<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ___________
COMMISSION FILE NUMBER: 0-26470
AMERICAN RETIREMENT VILLAS
PROPERTIES III, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0365417
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1 COSTA MESA, CA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
American Retirement Villas Properties III, L.P.
(a California limited partnership)
Condensed Balance Sheets
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Properties, at cost:
Land $ 4,674 $ 4,674
Buildings and improvements, less
accumulated depreciation of $4,892 and
$4,122 at September 30, 1998 and
December 31, 1997, respectively 24,198 24,126
Furniture, fixtures and equipment, less
accumulated depreciation of $343 and
$373 at September 30, 1998 and December
31, 1997, respectively 921 760
-------- --------
Net properties 29,793 29,560
Cash 2,144 1,086
Restricted cash 160 153
Loan fees, less accumulated amortization of
$201 and $175 at September 30, 1998
and December 31, 1997, respectively 44 70
Amounts receivable from affiliates -- 265
Other assets 1,048 107
-------- --------
$ 33,189 $ 31,241
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable to banks $ 18,390 $ 16,086
Notes payable to others 4,760 4,803
Accounts payable 631 974
Accrued expenses 432 328
Amounts payable to affiliate 682 383
Distributions payable to Partners 401 46
-------- --------
Total liabilities 25,296 22,620
-------- --------
Commitments and contingencies
Minority interest 91 74
-------- --------
Partners' capital (deficit):
General partners' deficit (73) (74)
Limited partners' capital, 18,666 units
outstanding 7,875 8,621
-------- --------
Total partners' capital 7,802 8,547
-------- --------
$ 33,189 $ 31,241
======== ========
</TABLE>
See accompanying notes to the unaudited financial statements.
2
<PAGE> 3
American Retirement Villas Properties III, L.P.
(a California limited partnership)
Condensed Statements of Operations
(unaudited)
(In thousands, except unit data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Rent $ 2,112 $ 1,394 $ 6,007 $ 4,147
Assisted living 257 155 705 432
Interest and other 131 24 337 76
------- ------- ------- -------
Total revenues 2,500 1,573 7,049 4,655
------- ------- ------- -------
COSTS AND EXPENSES:
Rental property operations . 1,176 730 3,198 2,106
Assisted living 94 60 270 167
Depreciation and amortization 359 222 1,074 677
Interest 501 357 1,469 1,076
General and administrative . 135 102 415 346
Property taxes 84 64 224 195
Advertising 34 32 84 55
Minority interest 46 23 118 61
------- ------- ------- -------
Total costs and
expenses 2,429 1,590 6,852 4,683
------- ------- ------- -------
Net income (loss) $ 71 $ (17) $ 197 $ (28)
======= ======= ======= =======
Net income (loss) per limited
partner unit $ 3.78 $ (0.88) $ 10.47 $ (1.48)
======= ======= ======= =======
</TABLE>
See accompanying notes to the unaudited financial statements.
3
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American Retirement Villas Properties III, L.P.
(a California limited partnership)
Condensed Statements of Cash Flows
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 197 $ (28)
Adjustments to reconcile net income to net cash
provided by
Operating activities:
Depreciation and amortization 1,074 677
Interest expense on notes payable to bank
added to principal 74 --
Change in assets and liabilities:
Increase in restricted cash (7) (12)
Increase in other assets (325) (183)
(Decrease) increase in accounts payable
and accrued expenses (239) 648
Increase (decrease) in amounts payable
to affiliates, net 564 (52)
Increase in minority interest 17 24
------- -------
Net cash provided by operating
activities 1,355 1,074
------- -------
Cash flows used in investing activities:
Improvements and building construction (841) (4,074)
Additions to furniture, fixtures and
equipment, net (350) (55)
------- -------
Net cash used in investing activities (1,191) (4,129)
------- -------
Cash flows from financing activities:
Proceeds from notes payable 2,429 3,573
Principal repayments on notes payable to (242) (210)
banks and others
Interest rate lock fees paid in connection (706) --
with refinancing
Distributions paid (587) --
------- -------
Net cash provided by financing
activities 894 3,363
------- -------
Net increase in cash 1,058 308
Cash at beginning of period 1,086 893
------- -------
Cash at end of period $ 2,144 $ 1,201
======= =======
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 1,463 $ 1,053
======= =======
</TABLE>
See accompanying notes to the unaudited financial statements.
<PAGE> 5
American Retirement Villas Properties III, L.P.
(a California limited partnership)
Notes to Condensed Financial Statements
(Unaudited)
September 30, 1998
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
We prepared the accompanying condensed financial statements of American
Retirement Villas Properties III, L.P. following the requirements of the
Securities and Exchange Commission ("SEC") for interim reporting. As permitted
under those rules, certain footnotes or other financial information that are
normally required by generally accepted accounting principles ("GAAP") can be
condensed or omitted. We have reclassified certain prior year data to conform to
the 1998 presentation.
The financial statements include all normal and recurring adjustments that we
consider necessary for the fair presentation of our financial position and
operating results. These are condensed financial statements. To obtain a more
detailed understanding of our results, one should also read the financial
statements and notes in our Form 10-K for 1997, which is on file with the SEC.
The results of operation can vary during each quarter of the year. Therefore,
the results and trends in these interim financial statements may not be the same
as those for the full year.
USE OF ESTIMATES
In preparing the financial statements conforming with GAAP, we have made
estimates and assumptions that affect the following:
o reported amounts of assets and liabilities at the date of the
financial statements;
o disclosure of contingent assets and liabilities at the date of
the financial statements; and
o reported amounts of revenues and expenses during the reporting
period.
Actual results could differ from those estimates.
(2) TRANSACTIONS WITH AFFILIATES
We have an agreement with ARV Assisted Living, Inc., our Managing General
Partner, providing for a property management fee of five percent of gross
revenues amounting to $122,000 and $345,000, for the three-month and the
nine-month periods ended September 30, 1998, respectively. Additionally, a
partnership management fee of 10 percent of cash flow before distributions, as
defined in the Partnership Agreement, amounted to $49,000 and $146,000 for the
three-month and the nine-month periods ended September 30, 1998, respectively.
(3) SUBSEQUENT EVENTS
Included in other assets are approximately $0.7 million of fees incurred during
the quarter ended September 30, 1998 as part of a proposed discretionary
refinancing of our three assisted living communities. These fees consist of $0.6
million of interest rate lock fees and $0.1 million of loan commitment fees.
Subsequent to September 30, 1998, PRN Mortgage Capital LLC ("PRN"), the lender
that was providing the financing, informed us that the commitment to provide a
fixed rate financing was being revoked due to adverse market conditions.
ContiFinancial Services Corporation ("Conti"), an approximate 30% owner of PRN
who provides credit enhancement to PRN, terminated the underlying contract for
the interest rate lock. Representatives of Conti cited adverse conditions in the
commercial mortgage backed securities markets as its reason for terminating the
contract. In conjunction with the termination, Conti advised us that they would
return approximately $0.2 million of the rate lock fees. It is our belief that
we are entitled to a full and complete return of the rate lock fees we have
paid. We intend to vigorously pursue a return of all fees, and will seek legal
recourse if necessary.
Currently, we are working with PRN to obtain an alternative financing on terms
and conditions acceptable to all parties. While there can be no assurances that
such financing will be available on terms and conditions acceptable to us it is
our belief that such alternative financing will be obtained.
As of November 11, 1998, our general partners sent a consent solicitation to the
limited partners, seeking approval of the sale of our three senior apartment
projects, to an unrelated third party, for a price of no less than their
appraised values. Our managing partner has received one offer and a back up
offer, at a price above appraised value, for the sale of the three senior
apartment projects.
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Limited partners have until December 9, 1998, unless extended, to return their
consents. If the limited partners representing a majority of units voted approve
the transaction, the sale is expected to close on or around December 15, 1998.
There can be no assurance that a majority of the limited partners units will be
in favor of the sale, or that a sale will close.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
Revenue includes rental income, assisted living income, interest earned on cash
balances and other revenue. Revenue increased $0.9 million and $2.4 million for
the three-month and nine-month periods ended September 30, 1998, respectively,
compared with the corresponding periods in 1997. These increases resulted
primarily from the operations of Villa Las Posas, which opened in December 1997,
and by an increase in residents using assisted living services during 1998.
COSTS AND EXPENSES
Total costs and expenses includes rental property operations (consisting of, but
not limited to, property management costs, payroll related expenses, utilities,
food, and maintenance expenses), assisted living expenses, general and
administrative (comprised of, but not limited to, costs for accounting,
partnership administration, bad debt, data processing, investor relations,
insurance and professional services), depreciation and amortization, property
taxes, advertising and interest. Costs and expenses increased $0.8 and $2.2
million for the three-month and nine-month periods ended September 30, 1998,
compared with the corresponding periods in 1997. The increase resulted primarily
from the operations of Villa Las Posas, which commenced operations in December
1997.
LIQUIDITY AND CAPITAL RESOURCES
We expect that the cash to be generated from operations of all our properties
will be adequate to pay operating expenses, make necessary capital improvements,
make required principal reductions of debt and make quarterly distributions. On
a long-term basis, our liquidity is sustained primarily from cash flow provided
by operating activities.
During the nine-month period ended September 30, 1998, cash provided by
operating activities increased to $1.4 million compared to $1.1 million for the
corresponding period in 1997. The increase was primarily due to:
o improved net income before depreciation;
o timing of payments for accounts payable, accrued liabilities and
amounts due to affiliates.
During the nine-month period ended September 30, 1998, our net cash used in
investing activities decreased to $1.2 million compared to $4.1 million for the
corresponding period in 1997. Our investing activities consist of the following:
o costs incurred for the construction of Villa Las Posas;
o improvements to existing buildings; and
o purchase of furniture, fixtures and equipment.
During the nine-month period ended September 30, 1998, our net cash provided by
financing activities decreased to $0.9 million compared to $3.4 million for the
corresponding period in 1997. Our financing activities consisted of the
following:
o borrowings from our construction loan; offset by
o principal reduction on our notes payable to banks and others;
o payment of interest rate lock fees in connection to our proposed
refinance; and
o distributions paid to our partners.
We are not aware of any trends, other than national economic conditions which
have had, or which may be reasonably expected to have, a material favorable or
unfavorable impact on the revenues or income from the operations or sale of
properties. We believe that if the inflation rate increases they will be able to
pass the subsequent increase in operating expenses onto the residents of the
6
<PAGE> 7
communities by way of higher rental and assisted living rates. The
implementation of price increases is intended to lead to an increase in revenue
however, those increases may result in an initial decline in occupancy and/or a
delay in increasing occupancy. If this occurs, revenues may remain constant or
even decline.
In July 1998, the Board of Directors of our Managing General Partner approved
the refinancing of our three assisted living communities. The purpose of the
refinancing was to take advantage of lower fixed interest rates available at the
time through the commercial mortgage backed security market and provide a return
of equity to the partners by borrowing against the increased value of these
properties. As a result of this refinancing, our consolidated long-term debt on
these assisted living communities would increase to approximately $19.9 million
from $12.4 million. In order to refinance certain long-term debt obligations, we
would pay a prepayment penalty of three percent if the outstanding balance of
the debt, approximately $145,000. The savings on the interest from the new debt
would mitigate the effects of the prepayment penalty.
In conjunction with this financing, we paid approximately $0.7 million of fees
for an interest rate lock and loan commitment fees. These fees consist of $0.6
million of interest rate lock fees and $0.1 million of loan commitment fees.
Subsequent to the quarter ended September 30, 1998, PRN Mortgage Capital LLC
("PRN"), the lender that was providing the financing, informed us that the
commitment to provide a fixed rate financing was being revoked due to adverse
market conditions in the commercial mortgage backed security market.
Currently, we are working with PRN to obtain an alternative financing on terms
and conditions acceptable to all parties. We are also working to obtain a refund
of all fees paid for the rate lock financing commitment. Although there can be
no assurance that such financing will be available on terms and conditions
acceptable to us, it is our belief that such alternative financing will be
obtained. Furthermore, while there can be no assurances that all of the rate
lock and commitment fees will be returned, we will vigorously pursue a return of
all fees, and will seek legal recourse if necessary.
On September 30, 1998, $7.7 million of outstanding debt became due and payable
however, we are currently working with the lender to extend this debt through
September 30, 1999.
We contemplate spending approximately $800,000 for capital expenditures during
1998 for physical improvements at its communities. As of September 30, 1998, we
have contracted approximately $200,000 of this amount. Funds for these
improvements are expected to be available from operations. A portion of the
funds for these improvements is expected to come from the refinancing referenced
above.
There are no known material trends, favorable or unfavorable, except as
disclosed above, in our capital resources, and there is no expected change in
the mix of such resources.
YEAR 2000 ISSUE
Certain computer programs utilized by us were written using two digits rather
than four to define the year. As a result, those programs may recognize a date
using "00" as the year 1900 rather than the year 2000. In the event this were to
occur with any of our computer programs, a system failure or miscalculation
causing disruptions of operations could occur. Such a failure could cause the
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
Unrelated to the Year 2000 Issue, the Managing General Partner, which provides
accounting services, intends to replace substantially all of its accounting
information systems software during 1999. The Managing General Partner believes
that with the conversion to the new accounting software, the Year 2000 Issue
will not pose significant business or operating issues.
We are assessing our remaining software and operating equipment to determine
whether any existing programs will have to be modified or replaced so that these
systems will function properly with respect to dates in the year 2000 and
thereafter. We anticipate completing this during the second quarter of 1999.
We have initiated communications with the third-party providers of certain of
our administrative services, as well as our significant suppliers of services
and products to determine the extent to which we are vulnerable to those
parties' failures to remediate their own Year 2000 Issues. We have completed our
evaluation of those suppliers during the third quarter of 1998. We do not
presently believe that third party Year 2000 Issues will have a material adverse
effect on us. However, there can be no guarantee that the systems of other
companies on which our operations or systems rely will be timely remedied or
that a failure by another company to remediate its systems in a timely manner
would not have a material adverse effect on us.
We expect to successfully implement the changes necessary to address these Year
2000 Issues, and do not believe that the cost of such actions will have a
material effect on us. There can be no assurance, however, that there will not
be delays in, or increased costs associated with, the implementation of such
changes, and our inability to implement such changes could have a material
adverse effect on our business, operating results, and financial condition.
7
<PAGE> 8
We intend to determine if contingency plans are needed for any aspect of our
business with respect to Year 2000 Issues (including most reasonably likely
worst case Year 2000 scenarios), and to create those contingency plans by the
end of the first quarter of 1999.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. None
8
<PAGE> 9
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN RETIREMENT VILLAS PROPERTIES III,
A CALIFORNIA LIMITED PARTNERSHIP
By: ARV Assisted Living, Inc.,
a Delaware Corporation
(Managing General Partner)
By: /s/ Howard G. Phanstiel
-----------------------------------------
Howard G. Phanstiel
Chief Executive Officer and
Chairman the Board
Date: November 13, 1998
By: /s/ Paul Kuliev
-----------------------------------------
Paul Kuliev
Vice President, Controller
Date: November 13, 1998
9
<PAGE> 10
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,144
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 35,028
<DEPRECIATION> 5,235
<TOTAL-ASSETS> 33,189
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 7,802
<TOTAL-LIABILITY-AND-EQUITY> 33,189
<SALES> 0
<TOTAL-REVENUES> 2,500
<CGS> 0
<TOTAL-COSTS> 1,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 501
<INCOME-PRETAX> 71
<INCOME-TAX> 0
<INCOME-CONTINUING> 71
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71
<EPS-PRIMARY> 3.78
<EPS-DILUTED> 0
</TABLE>
