 22,620 16,941
------- -------
Commitments and contingencies
------- -------
Minority interest 74 41
------- -------
Partners' capital (deficit):
General partners (74) (76)
Limited partners, 18,666 units outstanding at December 31, 1997
and 1996, respectively 8,621 8,394
------- -------
Total partners' capital 8,547 8,318
------- -------
$31,241 $25,300
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 21
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
(In thousands except per unit data)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Revenues:
Rent $5,610 $5,446 $ 5,130
Assisted living 601 419 344
Interest 11 178 500
Grants -- -- 41
Other 111 97 80
------ ------ -------
Total operating revenues 6,333 6,140 6,095
------ ------ -------
Costs and expenses:
Rental property operations (including $1,518,
$1,367
and $1,285 related to affiliates in 1997, 1996
and 1995, respectively) 2,880 2,639 2,497
Assisted living (all related to affiliates) 235 197 168
General and administrative (including $264, $210
and $145 related to affiliates in 1997, 1996 and
1995, respectively) 521 420 402
Depreciation and amortization 913 1,003 1,254
Property taxes 264 281 333
Advertising 67 26 41
Interest 1,431 1,603 1,868
Minority interest in operations 83 57 (4)
------ ------ -------
Total operating costs and expenses 6,394 6,226 6,559
------ ------ -------
Operating loss (61) (86) (464)
Net profit on sale of property 290 569 --
------ ------ -------
Net income (loss) $ 229 $ 483 $ (464)
====== ====== =======
Net income (loss) per limited partner unit $12.27 $25.63 $(24.62)
====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 22
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Consolidated Statements of Partners' Capital
Years ended December 31, 1997, 1996 and 1995
(In thousands except per unit data)
<TABLE>
<CAPTION>
TOTAL
GENERAL LIMITED PARTNERS'
PARTNERS PARTNERS CAPITAL
------------ ----------- ------------
<S> <C> <C> <C>
Balance (deficit) at December 31, 1994 $ (68) $ 9,122 $ 9,054
Distributions to partners ($15.03 per limited
partner unit) (3) (280) (283)
Net loss (5) (459) (464)
--------- --------- --------
Balance (deficit) at December 31, 1995 (76) 8,383 8,307
Distributions to partners ($25.02 per limited
partner unit) (5) (467) (472)
Net income 5 478 483
--------- --------- --------
Balance (deficit) at December 31, 1996 (76) 8,394 8,318
Net income 2 227 229
--------- --------- --------
Balance (deficit) at December 31, 1997 $ (74) $ 8,621 $ 8,547
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 23
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(In thousands except per unit data)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 229 $ 483 $ (464)
Adjustment to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 913 1,003 1,254
Gain recognized on property sold (290) (569) --
(Gain) loss on disposal of property and equipment (12) 53 --
Change in assets and liabilities:
(Increase) decrease in restricted cash (16) (7) 120
Increase in other assets (14) (1) --
Increase in amounts receivable from affiliate (265) -- --
Increase in accounts payable and accrued expenses 568 246 9
Increase in amounts payable to affiliates 245 72 11
Increase (decrease) in minority interest 33 57 (23)
Other -- 11 (1)
------- ------- -------
Net cash provided by operating activities 1,391 1,348 906
------- ------- -------
Cash flows from investing activities:
Improvements and building construction (6,183) (1,455) (276)
Additions to furniture, fixtures and equipment, net (69) (90) (154)
Deposit on property under contract for sale -- -- 1,185
Cash received for property sold under contract 290 1,474 --
------- ------- -------
Net cash provided by (used in) investing
activities (5,962) (71) 755
------- ------- -------
Cash flows from financing activities:
Decrease in amounts receivable from affiliate -- -- 47
Proceeds from notes payable 5,046 7 66
Principal repayments on notes payable to banks and others (282) (256) (223)
Repayments on line-of-credit agreement -- -- (350)
Distributions paid -- (613) (2,209)
------- ------- -------
Net cash provided by (used in) financing
activities 4,764 (862) (2,669)
------- ------- -------
Net increase (decrease) in cash 193 415 (1,008)
Cash at beginning of year 893 478 1,486
------- ------- -------
Cash at end of year $ 1,086 $ 893 $ 478
======= ======= =======
Supplemental cash flow information - cash paid during
the year for interest (net of capitalized interest
of $151, $0 and $50 in 1997, 1996 and 1995, respectively) $ 1,415 $ 1,893 $ 1,870
======= ======= =======
Noncash - application of deposits to sale of property $ -- $ 4,601 $ --
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 24
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of American Retirement Villas
Properties III, L.P. (the Partnership) include the accounts of the
Partnership, ARVP III/Bradford Square, L.P. (ARVP III/BS), Heritage Pointe
Ontario Partners, L.P. (HPOP), and Heritage Pointe Pomona Partners, L.P.
(HPPP) at December 31, 1997, 1996 and 1995 and for the years then ended
and Heritage Pointe Claremont Partners, L.P. (HPCP) at December 31, 1996
and 1995 and for the years then ended. In April 1996, under the
requirements of Statement of Financial Accounting Standards No. 66 (SFAS
No. 66), "Accounting for Sale of Real Estate," the sale of HPCP was
recorded. As a result, consolidated financial statements of the
Partnership as of and for the year ended December 31, 1997 and 1996 do not
include the accounts of HPCP. The Partnership is a 50% general partner in
ARVP III/BS and effective in May 1993, became a 100% owner of HPOP, HPPP
and HPCP. The Partnership was previously a 50% general partner in HPOP,
HPPP and HPCP. All intercompany balances and transactions have been
eliminated in consolidation. The Partnership consolidates these limited
partnerships since it has a controlling financial interest. Minority
interest represents the minority partners' cost to acquire the minority
interest adjusted by their proportionate share of subsequent earnings,
losses and distributions.
BASIS OF ACCOUNTING
The Partnership maintains its records on the accrual method of accounting
for financial reporting and Federal and state tax purposes.
CARRYING VALUE OF REAL ESTATE
Properties are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging from 3 to approximately 27-1/2 years.
The Partnership reviews its long-lived assets for impairment when events
or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. In reviewing recoverability, the
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
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
PRE-OPENING COSTS
Costs such as fees paid for employee training, rent-up and other related
costs incurred prior to the opening of a retirement community are deferred
and amortized using the straight-line method over a period of one year
after the community's opening.
F-6
<PAGE> 25
LOAN FEES
Amortization of loan fees is computed 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. Advance
deposits are applied to the first month's rent.
INCOME TAXES
Under provisions of the Internal Revenue Code and the California Revenue
and Taxation Code, partnerships are generally not subject to income taxes.
For tax purposes, any income or losses realized are those of the
individual partners, not the Partnership.
The Partnership has not requested a ruling from the Internal Revenue
Service to the effect that it will be treated as a partnership and not an
association taxable as a corporation for Federal income tax purposes. The
Partnership received an opinion of counsel as to its tax status prior to
the offering of limited partnership units, but such opinion is not binding
upon the Internal Revenue Service.
Following are the Partnership's assets and liabilities as determined in
accordance with generally accepted accounting principles (GAAP) and for
Federal income tax reporting purposes at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
GAAP TAX BASIS GAAP TAX BASIS
BASIS (1) BASIS (1)
--------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets $31,241 $32,254 $25,300 $32,513
========================================================
Total liabilities $22,355 $22,428 $16,941 $21,627
========================================================
</TABLE>
Following are the differences between the financial statement and tax
return income (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Net income (loss) per financial statements $ 229 483 (464)
Guaranteed payments (1) 435 410 372
Depreciation differences on properties (1) 156 208 456
Amortization differences on intangible assets (1) 57 57 53
Deferred income (1) 5 -- (10)
Capitalized costs (1) 477 -- (324)
Imputed interest (1) -- -- --
Interest expense (1) -- (470) --
Interest income (1) -- 771 --
Loss on sale of assets (1) (2) (254) --
Other (1) (12) 75 749
------ ------ -----
Total income per Federal tax return (1) $1,345 $1,280 $ 832
====== ====== =====
</TABLE>
(1) Unaudited.
F-7
<PAGE> 26
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 in 1997,
1996 and 1995.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform to the
1997 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share (EPS)"
which is effective for both interim and annual reporting periods ending
after December 15, 1997. This standard requires restatement of prior
interim and annual earnings per share calculations. SFAS No. 128 replaces
fully diluted EPS with diluted EPS and replaces primary EPS with basic
EPS. Basic EPS is computed by dividing reported earnings by weighted
average shares outstanding. Diluted EPS is computed the same way as fully
diluted EPS, except that the calculation now uses the average share price
for the reporting period to compute dilution from options and warrants
under the treasury stock method. The adoption of SFAS No. 128 did not have
an impact on the Partnership's financial statements.
The FASB issued SFAS No. 129, "Disclosure of Information about Capital
Structure." This statement is effective for both interim and annual
financial statement periods ending after December 15, 1997. This statement
requires disclosure in summary form of the pertinent rights and privileges
of various securities outstanding including dividend and liquidation
preferences, participation rights, call prices and dates, sinking-fund
requirements, unusual voting rights and significant terms of contracts to
issue additional shares. The adoption of SFAS No. 129 did not have an
impact on the Partnership's financial statements.
The FASB issued SFAS No. 130, "Reporting Comprehensive Income" which is
effective for fiscal years beginning after December 15, 1997, and requires
restatement of earlier financial statements for comparative purposes. SFAS
No. 130 requires that items meeting the criteria of a component of
comprehensive income, including foreign currency items and unrealized
gains and losses on certain investments in debt and equity securities, be
shown in the financial statements. SFAS No. 130 does not require a
specific format for disclosure of comprehensive income and its components
in the financial statements. The partnership elected early adoption of
SFAS No. 130 which did not have an impact on the Partnership's financial
statements.
The FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information." This standard requires that a public business
enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. SFAS No. 131 also
requires that all public business enterprises report information about the
revenues derived form the enterprise's products or services (or groups of
similar products or services), about the countries in which the enterprise
earns revenues and holds assets and about major customers regardless of
whether that information is used in making operating decisions. However,
this Statement does not require an enterprise to report information that
is not prepared for internal use if reporting it would be impractical.
This Statement is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is required to be restated. Comparative
information for interim periods is not required until the second year of
application. The partnership elected early adoption of SFAS No. 131 which
did not have an impact on the Partnership's financial statements.
F-8
<PAGE> 27
(2) ORGANIZATION AND PARTNERSHIP AGREEMENT
The Partnership was formed on June 28, 1989 for the purpose of acquiring,
developing and operating assisted living and senior apartment communities.
The term of the Partnership is 60 years and may be dissolved earlier under
certain circumstances. The Partnership commenced operations on December
28, 1989 when the minimum number of units (1,250) had been sold.
Limited partner units (minimum of 2 units per investor for Individual
Retirement Accounts, KEOGH'S and pension plans and 5 units for all other
investors) were offered for sale to the general public. Each limited
partner unit represents a $1,000 capital contribution. There were 18,666
Limited Partner units sold through the end of the offering in October 1992
which represented a cumulative capital investment of $18,665,000, net of
units repurchased. Under the Partnership Agreement, the maximum liability
of the Limited Partners is the amount of their capital contributions.
The Managing General Partner is ARV Assisted Living, Inc. (ARVAL), a
California corporation, and the individual General Partners are John A.
Booty, John S. Jason, Gary L. Davidson, Tony Rota and David P. Collins.
The individual general partners are shareholders of the Managing General
Partner. The General Partners are not required to make capital
contributions to the Partnership.
Profits and losses for financial and income tax reporting purposes shall
generally be allocated, other than cost recovery deductions (as defined in
the Partnership Agreement), 1% to the General Partners and 99% to the
Limited Partners. Cost recovery deductions for each year are allocated 1%
to the General Partners and 99% to the Limited Partners who are taxable
investors.
Cash available for distribution from operations, which is determined at
the sole discretion of the managing general partner, is to be distributed
1% to the General Partners and 99% to the Limited Partners.
Upon any sale, refinancing or other disposition of the Partnership's real
properties, distributions are to be made 1% to the General Partners and
99% to the Limited Partners until the Limited Partners have received an
amount equal to 100% of their capital contributions plus an amount ranging
from 8% to 10% (depending upon the timing of the Limited Partner's
investment) of their capital contributions per annum, cumulative but not
compounded, from the date of each Partner's investment. The cumulative
return is to be reduced, but not below zero, by the aggregate amount of
prior distributions from all sources. Thereafter, distributions are 15% to
the General Partners and 85% to the Limited Partners, except that after
the sale of the properties, the proceeds of sale of any last remaining
assets owned by the Partnership are to be distributed in accordance with
positive capital account balances.
(3) TRANSACTIONS WITH AFFILIATES
The Partnership has an agreement with ARVAL providing for a property
management fee of 5% of gross revenues amounting to $316,000, $298,000 and
$280,000, for the years ended December 31, 1997, 1996 and 1995,
respectively. Additionally, the agreement provides for a Partnership
management fee of 10% of cash flow before distributions, as defined in the
Partnership Agreement, amounting to $119,000, $112,000 and $92,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Payment of the Partnership management fee out of cash flow is subordinated
to a quarterly noncumulative distribution from each property to the
Limited Partners of an amount equal to an annualized return, per quarter,
of 7.5% of Capital Contributions allocated to each property. The Managing
General Partner has determined that it has received payment of certain
fees accrued but not yet payable under the terms of the Partnership
Agreement. The Managing General Partner repaid such fees to the
Partnership in March 1998. At December 31, 1997, a receivable from ARVAL
of $265,000 and a corresponding payable have been established in the
Partnership's financial statements.
ARVAL pays certain expenses, such as repairs and maintenance, supplies,
payroll and retirement benefit expenses on behalf of the Partnership and
is subsequently reimbursed by the Partnership. The total reimbursements to
ARVAL, are included in rental property operations and general and
administrative expenses in the accompanying statements of
F-9
<PAGE> 28
operations and amounted to $1,578,000, $1,365,000 and $1,226,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Prior to 1995, in consideration for services rendered with respect to
property acquisitions, the Managing General Partner is paid a property
acquisition fee of a maximum of 2% of the gross offering proceeds. In
addition, the Managing General Partner is entitled to a development,
processing and renovation fee of a maximum of 3.5% of gross offering
proceeds allocated to a particular project. The Managing General Partner
is also entitled to a maximum fee of 4.5% of gross offering proceeds for
rent-up and staff training services.
Amounts payable to affiliate at December 31, 1997 and 1996 include expense
reimbursements and accrued property management and partnership management
fees.
(4) PROPERTIES
The following table sets forth, as of December 31, 1997 the location, the
date on which operations commenced and the number of units in the
community.
COMMENCED
COMMUNITY LOCATION OPERATIONS UNITS
--------- -------- ---------- ---------
[S] [C] [C] [C]
ASSISTED LIVING
COMMUNITIES
Bradford Square Placentia, CA 1992 92
Chandler Villa Chandler, AZ 1992 164
Villa Las Posas Camarillo, CA 1997 (a) 123
SENIOR APARTMENTS
Cedar Villas Ontario, CA 1992 137
Pacific Villas Pomona, CA 1992 132
Villa Azusa Azusa, CA 1993 147
(a) The Partnership commenced operations of Villa Las Posas in December
1997.
ARVP III/BRADFORD SQUARE LTD.
On December 18, 1990, the Partnership entered into a limited partnership,
ARVP III/BS, with an unrelated third party, Bradford Square Ltd. Both
partners made an initial $1,000 cash contribution. The Partnership is the
Managing General Partner and Bradford Square Ltd. is the Limited Partner,
each with a 50% interest. Pursuant to the agreement, Bradford Square Ltd.
contributed an existing facility (Bradford Square), to ARVP III/BS, and,
the Partnership contributed additional cash equal to the fair market value
of the property. Income and loss is generally allocated to the Managing
General Partner and Bradford Square, Ltd. based on their partnership
interests.
Under the limited partnership agreement between the Partnership and
Bradford Square Ltd., the Partnership receives a 9% preferred return on
125% of amounts contributed to the partnership. The remaining cash flow
from operations is divided equally between the Partnership and Bradford
Square Ltd. During 1997, 1996 and 1995, the Partnership received a
preferred return of $221,000, $253,000 and $167,000, respectively.
F-10
<PAGE> 29
(5) SALE OF PROPERTY - HERITAGE POINTE CLAREMONT
In September 1993, the Partnership contracted to sell Heritage Pointe Claremont
to Claremont Senior Partners ("CSP") for $12,281,900. The managing general
partner of the Partnership is the Special Limited Partner of CSP. The
transaction closed on December 30, 1993. CSP assumed the balance of the
construction loan of $4,852,216 (although the Partnership remained fully liable
for the loan) and the Partnership had taken back two notes receivable to finance
the sale.
In September 1994, CSP obtained permanent financing, the proceeds of which were
primarily utilized to pay off the existing balance on the construction loan and
a portion of the existing principal and interest on the Partnership's related
promissory notes. As a result, both promissory notes were amended and the
combined balance due was reduced to $6,076,110 (eliminating the portion related
to the construction loan). The notes bear interest at 8% and the outstanding
balance and interest are payable from excess cash flows as defined in the CSP
partnership agreement. Additionally, these notes continue to be collateralized
by certain CSP partners' interests in CSP and are due January 25, 2010.
In April 1996 and January 1995, CSP paid $1,444,000 and $1,145,000 to the
Partnership as principal and interest reductions of the promissory notes. Prior
to 1996, this transaction had not been treated as a completed sale for
accounting purposes under the requirements of Statements of Financial Accounting
Standards Board No. 66 ("SFAS 66"); however, the sale was considered legally
consummated.
Upon the receipt of the principal and interest payment from CSP in April 1996, a
sufficient investment as defined by SFAS 66 was made and the sale was
recognized. As CSP's excess cash flows do not currently exceed the interest
payment requirements, SFAS 66 requires profit on the sale to be recognized under
the cost recovery method as payments are received on the notes. During 1997, the
Partnership received payments and recorded gains totaling $290,000 on these
notes. As of December 31, 1997, gross profit not recognized on sale of property
was approximately $3.8 million.
(6) NOTES PAYABLE TO BANKS AND OTHERS
At December 31, 1997 and 1996, notes payable to banks and others included
the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Notes Payable to Banks:
Note payable not formally assumed by the
Partnership, collateralized by deed of trust on
Pacific Villas, interest at 2.25% above the
eleventh district cost of funds (4.963% at
December 31, 1997) adjusted quarterly; terms of
promissory note required full payment of amounts
due when the property was sold to the Partnership
in 1992, otherwise monthly principal and interest
installments of $32 and all unpaid principal and
interest is due on November 1, 2017 $4,150 $4,242
Note payable not formally assumed by the
Partnership, collateralized by deed of trust on
Cedar Villas, interest at 2.25% above the eleventh
district cost of funds and in no event shall the
interest rate be less than 8% or more than 14% (8%
at December 31, 1997); terms of promissory note
required full payment of amounts due when the
property was sold to the Partnership in 1992,
otherwise monthly principal and interest
installments of $31 and all unpaid principal and
interest is due on February 1, 2019 3,805 3,871
</TABLE>
F-11
<PAGE> 30
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note payable not formally assumed by the Partnership,
collateralized by deed of trust on Villa Azusa,
interest at 2.25% above the monthly
eleventh district cost of funds (4.963% at
December 31, 1997) adjusted semi-annually;
terms of promissory note required full
payment of amounts due when the property
was sold to the Partnership in 1992,
otherwise payable in monthly principal and
interest installments of $23 with all
unpaid principal and interest due on
February 1, 2017 2,934 3,003
Construction loan collateralized by deed of trust on
Villa Las Posas and guaranteed by the General Partners,
interest at 2.75% above the 30-day LIBOR rate
(6% at December 31, 1997); all unpaid
principal and interest is due on October 1, 1998 5,197 --
------- -------
Notes payable to banks 16,086 11,116
------- -------
Notes Payable to Others:
Note payable collateralized by deed of trust on
Chandler Villas and guaranteed by the General
Partners, interest for the initial 7-year term
at 5.25% in excess of the seven-year treasury
yield as of the inception date (6.38% at
inception) with annual increase of 2% per year
and interest for the second seven-year period
at 7% in excess of the seven-year treasury
yield as of the reset date with annual
increases of 2 %; monthly principal and
interest installments of $27 and all unpaid
principal and interest is due on January 1,
2007 2,396 2,421
Note payable collateralized by deed of trust on
Bradford Square and guaranteed by the General
Partners, interest for the initial 7-year
term, ending December 31, 1999, at 5.25% in
excess of the seven-year treasury yield as of
the inception date (6.38% at inception) with
annual increase of 2% per year and interest
for the second seven-year period at 7% in
excess of the seven-year treasury yield as of
the reset date with annual increases of 2%;
monthly principal and interest installments of
$27 and all unpaid principal and interest is
due on January 1, 2007 2,396 2,421
Other 11 65
------- -------
Notes payable to others 4,803 4,907
------- -------
$20,889 $16,023
======= =======
</TABLE>
F-12
<PAGE> 31
The annual principal payments of notes payable as of December 31, 1997 are
as follows (in thousands):
Year ending December 31:
1998 (see below) $16,123
1999 41
2000 40
2001 39
2002 30
Thereafter 4,616
-------
$20,889
=======
In 1992, the Partnership purchased three properties subject to existing
notes payable in favor of banks. These notes were not formally assumed in
the purchase and contain provisions that required payment in full upon the
sale of these properties. The Partnership is negotiating or plans to
negotiate with the banks to assume these notes under the original payment
terms, has made payments on the notes under those terms and believes these
notes will not be called by the banks. Until such time as the notes are
formally assumed by the Partnership, however, they are considered due on
demand and included in amounts due in 1998 in the above schedule of annual
principal payments. If the Partnership is unable to negotiate reasonable
terms with the existing lender, management believes alternate financing on
favorable terms could be obtained.
(7) GRANTS RECEIVED
During 1993, the Partnership entered into 30-year rehabilitation and
affordable housing subsidy agreements with the cities of Azusa and
Ontario. In conjunction with the agreements, the Partnership is to receive
up to $535,000 and $546,000 as compensation or reimbursement to
rehabilitate Villa Azusa and Cedar Villas, respectively, in order to
provide low income housing to persons 55 years of age or older. Total
grant funds of $513,000 and $546,000 had been received from the cities of
Azusa and Ontario, respectively, for rehabilitation work performed.
Approximately $41,000 received from the city of Azusa was not required to
be used for rehabilitation work on the project and, as such, these fees
were recorded as grant income in 1995. In the event that the Partnership
defaults on the provisions of the agreement within 15 years, including,
but not limited to, eliminating the low income housing status of the
apartment facility, the grant money must be returned to the respective
city. No default existed at December 31, 1997.
(8) EMPLOYEE BENEFIT PLANS
ARVAL offers an Employee Stock Ownership Plan ("ESOP") to all eligible
employees. The amount of stock contributed annually to the ESOP was at the
discretion of ARVAL. During 1995, ARVAL's Board of Directors declared a
contribution in only the first quarter of the year and that contribution
approximated 3% of each employee's payroll expense. No further
contributions have been declared. The Partnership's expense was $4,000 for
the ESOP (as a reimbursement to ARVAL) in 1995.
Effective January 1, 1997, ARVAL established a savings plan (the "Savings
Plan") that qualifies as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code. Under the Savings Plan, participating
employees may defer a portion of their pretax earnings, up to the Internal
Revenue Service annual contribution limit. ARVAL matches 25% of each
employee's contributions up to a maximum of 6% of the employee's earnings.
An employee becomes eligible to participate in the plan upon completing
one year of service. ARVAL employees employed at Partnership communities
are eligible to participate in the Savings Plan. The Partnership's Savings
Plan expense was $6,000 (as a reimbursement to ARVAL) for the year ended
December 31, 1997.
F-13
<PAGE> 32
(9) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Partnership's financial instruments have
been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that could be realized in a current market exchange. The
use of different market assumptions or estimation methodologies may have a
material impact on the estimated fair value amounts.
Fair value information related to financial instruments is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
1997 1996
---------------------------- ---------------------------
FINANCIAL BOOK VALUE FAIR BOOK VALUE FAIR
INSTRUMENT VALUE VALUE
------------------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Cash $ 1,086 $ 1,086 $ 893 $ 893
============ ============ =========== ===========
Notes payable $ 20,889 $ 22,085 $ 16,023 $ 15,665
============ ============ =========== ===========
</TABLE>
CASH
The carrying amount for cash approximates fair value because these
instruments are demand deposits and do not present unanticipated interest
rate or credit concerns.
NOTES PAYABLE
For notes payable with variable interest rates, fair value is the amount
reported as payable in the financial statements. For notes payable with
fixed rates of interest, fair value is estimated using the rates currently
offered for bank borrowings with similar terms.
(10) YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. ARVAL had
developed a plan to address the Year 2000 problem for its financial
information systems and, during the year ended December 31, 1997, began
converting its computer systems to be Year 2000 compliant. However, ARVAL
abandoned its attempted accounting software conversion in February 1998,
when numerous application errors were discovered in the software package
ARVAL had purchased. As a result, ARVAL is currently reassessing its
planned conversion efforts for its financial and operational information
systems as well as related operational issues at its communities. While an
estimate of the total project costs is not currently available due to the
recent events, it is expected that such will be funded from operating cash
flow.
F-14
<PAGE> 33
Schedule III
AMERICAN RETIREMENT VILLAS PROPERTIES III
(A California Limited Partnership)
Real Estate and Related Accumulated Depreciation and Amortization
December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT
COSTS
CAPITALIZED
BUILDINGS SUBSEQUENT DEPRECIABLE
AND TO BUILDINGS AND ACCUMULATED DATE OF LIVES
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL(1) DEPRECIATION ACQUISITION (YEARS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Villa Azusa $ 2,934 $ 800 $3,705 $ 166 $ 800 $3,871 $ 4,671 $ 641 March 1993 27-1/2years
Villa Las Posas 5,197 1,210 572 8,754 1,249 9,287 10,536 28 December 1989 27-1/2years
Bradford Square 2,396 675 2,977 282 675 3,259 3,934 809 December 1990 27-1/2years
Chandler Villas 2,396 300 2,902 233 300 3,135 3,435 822 September 1990 27-1/2years
Cedar Villas 3,805 650 4,078 277 650 4,355 5,005 847 October 1992 27-1/2years
Pacific Villas 4,150 1,000 4,545 365 1,000 4,910 5,910 975 October 1992 27-1/2years
-------------------------------------------------------------------------------------
$20,878 $4,635 $18,779 $10,077 $ 4,674 $28,817 $33,491 $4,122
=====================================================================================
</TABLE>
Following is a summary of investment in properties for the years ended December
31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 26,969 $ 25,562 $ 25,236
Improvements/construction 6,522 1,758 326
Disposals -- (351) --
-------------- ------------ ------------
Balance at end of year $ 33,491 $ 26,969 $ 25,562
============== ============ ============
</TABLE>
Following is a summary of accumulated depreciation and amortization of
investment in properties for the years ended December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 3,373 $ 2,658 $ 1,944
Additions charged to expense 749 715 714
-------------- ------------ ------------
Balance at end of year $ 4,122 $ 3,373 $ 2,658
============== ============ ============
</TABLE>
(1) Aggregate cost for Federal income tax purposes is $31,989 at December 31,
1997.
<PAGE> 34
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,086
<SECURITIES> 0
<RECEIVABLES> 265
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 34,055
<DEPRECIATION> 4,495
<TOTAL-ASSETS> 31,241
<CURRENT-LIABILITIES> 0
<BONDS> 20,889
0
0
<COMMON> 0
<OTHER-SE> 8,547
<TOTAL-LIABILITY-AND-EQUITY> 31,241
<SALES> 0
<TOTAL-REVENUES> 6,333
<CGS> 0
<TOTAL-COSTS> 4,963
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,431
<INCOME-PRETAX> (61)
<INCOME-TAX> 0
<INCOME-CONTINUING> (61)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 229
<EPS-PRIMARY> 12.29<F1>
<EPS-DILUTED> 12.29<F1>
<FN>
<F1>Net income per limited partner unit.
</FN>
</TABLE>
